LAW OFFICES OF DR. BELINDA GAIL QUARTERMAN NOAH, ATTORNEY - STARTUP LAW FROM A TO Z
LAW OFFICES OF DR. BELINDA GAIL QUARTERMAN NOAH, ATTORNEY -
BLOCKCHAIN USED TO COMBAT MOVIE PIRACY


A Bitcoin wallet using the blockchain is the latest means of combating movie piracy.  An African startup, Custos Media Technologies, can embed the unique private key of a bitcoin wallet address in every single copy of a distributed film that is sold. 

The African startup is using the bitcoin blockchain for this process and has raised $265,000 in seed capital from a South African investor and a New York-based Digital Currency Group.

The startup is focusing on assisting independent movie makers because acts of piracy are very devastating to their bottom line.  Piracy of independent movies may easily result in the film company being unable to meet payroll and possibly facing bankruptcy. The company has plans to offer their services to the large movie studios as they begin to take notice of their services.

If a keyed movie is pirated, the encoded key inside the pirated copy reveals the source of the leak. The startup provides a unique tool that extracts the private key, using a tool provided by the startup to detect whose copy was infringed and can report the infringement to the media owner. 

Because bitcoin is a global network where everyone can see transactions on its blockchain, the startup can immediately know when someone moves the bitcoin funds allocated to a protected media file.

The process discourages media recipients from distributing content which enhances the opportunity for the independent movie makers and other artists to be properly compensated for their efforts.




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LEGAL TECHNOLOGY STARTUPS

Legal technology is disrupting the practice of law in ways you may not have imagined a few years ago.  These startup companies are booming as they compete to share this technological, legal space in the global legal marketplace. The market for legal technology has now reached $400 billion. The legal technology field is a challenge to penetrate because it lacks uniform regulations in all states and the stakeholders are cognizant of reducing or eliminating risks.

The current environment is ripe for startups to enter the legal technology field with the intention to provide cutting edge, efficient, and time reducing measures that will enable attorneys to compete in the global marketplace.

Below are 4 Legal Technology Startups offering innovative methods  to analyze legal information and provide services:

1.     Docket Alarm

The Docket Alarm app will predict litigation outcomes based on historical records. The legal technology reviews thousands of cases and analyzed judicial opinions to find similarities. The results from each case are then tallied and presented in a comprehensive format of what a judge may do during the trial.


2.     One400

The startup, One400,  is a digital marketing agency for the legal profession.

3.     PatentVector

The startup, PatentVector is global in nature and has canvassed global patent registries and developed a suite of tools for discovering valuable patents.

4.     PlainLegal

The startup, PlainLegal,  is global in scope and serves as a legal assistant by collecting the initial consultation information attorneys typically receive from their clients.


PLAINTIFFS GET A LEG UP

A startup designed to enhance the financing opportunities available to plaintiffs involved in civil litigation, Mighty, has launched backed by a $5.25M Series A round of financing. 

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Mighty is a New York-based startup that appears to be determined to disrupt the world of plaintiff financing. The objective is to provide a better opportunity for plaintiffs to obtain justice in a system that is stacked against the underdog.  Mighty utilizes an online marketplace to connect plaintiffs involved in civil litigation with investors vying for the opportunity to advance a portion of the potential settlement.

The startup may be especially attractive to plaintiffs who are struggling to pay their living expenses and medical bills, while their case is in litigation for an average of two years. If the case is a loser, the plaintiff will not have to repay the investor.
 
Mighty will contribute to leveling the playing field in the world of civil litigation, where the cards are stacked against the plaintiff in favor of the defendants who in most cases have deep pockets. Because of the deep pockets, the defendants can prolong the litigation while offering very lowball settlement amounts.

The investors financing the plaintiffs have legal experience and can fund the plaintiffs through Mighty's online marketplace. The average amount advanced by the investors is $5,000.00, and normally involves a personal injury case. The plaintiff must have retained an attorney, and the financing is strictly for the plaintiff's living expenses and medical bills. 

A large percentage of Americans, over seventy-seven percent, live from paycheck to paycheck. Thus, Mighty will enhance the justice received by such plaintiffs, by helping to level the playing field, so that their case can be decided on the merits of the claim.


DISNEY, 2OTH CENTURY FOX, LUCASFILM, AND WARNER BROTHERS SUE STARTUP VIDANGEL

The plaintiffs, Disney, 20th Century Fox, Lucasfilm, and Warner Brothers are suing a startup for violating their rights under the Copyright Act and for violating the Digital Millennium Copyright Act. The startup, VidAngel, states that it is confident that filtering a DVD or Blu-ray you own on your favorite devices is legally permissible.
 
VidAngel permits users to buy a movie for $20 then sell it back for $19; VidAngel contends that it doesn’t alter any of the original content. VidAngel states that it is entirely legal. 

In their complaint, the plaintiffs contend that VidAngel does not possess the rights to stream television shows and movies. The plaintiffs further allege that VidAngel is circumventing technological protection measures to create unauthorized copies of those television shows and movies to stream to customers. The plaintiffs argue that such actions violate the Copyright Act.
 

A judge or jury will make a decision on the merits of the complaint.


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There are certain matters an aspiring founder of a new startup company should take care of before leaving their place of employment.

1.  Evaluate all contracts with your present employer. Many employees may have signed an offer letter, a confidential information and invention assignment agreement, and a stock option agreement.  Additional relevant documents may include an employment agreement, employee handbook, conflict of interest policy or separation agreement. These materials should be evaluated carefully for clauses that may impede the future startup company.  

Evaluating the documents for the following clauses is crucial.

Confidentiality.  All technology companies require employees to consummate a confidentiality contract that precludes the employee from using or divulging employer confidential information unless it is for the benefit of the enterprise.  These confidentiality clauses may be for an indefinite length of time, instead of a particular period. Trade secrets cannot be misappropriated as a matter of law, in most states, so whether the employee signed a confidentiality agreement or not is irrelevant. Hence, an aspiring startup company founder should make sure that needs he/she does not use previous employer confidential data and information about the new business.

2.  Invention assignment.  All technology firms require employees to assign inventions created during employment to the employer.

3,  Invention disclosure.  There also may be a provision requiring post-termination invention assignment.  Some companies include clauses in standard documents that require the employee to disclose inventions created (or patents filed) for a period of time after termination of employment.  Such a clause may be enforceable if it is reasonably necessary to protect the company’s business interests.

4.  Non-compete.  In general, but not in all states, non-competes are enforceable if they are reasonable in scope and duration.  A typical non-compete clause provides.  An aspiring startup company founder should review the extent of the definition of Competing Business and the period of the non-compete carefully.

5.  Non-solicitation of consumers and vendors.  Some employment agreements also include a prohibition on soliciting customers and suppliers.  A typical non-solicit provision provides:

6.  Non-solicitation of workers.  Many technology companies require employees to refrain from asking employees for a particular time, such as one year after termination of employment. Hence, startup companies where founders plan to employ their former co-workers need cautiously to traverse the limits of legitimate action under these provisions. Also, key employees of a business may be bound by fiduciary duties to the firm and may be subject to claims of breach of fiduciary duty, fraud and intentional interference with contract for soliciting co-workers even without written agreements.  A standard non-solicit of employees clause provides:

I agree that for a period of twelve (12) months immediately following the termination of my relationship with the Company for any reason, whether voluntary or involuntary, with or without cause, I shall not either directly or indirectly solicit any of the Company’s employees to leave their employment, or attempt to solicit employees of the Company, either for myself or for any other person or entity. I agree that nothing in this Section 8 shall affect my continuing obligations under this Agreement during and after this twelve (12) month period, including, without limitation, my requirements under Section 2A.


7.  No moonlighting.  Some employment agreements contain clauses that prevent employees from working on business activities unrelated to their employer, even if it is after hours. 








MOVIE STARTUPS

A startup called the  “Screening Room,” plans to allow viewers to watch  movies from the comfort of their homes on the same day the movie debuts in theaters. The customers will purchase a $150 set-top box that they will use  to show the movies that they will rent for  48 hours at a cost of $50 per film.  The Screening Room has proposed  giving  theater owners up to $20 of the $50 fee. Also, the Screening Room owners have proposed offering customers tickets  to see the films in theaters, in the hope that they will purchase drinks and snacks which are the revenue lifeblood of theaters.

Discussions with theater owners and movie studios are ongoing. The Screening Room has received a favorable response from the theater 
chain AMC, and it is possible they will reach a deal very soon. Also, other studios such as Fox, Sony, and Universal have expressed interest, according to Variety.

MOVIE STARTUPS CONTINUED

Screening Room, an entertainment startup backed by Sean Parker of Facebook and Napster renown, is part of an effort to increase the profits of the home entertainment market, according to the National Association of Theater Owners (NATO).

The Screening Room's focus is on the older movie watchers who they believe are not frequenting the movie theaters as often as in the past. 

NATO has no official position on Screening Room, but they have emphasized that they must protect the exclusivity of the theatrical release window. The fact that movies are only shown in theaters for a particular period increases the audience size for those films. AMC, the United State's second largest theater chain, is supporting Screening Room, but no studios or the other main theater groups are backing the technology as of yet.


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STARTUP LAW 

A startup may be described generally as a company that is in the early stages of growth, has been in business for ten years or less, and has $30 million dollars or less in capital. Currently, many startups are engaged in technology and computer based ventures, although they are not limited to this area. Startups range from companies that have established offices and staff to those that are operating out of their bedroom or kitchen.

STARTUP GLOSSARY

Here is a glossary of terms commonly used by entrepreneurs, investors, accelerators, and others who interact with startup ventures and startup financing:

A Round Financing -  "A" Round Financing - The first major round of business financing by private equity investors or venture capitalists. In private equity investing, an “A” round, or Series A financing, is usually in the form of convertible preferred stock. An “A” round by external investors generally takes place after the founders have used their seed money to provide a “proof of concept” demonstrating that their business concept is a viable and eventually profitable one. 1

Accelerator -  In an accelerator, a Seed investment is made in return for equity and usually between $15K - $50K. Startups are admitted in classes and work in groups. They are generally given a deadline to complete intensive training and iteration (typically 1 week to 6 months). Startups end an accelerator program with a Demo Day in which they pitch to investors.

Accredited Investor - 
  • Per federal law, a natural person with either $1,000,000 or more in net worth (excluding primary residence) or $200,000 annual income (or $300,000 with spouse) for past two years and reasonable expectation of same for current year.  Other definitions also exist for entities other than natural persons.1
  • Rule 501 of the SEC regulations defines an individual accredited investor as: “Any natural person whose individual net worth or joint net worth with that person’s spouse at the time of his purchase exceeds $1,000,000”; OR “Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.” For the complete definition of “accredited investor,” see the SEC web site.3
  • According to the Securities and Exchange Commission, Rule 501 of Regulation D, an accredited investor can be a bank, insurance company, charitable establishment, or person who has an individual or joint net worth that exceeds $1 million at the time in which an investment has been made. Individuals who are considered to be accredited investors should have a personal income of at least $200K in each of the two most recent years of investment or have a combined account with a spouse in excess of $300K in each of those years. They should also have the same expected income level in the current year. An accredited investor can also be an employee benefit plan or a trust that has assets exceeding $5 million.4
  • Accredited investor is a wealthy investor who meets certain SEC requirements for net worth and income as they relate to some restricted offerings. Accredited investors include institutional investors, company directors and executive officers, high net worth individuals, and certain other entities. Some limited partnerships and angel investor networks accept only accredited investors.5

Accrued Interest -  The interest due on preferred stock or a bond since the last interest payment was made. 3 

Acquisition - 
  • This is the corporate tactic whereby a large enterprise “acquires” or obtains control of another company. This term is often used synonymously with the word “takeover” since a larger corporation takes control by purchasing all of the shares or assets of the smaller company. Takeovers can be either friendly or hostile, depending upon the corporate negotiations. An example of an acquisition occurred in 1989 when Exxon acquired Mobil for $81 billion and formed ExxonMobil.4
  • Acquisition is the process through which one company takes over the controlling interest of another company. Acquisition includes obtaining supplies or services by contract or purchase order with appropriated or non-appropriated funds, for the use of Federal agencies through purchase or lease.5

ACRS -  Accelerated Cost Recovery System. The IRS-approved method of calculating depreciation expense for tax purposes. Also known as Accelerated Depreciation. 3 

Add-on Service -  Add-on Services are the services provided by a venture capitalist that are not monetary in nature, such as helping to assemble a management team and helping to prepare the company for an IPO.9

ADR -  American Depositary Receipt (ADRs). A security issued by a U.S. bank in place of the foreign shares held in trust by that bank, thereby facilitating the trading of foreign shares in U.S. markets. 3
 
Adventure Capitalist -  An adventure capitalist is an entrepreneur who helps other entrepreneurs financially and often plays an active role in the company's operations such as by occupying a seat on the board of directors, etc.9

Advisory Board -  A group of external advisors to a private equity group or portfolio company. Advice provided varies from overall strategy to portfolio valuation. Less formal than a Board of Directors.3

Allocation -  The amount of securities assigned to an investor, broker, or underwriter in an offering. An allocation can be equal to or less than the amount indicated by the investor during the subscription process, depending on market demand for the securities.3

Alpha Test -  Internal testing, of a pre-production model, typically on a controlled basis, with the objective of identifying functional deficiencies and design flaws.6

Amortization -  An accounting procedure that gradually reduces the book value of an intangible asset through periodic charges to income.3

AMT -  Alternative Minimum Tax. A tax designed to prevent wealthy investors from using tax shelters to avoid income tax. The calculation of the AMT takes into account tax-preference items.3
 
Angel Capital Association -  (ACA) America’s national Angel industry trade organization, currently with about 180 regional member groups of angel investors and 20 affiliate organizations.  See http://www.angelcapitalassociation.org for more information.1
 
Angel Financing - 
  • Capital raised for a private company from independently wealthy investors. This capital is generally used as seed financing.3
  • This term refers to the amount of capital that independent, wealthy angel investors are able to “raise” or provide for a particular business investment. Angel investors who provide such financing are often not family members or friends of the business’ founders.4

Angel Fund -  A formal or informal assemblage of active angel investors who cooperate in some part of the investment process. Key characteristics of an angel group are: control by member angels (who manage the entity or have control over the entity’s managers), and collaboration by member angels in the investment process.3

Angel Investor -  Once, an unrelated individual investing monies in a business venture, often later than founders, friends and family (the “3F’s”), but before larger corporate investors such as venture capitalists (“VC’s”). The term “angel” arose in the entertainment industry, where investors would bankroll a production for a share of the profits. Now, with wealthier individuals able to invest significant funds throughout the development of a company (so-called “super-angels”), and venture capitalists sometimes investing alongside and on the same terms as angels, a more modern definition is that “angels” write checks with their own money, while “VC’s” write checks with other people’s money (venture capitalists typically raise funds from investors called “limited partners” who do not actively participate in the fund’s investment decisions and operations, whereas the VC’s act as the “general partners” making the investment decisions and overseeing the invested companies.)
Annex Fund -  Annex funds are side funds that can provide an extra pool of money to supplement the original VC Funds.9

Anti Dilution Provisions -  Anti Dilution Provisions are contractual measures that allow investors to keep a constant share of a firm's equity in light of subsequent equity issues. These may give investors preemptive rights to purchase new stock at the offering price. Examples include Broad-Based Weighted Average Ratchet, Narrow-Based Weighted Average Ratchet, and Full Ratchet Anti Dilution.9
Articles of Incorporation -  Documentation filed with the Secretary of State or Company Registrar which acts as a charter to document the establishment and existence of a corporation.6
 
Articles of Organization -  Documentation filed with the Secretary of State which acts as a charter to document the establishment and existence of a Limited Liability Company.6

Assets -  This word refers to all financial resources that a corporation owns. Current assets can be any form of currency, including traded inventory, investments, and checks. Fixed assets (capital assets) consist of material goods and equipment of a company, such as the land by which the company sits on, the company building, and technological machinery. Intangible assets mainly comprise of intellectual property protection, copyrights, patents, etc.4

Balance Sheet -  A condensed financial statement showing the nature and amount of a company’s assets, liabilities, and capital on a given date.3
Bankruptcy -  An inability to pay debts. Chapter 11 of the bankruptcy code deals with reorganization, which allows the debtor to remain in business and negotiate for a restructuring of debt.3

Bear Hug -  An offer made directly to the Board of Directors of a target company. Usually made to increase the pressure on the target with the threat that a tender offer may follow.3

Benchmarks -  Benchmarks are performance goals against which a company's success is measured. Benchmarks are often used by investors to help determine whether a company should receive additional funding or whether management should receive extra stock.5

Best Efforts -  An offering in which the investment banker agrees to distribute as much of the offering as possible and return any unsold shares to the issuer.3

Blind Pool -  A blind pool is a form of limited partnership which doesn't specify what investment opportunities the general partner plans to pursue.9

Blue Sky Laws -  A common term that refers to laws passed by various states to protect the public against securities fraud. The term originated when a judge ruled that a stock had as much value as a patch of blue sky.3

Bond -  Specific type of debt instrument most commonly sold by government entities.3

Book Value -  Book value of a stock is determined from a company’s balance sheet by adding all current and fixed assets and then deducting all debts, other liabilities, and the liquidation price of any preferred issues. The sum arrived at is divided by the number of common shares outstanding, and the result is book value per common share.3

Bridge Financing -  A limited amount of equity or short-term debt financing typically raised within 6-18 months of an anticipated public offering or private placement meant to “bridge” a company to the next round of financing.3

Bridge Loan - 
  • A short-term loan (up to one year) that a company uses in between times when financing is needed. For startups, this type of loan is intended to fund the company to an anticipated future event e.g., long-term financing.2
  • Bridge loan is a short-term loan that is used until a person or company can arrange a more comprehensive longer-term financing. The need for a bridge loan arises when a company runs out of cash before it can obtain more capital investment through long-term debt or equity.5

Broker-Dealer -  In reference to “Crowdfunding”, one of the two types of "Intermediary" (“Portals” being the other) authorized by the “JOBS Act” to handle the sale of crowdfunded securities (i.e. equity or debt instruments) by an “issuing company”.  More generally, a governmentally regulated component of the U.S. financial system, either a natural person or an organization trading securities on its own account or on behalf of customers. 

Broker-dealers are regulated by the federal Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA)(a “Self-Regulatory Organization”, or “SRO”), and sometimes the various states.1

Burn Out -  AKA. Cram Down - Extraordinary dilution, by reason of a round of financing, of a non-participating investor’s percentage ownership in the issuer.3

Burn Rate -  The rate at which a company expends net cash over a certain period, usually a month.3

Business Development Company -  (BDC) A vehicle established by Congress to allow smaller, retail investors to participate in and benefit from investing in small private businesses as well as the revitalization of larger private companies.3 

Business Judgment Rule -  The legal principle that assumes the board of directors is acting in the best interests of the shareholders unless it can be clearly established that it is not. If the board was found to violate the business judgment rule, it would be in violation of its fiduciary duties to the shareholders.3

Business Model Canvas -  Based on nine building blocks, the Business Model Canvas is an entrepreneurial tool that enables entrepreneurs to design, develop, articulate, challenge, invent and pivot their strategic business model. The building blocks referenced above include customer segments, value proposition, channels, customer relations, revenue streams, key resources, key activities, key partnerships, and cost structures.6 

Business Plan - 
  • A document that describes the entrepreneur’s idea, the market problem, proposed solution, business and revenue models, marketing strategy, technology, company profile, competitive landscape, as well as financial data for coming years. The business plan opens with a brief executive summary, most probably the most important element of the document due to the time constraints of venture capital funds and angels.3
  • This is a legal document that business owner’s use in detailing their business idea(s) as well as their company’s overall financial objectives. Many investors heavily rely on an entrepreneur’s business plan when deciding to invest in a company; therefore, many prospective business owners work diligently to refine their business plan in order to raise their desired capital.4

Buyout -  A buyout is defined as the purchase of a company or a controlling interest of a corporation's shares, product line or business. A leveraged buyout is accomplished with borrowed money or by issuing more stock.9

CAGR -  Compound Annual Growth Rate. The year-over-year growth rate applied to an investment or other aspect of a firm using a base amount.3

Call Option -  The right to buy a security at a given price (or range) within a specific time period.3

Capital -  Financial capital is a term that can refer to the money exchanged between entrepreneurs and investors during a business deal. Entrepreneurs need to raise capital for their startups while investors can provide them with the needed capital (or funding). Financial capital usually comes with interest, and new business owners can use their financial capital in purchasing real capital (or machinery or equipment) for their new business.4

Capital Expenditures -  Capital Expenditures are money spent by a company to add or expand property, plant, and equipment assets, with the expectation that they will benefit the company over a long period of time (more than one year).9 

Capital Gains - 
  • The difference between an asset’s purchase price and selling price, when the selling price is greater. Long-term capital gains (on assets held for a year or longer) are taxed at a lower rate than ordinary income.3
  • Capital Gain is the gain to investor from selling a stock, bond or mutual fund at a higher price than the purchase price. The capital gain is usually the amount realized (net sales price) less your investment (adjusted tax basis) in the property. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.5

Capital Under Management - 
  • (or, Assets Under Management) The amount of capital available to a fund-management team for venture investments.3
  • Capital under management is the amount of capital available to a management team for venture investments.5

Capitalization Table - 
  • Also called a “Cap Table,” this is a table showing the total amount of the various securities issued by a firm. This typically includes the amount of investment obtained from each source and the securities distributed — e.g., common and preferred shares, options, warrants, etc. — and respective capitalization ratios.3
  • Capitalization table, a table of how much stock ownership is held by each entity/person. Typically includes founder/investor equity, and employee Stock Option Pool.2

Capitalize -  To record an outlay as an asset (as opposed to an expense), which is subject to depreciation or amortization.3

Carried Interest -  or “Carry3” The portion of any gains realized by the fund to which the fund managers are entitled, generally without having to contribute capital to the fund. Carried interest payments are customary in the venture capital industry, in order to create a significant economic incentive for venture capital fund managers to achieve capital gains.3

Cash Position -  The amount of cash available to a company at a given point in time.3

Chapter 11 -  The part of the Bankruptcy Code that provides for reorganization of a bankrupt company’s assets.3

Chapter 7 -  The part of the Bankruptcy Code that provides for liquidation of a company’s assets.3

Claim Dilution -  A reduction in the likelihood that one or more of the firm’s claimants will be fully repaid, including time value of money considerations.3

Clawback -  A clawback obligation represents the general partner’s promise that, over the life of the fund, the managers will not receive a greater share of the fund’s distributions than they bargained for. Generally, this means that the general partner may not keep distributions representing more than a specified percentage (e.g., 20%) of the fund’s cumulative profits, if any. When triggered, the clawback will require that the general partner return to the fund’s limited partners an amount equal to what is determined to be “excess” distributions.3

Closed-end Fund -  A type of fund that has a fixed number of shares outstanding, which are offered during an initial subscription period, similar to an initial public offering. After the subscription period is closed, the shares are traded on an exchange between investors, like a regular stock. The market price of a closed-end fund fluctuates in response to investor demand as well as changes in the values of its holdings or its Net Asset Value. Unlike open-end mutual funds, closed-end funds do not stand ready to issue and redeem shares on a continuous basis.3

Closing - 
  • An investment event occurring after the required legal documents are implemented between the investor and a company and after the capital is transferred in exchange for company ownership or debt obligation.3
  • This is the transaction that occurs after entrepreneurs and investors legally exchange all required legal documentation and capital that is needed in their business deal. When an investor “closes in on a deal,” they have already negotiated with the entrepreneur the details encompassing corporate ownership and monetary obligation.4
  • Closing is the final event to complete the investment, at which time all the legal documents are signed and the funds are transferred.5

Co-investment -  The syndication of a private equity financing round or an investment by an individual (usually general partners) alongside a private equity fund in a financing round.3

Collar Agreement -  Agreed-upon adjustments in the number of shares offered in a stock-for-stock exchange to account for price fluctuations before the completion of the deal.3

Collateral -  This word is used in the financial transaction between the lender and borrower. Often times, when entrepreneurs seek capital from a financial institution, they use their assets (personal belongings and material goods) as a “collateral” or security for their loan. Should the borrower default on payments, the lending institution has the legal authority confiscate those assets.4

Committed Capital -  The total dollar amount of capital pledged to a private equity fund.3

Common Stock - 
  • A class of ownership that has lower claims on earnings and assets than Preferred Stock. It is riskier to own common stock because in the event of Liquidation, common stock shareholders are the last to claim rights to assets.2
  • A unit of ownership of a corporation. In the case of a public company, the stock is traded between investors on various exchanges. Owners of common stock are typically entitled to vote on the selection of directors and other important events and in some cases receive dividends on their holdings. Investors who purchase common stock hope that the stock price will increase so the value of their investment will appreciate. Common stock offers no performance guarantees. Additionally, in the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock.3
  • This term represents a constituent in corporate ownership. People who own shares of common stock (common stockholders) often have voting rights in their company’s decision-making matters and executive board of elections.  Through company dividends and capital appreciation of corporate assets, common stockholders can also share in their company’s financial success.4

Conversion Ratio -  The number of shares of stock into which a convertible security may be converted. The conversion ratio equals the par value of the convertible security divided by the conversion price.3

Convertible -  Convertibles are the corporate securities, usually preferred shares or bonds, that can be exchanged for a set number of another form, usually common share, at a pre-stated price. Convertibles are appropriate for investors who want higher income than is available from common stock, together with greater appreciation potential than regular bonds offer. From the issuer's standpoint, the convertible feature is usually designed as a sweetener, to enhance the marketability of the stock or preferred.5

Convertible Note - 
  • A type of bond that can be converted into shares of Common Stock.2
  • [Note] [Debenture]: Debt instrument that automatically or voluntarily converts to some other security, either debt or equity.3
  • (convertible debt or bond): This term refers to a type of legal exchangeable security issued by many corporations. These notes or bonds can be given to investors in exchange for reduced interest rates.  Investors, on the other hand, can choose to convert this bond into common preferred stock for a reduced amount of equity.4

Convertible Preferred Stock -  Preferred stock that may be converted into common stock or another class of preferred stock, either voluntarily or mandatory.3

Convertible Security -  A bond, debenture or preferred stock that is exchangeable for another type of security (usually common stock) at a pre-stated price. Convertibles are appropriate for investors who want higher income, or liquidation-preference protection, than is available from common stock, together with greater appreciation potential than regular bonds offer. (See Common Stock, Dilution, and Preferred Stock).3

Corporate Charter -  The document prepared when a corporation is formed. The Charter sets forth the objectives and goals of the corporation, as well as a complete statement of what the corporation can and cannot do while pursuing these goals.3

Corporate Resolution -  A document stating that the corporation’s board of directors has authorized a particular individual to act on behalf of the corporation.3

Corporate Venture Capital -  Corporate venture capital is a subsidiary of a large corporation which makes venture capital investments.5

Corporate Venturing - 
  • Venture capital provided by [in-house investment funds of] large corporations to further their own strategic interests.3
  • Corporate Venturing is a practice of a large company, taking a minority equity position in a smaller company in a related field.5

Corporation - 
  • This word can be used synonymously with “company,” “enterprise,” or “business establishment.”4
  • A legal, taxable entity chartered by a state or the federal government. Ownership of a corporation is held by the stockholders.3

Covenant -  A protective clause in an agreement.3
Cram Down -  AKA. Burn Out - Extraordinary dilution, by reason of a round of financing, of a non-participating investor’s percentage ownership in the issuer.3

Crowdfunding -  “Crowdfunding” is the process of raising financial support for a venture via smaller amounts from many investors (“the crowd”), rather than the alternative pattern of larger amounts from a smaller number of supporters.  Charities and philanthropies have traditionally employed both fundraising strategies (soliciting both the general populace, or crowd, as well as fewer wealthier donors), while businesses have usually taken the route involving fewer and larger supporters.  Today’s internet has vastly increased the ability of fundraisers to communicate information, solicit and receive financial support from anyone on-line. Crowdfunding without the expectation of financial return, or with the promise of a specific good or service, are termed “donation-based” or “reward-based” crowdfunding, are in the nature of charitable solicitation or business marketing, and have never been illegal in the U.S.  In contrast, soliciting funds in return for a ownership interest or expectation of repayment, are termed “equity-based” or “debt-based” crowdfunding (together grouped as “securities-based” crowdfunding), and have been until now governed (and effectively prevented) by federal and state securities law.  One of the most significant parts (Title III) of the federal “Jumpstart Our Business Startups”, or JOBS Act of 2012 specifically enabled and legalized “security-based crowdfunding”, subject to a variety of regulations and restrictions.1

Crowdfunding Intermediary Regulatory Advocates -  (CfIRA) An open organization of diverse participants and parties interested in the crowdfunding industry (“portals”, “broker-dealers”, professional and business service providers, investors, etc.) dedicated to interacting with each other and advocating with the regulators charged with shaping and governing the nascent industry of securities-based crowdfunding authorized by the JOBS Act.  CfIRA has participated in numerous hearings, written official letters as well as popular articles, etc., both in public as well as government forums (Congress, SEC, FINRA, etc.)  See http://www.cfira.org for more information.1

Crowdfunding Professional Association -  (CfPA) The American industry trade organization dedicated to facilitating a vibrant, credible and growing crowdfunding community, from investors through service providers to entrepreneurs.  See http://crowdfundingprofessional.org for more information.1 

Cumulative Preferred Stock -  A stock having a provision that if one or more dividend payments are omitted, the omitted dividends (arrearage) must be paid before dividends may be paid on the company’s common stock.3

Cumulative Voting Rights -  When shareholders have the right to pool their votes to concentrate them on an election of one or more directors rather than apply their votes to the election of all directors. For example, if the company has 12 openings to the Board of Directors, in statutory voting, a shareholder with 10 shares casts 10 votes for each opening (10x12 = 120 votes). Under the cumulative voting method however, the shareholder may opt to cast all 120 votes for one nominee (or any other distribution he might choose).3

Deal Flow -  Deal flow (dealflow) is the rate at which investment offers are presented to funding institutions.5

Debenture - 
  • A debt instrument; basically the same as a Promissory Note.3
  • (promissory note)This designation is a legal document detailing the terms of repayment and interest that a borrower is responsible for. It also details the principal amount owed and the maturity date. For example, financial institutions can approve qualified applicants for loans. They send out debenture or promissory statements to borrowers as a reminder of their legal contract.4

Debt - 
  • Any obligation by one person to pay another. May be a primary (direct) obligation as in a Note, or a secondary (contingent) obligation as in a guaranty.3
  • This is an amount of money that a borrower owes to an individual, investor, or lending institution. In the finance world, the word “debt” is often associated with interest payments. For example, when an individual has a credit card limit of $5,000, the lender, usually a bank, is willing to lend the credit card holder $5,000 of credit. If the lender uses $500 of that total amount, they are now considered to be in $500 debt until the total amount is paid. Partial payment of an owed amount always encompasses interest.4

Debt Financing -  Debt Financing means when a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise to repay principal and interest on the debt.5

Debt Instrument -  Any instrument evidencing the obligation of the maker to pay the holder of the debt instrument. Includes Bonds, Debentures and Notes of all kinds.3

Debt Table -  A debt table is a table providing a summary and analysis of a startup’s debt, by type. It includes details related to the interest rates for each instrument as well as debt service requirements.6

Deficiency Letter -  A letter sent by the SEC to the issuer of a new issue regarding omissions of material fact in the registration statement.3

Demand Registration -  Resale registration that gives the investor the right to require the Company to file a Registration Statement registering the resale of the securities issued to the investor in a private offering.3

Demand Rights -  Contemplate that the company must initiate and pursue the registration of a public offering including, although not necessarily limited to, the shares proffered by the requesting shareholder(s).3

Demo Day -  Where the graduating class of Incubators and Accelerators is given a chance to pitch to investors. 2

Depreciation - 
  • An expense recorded to reduce the value of a long-term tangible asset. Since it is a non-cash expense, it increases free cash flow while decreasing the amount of a company’s reported earnings.3
  • This term refers to the gradual loss in value of currency, stocks, and material goods. For example, biotechnology can “depreciate” over the course of 4 years.4

Dilution -  Issuing more shares of a company dilutes the value of holdings of existing shareholders.2 A reduction in the percentage ownership of a given shareholder in a company caused by the issuance of new shares.3

Dilution Protection -  Mainly applies to convertible securities. Standard provision whereby the conversion ratio is changed accordingly in the case of a stock dividend or extraordinary distribution to avoid dilution of a convertible bondholder’s potential equity position. Adjustment usually requires a split or stock dividend in excess of 5% or issuance of stock below book value. Share Purchase Agreements also typically contain anti-dilution provisions to protect investors in the event that a future round of financing occurs at a valuation that is below the valuation of the current round.3

Director -  Person elected by shareholders to serve on the board of directors. The directors appoint the president, vice president and all other operating officers, and decide when dividends should be paid (among other matters).3

Disclosure Document -  A booklet outlining the risk factors associated with an investment.3

Diversification -  The process of spreading investments among various types of securities and various companies in different fields.3

Dividend -  The payments designated by the Board of Directors to be distributed pro-rata among the shares outstanding. On preferred shares, it is generally a fixed amount. On common shares, the dividend varies with the fortune of the company and the amount of cash on hand and may be omitted if business is poor or if the Directors determine to withhold earnings to invest in capital expenditures or research and development.3

Dividend Preference -  Preferred stockholders receive dividends before common stockholders. Dividend can be cumulative or non-cumulative.2

Double Dip -  Participating preferred stock which entitles a holder to a liquidation preference and also to participate in the residual value.9

Drag-along Rights - 
  • Majority shareholders can force minority shareholders to join in the sale of a company. Minority shareholders will receive same price, terms, and conditions.2
  • A majority shareholder's right, obligating shareholders whose shares are bound into the shareholders’ agreement to sell their shares into an offer the majority wishes to execute.3

Drive-by Deal -  A drive-by deal is slang term often used when referring to a deal in which a venture capitalist invests in a startup with the goal of a quick exit strategy. The VC takes little to no role in the management and monitoring of the startup. 9

Due Diligence - 
  • A process undertaken by potential investors — individuals or institutions — to analyze and assess the desirability, value, and potential of an investment opportunity.3
  • This is the process whereby individuals or groups of people conduct independent investigations regarding a particular matter. In the business world, investors conduct timely due diligence when inquiring about prospective investment endeavors. This may entail a background search of the company’s founders, review of the entrepreneur’s credit scores, and routine follow-up with references and associates, etc. New business owners, on the other hand, are encouraged to also conduct due diligence when finding a potential investor. Through due diligence, both the investor and entrepreneur has the opportunity to diligently analyze and assess each other for the potential of an investment opportunity and partnership.4
  • Due diligence is the process of investigation and evaluation, performed by investors, into the details of a potential investment, such as an examination of operations and management and the verification of material facts.5

Early Stage - 
  • The key characteristic is market development. The business is focused on sales and marketing and proving business viability.2
  • A state of a company that typically has completed its seed stage and has a founding or core senior management team, has proven its concept or completed its beta test, has minimal revenues, and no positive earnings or cash flows.3
  • This term generally refers to a young enterprise that is three years old or younger. During this phase, a company is still in its novel stages of development. They could be in the process of experimenting with new products or services that they intend to market in the near future and/or may have viable products that are already available to the public.4

EBITDA -  Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of cash flow calculated as: = Revenue - Expenses (excluding tax, interest, depreciation, and amortization). EBITDA looks at the cash flow of a company. By not including interest, taxes, depreciation, and amortization, we can clearly see the amount of money a company brings in. This is especially useful when one company is considering a takeover of another because the EBITDA would cover any loan payments needed to finance the takeover.3
Economies of Scale -  Economic principle that, as the volume of production increases, the cost of producing each unit decreases.3

Elevator Pitch - 
  • An elevator pitch is a brief presentation, typically 30 – 60 seconds in duration, presenting the entrepreneur’s concept / solution, business model, “go to market” strategy and value proposition to potential angel or venture capital investors, in order to obtain the attention of the investors, such that they are compelled to learn more about the opportunity.6
  • An extremely concise presentation of an entrepreneur’s idea, business model, company solution, marketing strategy, and competition delivered to potential investors. Should not last more than a few minutes, or the duration of an elevator ride.3
  • This term refers to an entrepreneur’s brief verbal summary of their business proposal. The name “elevator pitch” was designated because the entrepreneur’s oral presentation is often the duration of a quick elevator ride.  During an elevator pitch, the entrepreneur concisely outlines their business proposal, marketing strategy, and competitive tactic to potential investors. Prospective business owners are strongly encouraged to polish this pitch, since it can mean the difference between raising desired capital and completely leaving their business ideas behind.4

Employee Stock Option Plan -  (ESOP) A plan established by a company whereby a certain number of shares is reserved for purchase and issuance to key employees. Such shares usually vest over a certain period of time to serve as an incentive for employees to build long-term value for the company.3 

Employee Stock Ownership Plan -  A trust fund established by a company to purchase stock on behalf of employees.3

Employer Identification Number -  An EIN or employer identification number is a unique, nine-digit identification number utilized by the Internal Revenue Service, (IRS) and assigned to business entities to identify employers as part of the tax reporting process. In order to obtain an EIN, business entities must file or apply to the IRS.6 
Equity - 
  • Ownership in the capital of a Company. In corporations, it is called “stock”; in limited partnerships or LLCs, it is called “interests” or  “units.”3
  • This designation is given to a stockholder’s ownership in a company. The amount of ownership is obtained when an individual or corporation purchases one or more shares of stock (equity shares).  The more equity purchased, the greater the ownership.4

Equity Financing -  Equity financing is a term used for company's issuance of shares of common or preferred stock to raise money. Equity financing is commonly done when its per share prices are high-the most money that can be raised for the smallest number of shares.5

Equity Kicker -  Option for private equity investors to purchase shares at a discount. Typically associated with mezzanine financings where a small number of shares or warrants are added to what is primarily a debt financing.3

Equity Offerings -  Equity Offerings is raising funds by offering ownership in a corporation through the issuing of shares of a corporation's common or preferred stock.5

ERISA - 
  • ERISA shall mean the United States Employee Retirement Income Security Act of 1974, as amended, including the regulations promulgated thereunder.3
  • Significant Participation Test: A test that is satisfied if the General Partner determines in its reasonable discretion that Persons that are “benefit plan investors” within the meaning of Section (f)(2) of the Final Regulation constitute or are expected to constitute at least 25 percent of the interests of the Limited Partners.  Note that the test is 25% of the interests of all the limited partners, which means 20% (+/-) in the partnership as a whole, taking into account the general partner’s interest.3

European Business Angels Network -  (EBAN) The European equivalent of America’s Angel Capital Association.  See http://www.eban.org for more information.1 

Exchange Act -  [“34 Act”] Regulates periodic reporting by companies with publicly traded securities, companies with more than 500 shareholders, and brokers and dealers in securities.3 

Executive Summary - 
  • An executive summary is a one to two page document which provides an overview of a startup entrepreneur’s business opportunity. It summarizes the key points of the startup’s business plan with a focus on obtaining investor interest, for potential investment. The goal of the executive summary is to grab the attention of the investor, such that they desire to learn more about the opportunity.6
  • This outline is a very important component of a company’s business plan. It concisely summarizes the proposed business idea(s) and the fundamental objectives of the company. Upon review, the investor(s) should have a precise understanding of the prospective company’s mission. The executive summary is the most informative part of a business plan for the investor(s) and plays an influential role in determining if the company is viable enough for investment.4

Exercise Price -  The price at which an option or warrant can be exercised.3

Exit -  Exit is the sale or exchange of a significant amount of company ownership for cash, debt, or equity of another company.5

Exit Route -  An exit route is the method by which an investor would realize an investment.9

Exit Strategy - 
  • A fund’s intended method for liquidating its holdings while achieving the maximum possible return. These strategies depend on the exit climates, including market conditions and industry trends. Exit strategies can include selling or distributing the portfolio company’s shares after an initial public offering (IPO), a sale of the portfolio company, or a recapitalization.3
  • This is a company’s negotiated approach whereby investors are given an event or time within the development of their company to receive their return on investment (ROI). This can be achieved through a liquidity event, where their equity is converted into cash.4
  • Exit Strategy is the way in which a venture capitalist or business owner intends to use to get out of an investment that he/she has made. Exit Strategy is also called liquidity event.5

Expansion Stage Company -  This term generally refers to a company that is three years old or more. During this period of development, a company may already have been successful commercializing many of their products and services but may not generate desired profit.  An enterprise that is in its expansion stage may resort to seeking additional sources of capital to minimize the risk of failure. Many venture capitalists invest during this stage of a company’s development.4

Fiduciary Responsibility -  Refers to trust responsibility to make good investments that will earn a high rate of return.2

Final Regulation -  An ERISA term, it is the United States Department of Labor’s Final Regulation relating to the definition of “plan assets” in (29 C.F.R. §2510.3-101).3

Financier -  Financier is a person or financial institution engaged in the lending and management of money and makes a living participating in commercial financing activities.5

Finder -  A person who helps to arrange a transaction.3

First Stage Capital -  First stage capital is the money provided to entrepreneur who has a proven product, to start commercial production and marketing, not covering market expansion, de-risking, acquisition costs.9

First-round Financing -  First-round financing is the first investment in a company made by external investors.9

Flipping -  The act of buying shares in an IPO and selling them immediately for a profit. Brokerage firms underwriting new stock issues tend to discourage flipping and will often try to allocate shares to investors who intend to hold on to the shares for some time. However, the temptation to flip a new issue once it has risen in price sharply is too irresistible for many investors who have been allocated shares in a hot issue.3

Follow-on Investing - 
  • (follow-up investing) This word refers to the event whereby investors reinvest in a company sometime during its development. Often times, follow-on investments occur when a company is not performing successfully as planned. Angel capitalists tend to avoid follow-on investments within the same company because of the high risk of additional monetary loss.4
  • A subsequent investment made by an investor who has made a previous investment in the company, generally a later stage investment in comparison to the initial investment.5

Form 10-K -  This is the annual report that most reporting companies file with the Commission. It provides a comprehensive overview of the registrant’s business.3

Form 10-KSB -  This is the annual report filed by reporting “small business issuers.” It provides a comprehensive overview of the company’s business, although its requirements call for slightly less detailed information than required by Form 10-K.3

Form S-1 -  The form can be used to register securities for which no other form is authorized or prescribed, except securities of foreign governments or political sub-divisions thereof.3

Form S-4 -  Type of Registration Statement under which public company mergers and security exchange offers may be registered with the SEC.3

Form SB-2 -  This form may be used by “small business issuers” to register securities to be sold for cash. This form requires less detailed information about the issuer’s business than Form S-1. 3

Founder's Agreement -  A formal written agreement among the founders of a startup which documents the founder’s accord on ownership, roles and responsibilities, company governance / decision-making and operations. Issues such as founder contributions, vesting and exit / departure are also typically included in these Agreements. Founder’s agreements are typically shorter, less technical agreements between the founders that are to be developed further into operating agreements or corporate by-laws, as the concept and structure of the company develops. Operating agreements and corporate by-laws generally contain all of the same provisions typically included in a founder’s agreement.6

Founders’ Shares -  Shares owned by a company’s founders upon its establishment.3

Free cash flow -  The cash flow of a company available to service the capital structure of the firm. Typically measured as operating cash flow less capital expenditures and tax obligations.3

Friends and Family -  A common way for a startup to fund their initial round of capital. A 20-25% discount from the next round is appropriate. The valuation cap is going to vary depending on the size of the raise and the size of the opportunity.2

Full Ratchet Antidilution - 
  • The sale of a single share at a price less than the favored investors paid reduces the conversion price of the favored investors’ convertible preferred stock “to the penny.” For example, from $1.00 to 50 cents, regardless of the number of lower-priced shares sold.3
  • Full ratchet is an investor protection provision which specifies that options and convertible securities may be exercised relative to the lowest price at which securities were issued since the issuance of the option or convertible security. The full ratchet guarantee prevents dilution, since the proportionate ownership would stay the same as when the investment was initially made.5

Fully Diluted Earnings Per Share -  Earnings per share expressed as if all outstanding convertible securities and warrants have been exercised.3

Fully Diluted Outstanding Shares -  The number of shares representing total company ownership, including common shares and current conversion or exercised value of the preferred shares, options, warrants, and other convertible securities.3

Fund Size -  The total amount of capital committed by the investors of a venture capital fund.3

Funding -  This term is used synonymously with the words “financing” and “capital.” It refers to the amount of money that is needed for a business endeavor. For example, a new business owner may seek a certain amount of funding for their startup company. This “raised” capital can be used to launch their endeavor as well as to sustain their company until monetary profit can be generated.4

Fundless Equity Sponsors -  Fundless equity sponsors are sourcing and vetting deals without any committed capital, lining up financial sponsors on a deal-by-deal basis.9

GAAP -  Generally Accepted Accounting Principles. The common set of accounting principles, standards, and procedures. GAAP is a combination of authoritative standards set by standard-setting bodies as well as accepted ways of doing accounting.3

General Partner -  (GP) The partner in a limited partnership responsible for all management decisions of the partnership. The GP has a fiduciary responsibility to act for the benefit of the limited partners (LPs) and is fully liable for its actions.3 

Golden Handcuffs -  This occurs when an employee is required to relinquish unvested stock when terminating his employment contract early.3

Golden Parachute -  Employment contract of upper management that provides a large payout upon the occurrence of certain control transactions, such as a certain percentage share purchase by an outside entity or when there is a tender offer for a certain percentage of a company’s shares. This is discussed in more detail at the Executive Employment Agreement.3

Holding Company -  A corporation that owns the securities of another, in most cases with voting control.3

Holding Period -  The amount of time an investor has held an investment. The period begins on the date of purchase and ends on the date of sale, and determines whether a gain or loss is considered short term or long term, for capital-gains-tax purposes.3

Hot Issue -  A newly issued stock that is in great public demand. Technically, it is when the secondary market price on the effective date is above the new issue offering price. Hot issues usually experience a dramatic rise in price at their initial public offering because the market demand outweighs the supply.3

Hurdle Rate -  The internal rate of return that a fund must achieve before its general partners or managers may receive an increased interest in the proceeds of the fund. Often, if the expected rate of return on an investment is below the hurdle rate, the project is not undertaken.3

In-Licensing Agreement -  Agreements with external or third parties under which the startup has been granted permission to utilize certain technologies owned by those third parties, under defined terms and conditions.6

Incubator - 
  • Designed to support the development of startups through resources (mainly office space) and mentorship. Oftentimes startups stay in an incubator for longer (1-3 years) than they would stay in an Accelerator though the lines between the two are blurring.2
  • Incubator is a company or facility designed to foster entrepreneurship and help startup companies, usually technology-related, to grow through the use of shared resources, management expertise and intellectual capital.5

Initial Public Offering - 
  • (IPO) The sale or distribution of a stock of a portfolio company to the public for the first time. IPOs are often an opportunity for the existing investors (often venture capitalists) to receive significant returns on their original investment. During periods of market downturns or corrections, the opposite is true.3
  • (IPO) This is a private corporation’s first-time sale or allocation of a stock that is made available to the public. IPOs can be distributed to both young and established companies who seek to expand or warrant public trading.4

Institutional Investors - 
  • Organizations that professionally invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds.3
  • Institutional Investors refers mainly to insurance companies, pension funds and investment companies collecting savings and supplying funds to markets but also to other types of institutional wealth like endowment funds, foundations, etc.5

Intermediary -  Either a "Broker-Dealer" or a "Portal", both allowed by the JOBS Act to consummate a securities-based crowdfunding transaction.¹

Invention Assignment Agreement -  An agreement under which founders, employees, contractors, developers and others assign intellectual property rights to a company. Typically, these stakeholders or related parties of the company acknowledge that any and all intellectual property developed by them while working for or with the company, whether individually or jointly with other stakeholders, are the property of the company, not the individual. It can also apply to intellectual property that founders and others may contribute to a startup company at the time of its establishment.6

Investment Banks -  Investment Bank is a financial intermediary that performs a variety of services which includes underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients.5

Investment Company Act of 1940 -  Investment Company Act shall mean the Investment Company Act of 1940, as amended, including the rules and regulations promulgated thereunder.3

Investment Letter  -  A letter signed by an investor purchasing unregistered long securities under Regulation D, in which the investor attests to the long-term investment nature of the purchase. These securities must be held for a minimum of one year before they can be sold.3

IPO -  Initial Public Offering or IPO is the first sale of stock by a private company to the public. IPOs are often smaller, younger companies seeking capital to expand their business.5 

IRA Rollover -  The reinvestment of assets received as a lump-sum distribution from a qualified tax-deferred retirement plan. Reinvestment may be the entire lump sum or a portion thereof. If reinvestment is done within 60 days, there are no tax consequences.3

IRR - 
  • Internal Rate of Return. A typical measure of how VC Funds measure performance. IRR is technically a discount rate: the rate at which the present value of a series of investments is equal to the present value of the returns on those investments.3
  • Internal Rate of Return or IRR is often used in capital budgeting, it's the interest rate that makes net present value of all cash flow equal zero. Essentially, IRR is the return that a company would earn if they expanded or invested in themselves, rather than investing that money abroad.5

Issued Shares -  The amount of common shares that a corporation has sold (issued).3
Issuer - 
  • A company raising funds through a "Portal" or "Broker-Dealer" via securities-based crowdfunding, and issuing a security (equity or debt) to each investor in return for his or her funds.1
  • Refers to the organization issuing or proposing to issue a security.3

JOBS Act  -  The “Jumpstart Our Business Startups” (“JOBS”) Act, passed by overwhelming bipartisan congressional majorities in both chambers and signed into law by President Obama in April, 2012.  The JOBS Act contains seven sections, or “titles” aimed at facilitating different aspects of the development and success of the all-important business startups and growth companies that create the vast majority of new employment in our country.  Title III legalizes and regulates securities-based crowdfunding.  Actual implementation of the securities-based crowdfunding authorized in the JOBS Act awaits rule-making by the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), called for within 270 days of passage of the JOBS Act but realistically hoped for sometime in 2013.1
Kentucky Windag -  In hunting, the modified aim required to compensate for wind or target movement. Used herein to describe the process by which an investor must increase the percentage he needs today so that he will end up with a desired target percentage ownership in the future, after adjusting for future dilutive financing rounds.3

Key Employees -  Professional management attracted by the founder to run the company. Key employees are typically retained with warrants and ownership of the company.3

Later Stage -  A stage of company growth characterized by viable products, a developed market, significant customers, sustained revenue growth, and both profits and positive cash flow from operations. Later-stage companies would generally be candidates for an IPO. Investments in the C round or after qualify as later stage.3

Later-stage Company -  This is a company that is considered to be in its mature stages of development. Unlike early and expansion-stage companies, later-stage companies already have successful commercialized products and services that are publically available as well as a significant generated cash flow. Many venture capitalists tend to invest in mature companies since they are less risky, are already established, have proven to be a financial success.4

Lead Investor - 
  • Also known as a bell cow investor. Member of a syndicate of private equity investors holding the largest stake, in charge of arranging the financing and most actively involved in the overall project.3
  • Lead investor is a company's principal provider of capital, such as the entity which originates and structures a syndicated deal.5

Leveraged Buyout - 
  • (LBO) A takeover of a company, using a combination of equity and borrowed funds. Generally, the target company’s assets act as the collateral for the loans taken out by the acquiring group. The acquiring group then repays the loan from the cash flow of the acquired company. For example, a group of investors may borrow  funds, using the assets of the company as collateral, in order to take over a company. Or the management of the company may use this vehicle as a means to regain control of the company by converting a company from public to private. In most LBOs, public shareholders receive a premium to the market price of the shares.3
  • (LBO) This is a type of aggressive business practice whereby investors or a larger corporation utilizes borrowed funds (junk bonds, traditional bank loans, etc.) or debt to finance its acquisition. The high debt-to-equity ratio enables the investors to “buyout” a smaller company with very little cash. Leveraged buy-outs can be either friendly or hostile, depending on the negotiations made.4

Limited Partner -  (LP) An investor in a limited partnership who has no voice in the management of the partnership. LPs have limited liability and usually have priority over GPs upon liquidation of the partnership.3 
Limited Partnerships - 
  • An organization comprised of a general partner, who manages a fund, and limited partners, who invest money but have limited liability and are not involved with the day-to-day management of the fund. In the typical venture capital fund, the general partner receives a management fee and a percentage of the profits (or carried interest). The limited partners receive income, capital gains, and tax benefits.3
  • Limited partnership is a business organization with one or more general partners, who manage the business and assume legal debts and obligations and one or more limited partners, who are liable only to the extent of their investments. Limited partnership is the legal structure used by most venture and private equity funds. Limited partners also enjoy rights to the partnership's cash flow, but are not liable for company obligations.5

Liquidation - 
  • When a business is bankrupt or terminated, its assets are sold and the proceeds pay creditors. Anything left over is distributed to shareholders.2
  • 1) The process of converting securities into cash. 2) The sale of the assets of a company to one or more acquirers in order to pay off debts. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock.3
  • This is an event that represents the complete or partial closing of a company. In a liquidation event, a company’s assets and material goods (securities) are converted into cash and/or distributed for sale to pay off existing corporate debt.4
  • Liquidation is the sale of the assets of a portfolio company to one or more acquirers when venture capital investors receive some of the proceeds of the sale.5

Liquidation Preference -  Liquidity preference is the right to receive a specific value for the stock if the business is liquidated.5

Liquidity Event - 
  • An event that allows a VC to realize a gain or loss on an investment. The ending of a private equity provider’s involvement in a business venture with a view to realizing an internal return on investment. Most common exit routes include Initial Public Offerings [IPOs], buy backs, trade sales, and secondary buyouts. (See also: Exit Strategy.)3
  • This occasion represents the common exit strategy of most entrepreneurs and investors. When a corporation is purchased (through a merger or acquisition) or when an IPO is made, equity is converted to cash.4
  • Liquidity event is the way in which an investor plans to close out an investment. Liquidity event is also known as exit strategy.5

Lock-up Period - 
  • The period of time that certain stockholders have agreed to waive their right to sell their shares of a public company. Investment banks that underwrite initial public offerings generally insist upon lockups for a set period of time, typically 180 days from large shareholders (such as 1% ownership or more) in order to allow an orderly market to develop in the shares. The shareholders that are subject to lockup usually include the management and directors of the company, strategic partners, and such large investors. These shareholders have typically invested prior to the IPO at a significantly lower price to that offered to the public and therefore stand to gain considerable profits. If a shareholder attempts to sell shares that are subject to lockup during the lockup period, the transfer agent will not permit the sale to be completed.3
  • Lock-Up Period is the period an investor must wait before selling or trading company shares subsequent to an exit, usually in an initial public offering the lock-up period is determined by the underwriters.5

Management Buy-in -  Management buy-in is the purchase of a business by an outside team of managers who have found financial backers and plan to manage the business actively themselves.9 
Management Buy-out -  Management buy-out is the term used for the funds provided to enable operating management to acquire a product line or business, which may be at any stage of development, from either a public or private company.9 

Management Fee - 
  • A charge levied by an investment manager for managing an investment fund. The management fee is intended to compensate the managers for their time and expertise. It can also include other items such as investor relations expenses and the administration costs of the fund.1
  • Compensation for the management of a venture fund’s activities, paid from the fund to the general partner or investment advisor. This compensation generally includes an annual management fee.3

Management Team -  The persons who oversee the activities of a venture capital fund.3
Market -  Based on supply and demand, this term refers to the societal arrangement whereby consumers purchase goods and services from businesses and individual sellers in exchange for currency. In economic relevance, the “market” can be divided into different industries, such as biotechnology, food, etc. The exchange between the consumer and seller contribute to a society’s market economy which greatly depends on these transactions for economic viability.4

Market Capitalization -  The total dollar value of all outstanding shares. Computed as shares multiplied by current price per share. Prior to an IPO, market capitalization is arrived at by estimating a company’s future growth and by comparing a company with similar public or private corporations. (See also: Pre-Money Valuation.)3

Merger - 
  • Combination of two or more corporations in which greater efficiency is supposed to be achieved by the elimination of duplicate plant, equipment, and staff, and the reallocation of capital assets to increase sales and profits in the enlarged company.3
  • This is a type of corporate approach whereby one company combines or “merges” with another to increase their overall operations and profitability. An example of this type of corporate strategy occurred in 2000 when America Online, Inc. merged with Time Warner to create AOL Time Warner.4

Mezzanine Debt -  Mezzanine debts are debts that incorporates equity-based options, such as warrants, with a lower-priority debt. Mezzanine debt is actually closer to equity than debt, in that the debt is usually only of importance in the event of bankruptcy. Mezzanine debt is often used to finance acquisitions and buyouts, where it can be used to prioritize new owners ahead of existing owners in the event that a bankruptcy occurs.5

Mezzanine Financing - 
  • A blend of debt and equity financing, requiring no collateral and does not necessarily involve giving up interest in the company. This capital is typically used to fund growth or to enable management to buy out company owners for succession purposes. The interest rate is high, ranging from 20-30% and lenders can convert their stake to equity or ownership in the event of default.2
  • Refers to the stage of venture financing for a company immediately prior to its IPO. Investors entering in this round have lower risk of loss than those investors who have invested in an earlier round. Mezzanine-level financing can take the structure of preferred stock, convertible bonds, or subordinated debt.3
  • Mezzanine Financing is a late-stage venture capital, usually the final round of financing prior to an IPO. Mezzanine Financing is for a company expecting to go public usually within 6 to 12 months, usually so structured to be repaid from proceeds of a public offerings, or to establish floor price for public offer.5

Mezzanine Level -  Mezzanine level is a term used to describe a company which is somewhere between startup and IPO. Venture capital committed at mezzanine level usually has less risk but less potential appreciation than at the startup level, and more risk but more potential appreciation than in an IPO.9

Minority Enterprise Small Business Investment Companies -  Minority Enterprise Small Business Investment Companies or MESBICs are government-chartered venture firms that can invest only in companies that are at least 51 percent owned by members of a minority group.5 

Mutual Fund -  A mutual fund, or an open-end fund, sells as many shares as investor demand requires. As money  flows in, the fund grows. If money flows out of the fund, the number of the fund’s outstanding shares drops. Open- end funds are sometimes closed to new investors, but existing investors can still continue to invest money in the fund.  In order to sell shares, an investor usually sells the shares back to the fund. If an investor wishes to buy additional   shares in a mutual fund, the investor must buy newly issued shares directly from the fund. (See also: Closed-end Funds.)3

NASD -  The National Association of Securities Dealers. A mandatory association of brokers and dealers in the over- the-counter securities business. Created by the Maloney Act of 1938, an amendment to the Securities Act of 1934.3

NASDAQ -  An automated information network which provides brokers and dealers with price quotations on securities traded over the counter.3

National Angel Capital Organization -  (NACO) Canada’s analogue of the American Angel Capital Association (ACA), and a close affiliate and partner of the ACA.  See http://www.nacocanada.com for more information. 1 

Net Asset Value -  (NAV) Calculated by adding the value of all of the investments in the fund and dividing by the number of shares of the fund that are outstanding. NAV calculations are required for all mutual funds (or open-end funds) and closed-end funds. The price per share of a closed-end fund will trade at either a premium or a discount to the NAV of that fund, based on market demand. Closed-end funds generally trade at a discount to NAV.³ 

Net Financing Cost -  Also called the cost of carry or, simply, carry, the difference between the cost of financing the purchase of an asset and the asset’s cash yield. Positive carry means that the yield earned is greater than the financing cost; negative carry means that the financing cost exceeds the yield earned.3

Net Income - 
  • The net earnings of a corporation after deducting all costs of selling, depreciation, interest expense, and taxes.3
  • This is the adjusted calculation of money that a company generates after deducting the necessary expenses from the total profit made. Essential costs, such as taxes and interest, are added together and then subtracted from the total revenue.4

Net Present Value -  An approach used in capital budgeting where the present value of cash inflow is subtracted from the present value of cash outflows. NPV compares the value of a dollar today versus the value of that same dollar in the future after taking inflation and return into account.3 

New Issue -  A stock or bond offered to the public for the first time. New issues may be initial public offerings by previously private companies or additional stock or bond issues by companies already public. New public offerings are registered with the Securities and Exchange Commission. (See Securities and Exchange Commission and Registration.)3

Newco -  The typical label for any newly organized company, particularly in the context of a leveraged buyout.3

No Shop, No Solicitation Clauses  -  A no shop, no solicitation, or exclusivity, clause requires the company to negotiate exclusively with the investor, and not solicit an investment proposal from anyone else for a set period of time after the term sheet is signed. The key provision is the length of time set for the exclusivity period.3

Non Solicitation Agreement -  An agreement under which an employee or principal agrees not to solicit their existing employer’s or company’s employees, clients or customers after departing the company either for their own benefit or that of a competitor.6

Non-Compete Agreement -  An agreement between two parties under which one party agrees not to become employed by, enter into or establish a similar business, trade or profession in competition with the other party. Such agreements typically restrict competition on a geographic basis for a certain period of time.6 

Non-Disclosure Agreement, (NDA) -  An NDA is a formal legal agreement between two or more parties undertaken by the parties to keep information shared or provided by one party to another confidential. 
NDAs are utilized where parties become privy to confidential and / or sensitive information, which the disclosing party desires not be made available to third parties or the general public. Such agreements may also include the confidentiality of the relationship in existence between the parties.6 

Nonaccredited -  An investor not considered accredited for a Regulation D offering. (See “Accredited Investor.”)3

NYSE -  The New York Stock Exchange. Founded in 1792, the largest organized securities market in the United States. The Exchange itself does not buy, sell, own, or set prices of stocks traded there. The prices are determined by public supply and demand. Also known as the Big Board.3

Offering Documents -  Documents evidencing a private-placement transaction. Include some combination of a purchase agreement and/or subscription agreement, notes or stock certificates, warrants, registration-rights agreement, stockholder or investment agreement, investor questionnaire, and other documents required by the particular deal.3

One Liner (Cocktail party) -  A cocktail party one liner is a clear, crisp, engaging sentence which provides potential investors a succinct overview of your startup concept and business model. It challenges the investor to become intrigued by both the implied problem and your proposed solution.6

Open-end Fund -  An open-end fund, or a mutual fund, generally sells as many shares as investor demand requires. As money flows in, the fund grows. If money flows out of the fund, the number of the fund’s outstanding shares drops. Open-end funds are sometimes closed to new investors, but existing investors can still continue to invest money in the fund. In order to sell shares, an investor generally sells the shares back to the fund. If an investor wishes to buy additional shares in a mutual fund, the investor generally buys newly issued shares directly from the fund.3

Operating Agreement -  An agreement between the members of a Limited Liability Company, (LLC) which governs the LLC’s business including member powers, rights, duties and obligations, and outlining the decision making process related to operational, functional and financial issues in a structured manner. The operating agreement of LLC companies is similar to bylaws utilized by corporations.6

Operating Budget -  A budget consisting of estimates of income and expenses from a company’s operations typically prepared on an annual basis. Expenses typically include operating costs related to producing the company’s product or service, labor, administration and marketing but exclude long term and non-operational items such as capital debt. 

Operating income would typically exclude items such as investment income.6 

Option -  A security granting the holder the right to purchase a specified number of a Company’s securities at a designated price at some point in the future. The term is generally used in connection with employee benefit plans as Incentive Stock Options (“ISOs” or “statutory options”) and Non-qualified stock options (“NSOs” or “Nonquals”).However “stand-alone options” may be issued outside of any plan. Generally non-transferable, in distinction to warrants.3

Option Pool -  The number of shares set aside for future issuance to employees of a private company.3

OTC -  Over-the-Counter. A market for securities made up of dealers who may or may not be members of a formal securities exchange. The over-the-counter market is conducted over the telephone and is a negotiated market rather than an auction market such as the NYSE.3 

Outstanding Stock -  The amount of common shares of a corporation which are in the hands of investors. It is equal to the amount of issued shares less treasury stock.3

Oversubscription -  Occurs when demand for shares exceeds the supply or number of shares offered for sale. As a result, the underwriters or investment bankers must allocate the shares among investors. In private placements, this occurs when a deal is in great demand because of the company’s growth prospects.3

Oversubscription Privilege -  In a rights issue, arrangement by which shareholders are given the right to apply for any shares that are not purchased.3

Pari  Passu -  At an equal rate or pace, without preference.3

Participating Preferred -  A preferred stock in which the holder is entitled to the stated dividend and also to additional dividends on a specified basis upon payment of dividends to the common stockholders.3

Participating Preferred Stock -  Preferred stock that has the right to share on a pro-rata basis with any distributions to the common stock upon liquidation, after already receiving the preferred-liquidation preference.3

Partnership -  A nontaxable entity in which each partner shares in the profits, losses, and liabilities of the partnership. Each partner is responsible for the taxes on its share of profits and losses.3

Partnership Agreement -  The contract that specifies the compensation and conditions governing the relationship between investors (LPs) and the venture capitalists (GPs) for the duration of a private equity fund’s life.3

Penny Stocks -  Low-priced issues, often highly speculative, selling at less than $5/share.3

Performance Based Vesting -  Under performance-based vesting, options Vest only if specified performance criteria are met. For example, options may vest if annual earnings per share exceed a certain target by a specified date.9

Piggyback Registration -  A situation when a securities underwriter allows existing holdings of shares in a corporation to be sold in combination with an offering of new public shares.3

PIK Debt Securities -  (Payment in Kind) PIK Debt are bonds that may pay bondholders compensation in a form other than cash.3 

PIPE -  ("Private Investment for Public Equity”)Private offering followed by a resale registration.3 

Pipeline -  Pipeline is the flow of upcoming underwriting deals.5

Pitch - 
  • A presentation, typically supported by slides developed in PowerPoint or Keynote, in which a startup company's founder describes his or her company and seeks an investment from angels or venture capitalists.7
  • Pitch is the set of activities intended to persuade someone to buy a product or take a specific course of action.5

Pitch Deck -  A presentation created by entrepreneurs that details the attributes of a startup opportunity in order to help the entrepreneurs communicate it with investors, in their efforts to raise money to fund their venture. The presentation, which typically includes approximately a dozen slides, provides a summary of the startup’s business plan, and helps investors determine if they have a continued interest in evaluating the company.6

PIV -  Pooled Investment Vehicle. A legal entity that pools various investors’ capital and deploys it according to a specific investment strategy.8
Placement Agent -  The investment bank, broker, or other person that locates investors to purchase securities from the Company in a private offering, in exchange for a commission.3

Plain English Handbook -  The Securities and Exchange Commission online version of “Plain English Handbook: How to Create Clear SEC Disclosure Documents.”6

Poison Pill -  A right issued by a corporation as a preventative to a takeover measure. It allows right holders to purchase shares in either their company or in the combined target and bidder entity at a substantial discount, usually 50%. This discount may make the takeover prohibitively expensive.3

Portal -  The second type of "Intermediary" authorized by the JOBS Act to facilitate securities-based crowdfunding, providing legally-mandated information to potential investors, and then managing transfer of the offered funds to the issuing companies in return for an equity ownership stake in or debt instrument from the issuing company.1

Portfolio Companies - 
  • Companies in which a given fund has invested.3
  • This refers to the company(ies) that an investor has invested in.4
  • A portfolio company is a company or entity in which a venture capital firm or buyout firm invests. All of the companies currently backed by a private equity firm can be spoken of as the firms portfolio.5

Post-money Cap Table -  A cap table depicting the ownership of the founders and investors in terms of absolute quantities of shares or units, depending upon entity type, and percentages of total ownership they represent. These ownership stakes and the related analyses, typically represent the stakeholders of a startup venture and also provides analysis of equity dilution. The table depicting the value of the entity and equity holdings by each of the stakeholders after an investment by new investors is a post-money cap table.6

Post-money Valuation - 
  • The company’s value immediately after funding. If Pre-Money Valuation = $2M and the company raises $500K, then the post-money valuation = $2.5M.2
  • The valuation of a company immediately after the most recent round of financing. This value is calculated by multiplying the company's total number of shares by the share price of the latest financing.3

Pre-money Cap Table -  A cap table depicting the ownership of the founders and investors in terms of absolute quantities of shares or units, depending upon entity type, and percentages of total ownership they represent. These ownership stakes and the related analyses, typically represent the stakeholders of a startup venture and also provides analysis of equity dilution. The table depicting the value of the entity and equity holdings by each of the stakeholders prior to an investment by new investors is a pre-money cap table.6

Pre-money Valuation - 
  • The company’s value immediately before funding. If Post-Money Valuation = $2.5M and the company raised $500K, then the pre-money valuation = $2M.2
  • The valuation of a company prior to a round of investment. This amount is determined by using various calculation models, such as discounted P/E ratios multiplied by periodic earnings or a multiple times a future cash flow discounted to a present cash value and a comparative analysis to comparable public and private companies.3

Preemptive Right -  A shareholder's right to acquire an amount of shares in a future offering at current prices per share paid by new investors, whereby his/her percentage ownership remains the same as before the offering.3

Preferred Dividend -  A dividend ordinarily accruing on preferred shares payable where declared and superior in right of payment to common dividends.3
Preferred Stock - 
  • A class of ownership that has a higher claim on assets than Common Stock. In the event of Liquidation, preferred stock shareholders have priority over earnings and assets and generally earn dividends, but forego voting rights.2
  • A class of capital stock that may pay dividends at a specified rate and that has priority over common stock in the payment of dividends and the liquidation of assets. Many venture capital investments use preferred stock as their investment vehicle. This preferred stock is convertible into common stock at the time of an IPO.3
  • This is a type of corporate share where the holders can exercise more rights, preferences, and privileges than those with common stocks. It is often issued by private corporations or enterprises that have not gone public yet. Both angel investors and venture capitalists prefer to invest with preferred stock because of the superior rights and protective provisions associated with these shares.4

Prepaid Warrant -  A prepaid warrant is a warrant issued by an issuer entitling the holder to exercise into a specified number of different securities, for no additional financial consideration, during a specified time period.9

Private Equity - 
  • A company ownership position that is not listed and cannot be traded on a public securities exchange.  Issuance, ownership and exchange of private securities are regulated differently from those of public securities under federal and state law.1
  • Equity securities of companies that have not “gone public” (are not listed on a public exchange). Private equities are generally illiquid and thought of as a long-term investment. As they are not listed on an exchange, any investor wishing to sell securities in private companies must find a buyer in the absence of a marketplace. In addition, there are many transfer restrictions on private securities. Investors in private securities generally receive their return through one of three ways: an initial public offering, a sale or merger, or a recapitalization.3
  • Private equities are equity securities of unlisted companies. Private equities are generally illiquid and thought of as a long-term investment. Private equity investments are not subject to the same high level of government regulation as stock offerings to the general public. Private equity is also far less liquid than publicly traded stock.5

Private Offering/Private Placement -  Sale of unregistered, restricted securities by the company.3

Private Placement - 
  • Also known as a Reg. D offering. The sale of a security directly to a limited number of investors in a private transaction.3
  • Private placement is a term used specifically to denote a private investment in a company that is publicly held. Private equity firms that invest in publicly traded companies sometimes use the acronym PIPEs to describe the activity. Private placements do not have to be registered with organizations such as the SEC because no public offering is involved.5

Private Placement Memorandum -  Also known as an Offering Memorandum. A document that outlines the terms of securities to be offered in a private placement. Resembles a business plan in content and structure.3

Private Securities -  Private securities are securities that are not registered and do not trade on an exchange. The price per share is set through negotiation between the buyer and the seller or issuer.3

Pro Forma -  A pro forma is a description of financial statements that have one or more assumptions or hypothetical conditions built into the data. A financial projection based on assumptions. Also, refers to a statement of income and balance sheets that exclude non-recurring items.9

Professional Partner -  Services and professional partners of the startup entity typically including, but not limited to their commercial attorney, intellectual property attorney, accountant / CPA, consultants and contract development partners.6

Promissory Note - 
  • [“Note”] Debt instrument in which the maker promises to pay the holder according to its terms.3
  • This term can also be referred to as a “note” or debenture. It is a legal document that details the principal amount owed, interest rates, and maturity dates. With this contract, the borrower promises to pay back the lender according to the terms of agreement.4

Prospectus -  A formal written offer to sell securities that provides an investor with the necessary information to make an informed decision. A prospectus explains a proposed or existing business enterprise and must disclose any material risks and information according to the securities laws. A prospectus must be filed with the SEC and be given to all potential investors. Companies offering securities, mutual funds, and offerings of other investment companies including Business Development Companies are required to issue prospectuses describing their history, investment philosophy or objectives, risk factors, and financial statements. Investors should carefully read them prior to investing.3

Public Company - 
  • A company that has securities that have been sold in a registered offering and that are traded on a stock exchange or NASDAQ. Must be a Reporting Company under SEC rules. Often used incorrectly to describe companies that are only Reporting Companies and that have not conducted a registered offering under Securities Act.3
  • Under SEC rules, a company that decides to go “public” offers their securities (stock, bonds, liabilities) to be sold in a registered public offering. Through the sale of such assets, a corporation can raise capital for their company, employees, or executive staff. These public offerings are often traded on a stock exchange.4

Put option -  The right to sell a security at a given price (or range) within a given time period.3

QPAM -  Qualified professional asset manager as defined by ERISA.3 

Raising Capital -  Raising capital refers to obtaining capital from investors or venture capital sources.9

Recapitalization -  The reorganization of a company’s capital structure. A company may seek to save on taxes by replacing preferred stock with bonds in order to gain interest deductibility. Recapitalization can be an alternative exit strategy for venture capitalists and leveraged-buyout sponsors. (See also: Exit Strategy and Leveraged Buyout.)3

Reconfirmation -  The act a broker/dealer makes with an investor to confirm a transaction.3

Red Herring -  The common name for a preliminary prospectus, due to the red SEC required legend on the cover. (See also: Prospectus.)3

Redeemable Preferred Stock -  Redeemable preferred stock, also known as exploding preferred, at the holder’s option after (typically) five years, which in turn gives the holders (potentially converting to creditors) leverage to induce the company to arrange a liquidity event. The threat of creditor status can move the founders off the dime if a liquidity event is not occurring with sufficient rapidity.3

Registered Offering -  [“Public Offering”] A transaction in which a Company sells specified securities to the public under a Registration Statement which has been declared effective by the SEC.3 

Registration -  The SEC’s review process of all securities intended to be sold to the public. The SEC requires that a registration statement be filed in conjunction with any public securities offering. This document includes operational and financial information about the company, the management, and the purpose of the offering. The registration statement and the prospectus are often referred to interchangeably. Technically, the SEC does not “approve” the disclosures in prospectuses.3

Registration Obligation -  The obligation of Company to register the shares issued to an investor in a private offering for resale to the public through a Registration Statement which the SEC has declared effective.3

Registration Rights -  The right to require that a company register restricted shares. Demand Registered Rights enable the shareholder to request registration at any time, while Piggy Back Registration Rights enable the shareholder to request that the company register his or her shares when the company files a registration statement (for a public offering with the SEC).³
Registration Rights Agreement -  Separate agreement in which the investor’s registration rights are evidenced.3

Registration Statement -  The document filed by a Company with the SEC under the Securities Act in order to obtain approval to sell the securities described in the Registration Statement to the public. [S-1, S-2, S-3, S-4, SB-1, SB-2, S-8, etc.] Includes the Prospectus.3

Regulation A -  SEC provision for simplified registration for small issues of securities. A Reg. A issue may require a shorter prospectus and carries lesser liability for directors and officers for misleading statements.3

Regulation C -  The regulation that outlines registration requirements for Securities Act of 1933.3

Regulation D -  Regulation D is the rule (Reg. D is a “regulation” comprising a series of “rules”) that allow for the issuance and sale of securities.3

Regulation D Offering -  (See Private Placement.)3

Regulation S -  The rules relating to Offers and Sales made outside the US without SEC Registration.
Regulation S-B -  Reg. S-B of the Securities Act of 1933 governs the Integrated Disclosure System for 
Small Business Issuers.3

Regulation S-K -  The Standard Instructions for Filing Forms Under Securities Act of 1933, 
Securities Exchange Act of 1934, and Energy Policy and Conservation Act of 1975.3

Regulation S-X  -  The regulation that governs the requirements for financial statements under the Securities Act of 1933 and the Securities Exchange Act of 1934.3

Reporting Company -  A company that is registered with the SEC under the Exchange Act.3

Resale Registration -  Registration by a Company of the investor’s sale of the shares purchased by the investor in a private offering.3

Restricted Securities -  Public securities that are not freely tradable due to SEC regulations. (See also: Securities and Exchange Commission.)3

Restricted Shares -  Shares acquired in a private placement are considered restricted shares and may not be sold in a public offering absent registration or after an appropriate holding period has expired. Non-affiliates must wait one year after purchasing the shares, after which time they may sell less than 1% of their outstanding shares each quarter. For affiliates, there is a two-year holding period.3

Retained Earnings -  Retained earnings are the corporate profits that are neither paid out in cash dividends to stockholders nor used to increase capital stock, but are reinvested in the company. It is calculated by adding company's net income to beginning retained earnings and subtracting any dividends paid to shareholders.9

Return on Investment - 
  • (ROI) This term is also referred to as the rate on return (ROR) or rate of profit. It is the amount of money that is gained in a past or existing investment. For example, angel investors tend to invest in startups and early stage companies. Because such investment is considered to be risky, they expect a large ROI to compensate for such risk.4
  • Return On Investment or ROI is the profit or loss resulting from an investment transaction, usually expressed as an annual percentage return. ROI is a return ratio that compares the net benefits of a project versus its total costs.5

Right of First Refusal -  A right is given to enter into a business transaction before others. For example, preferred stockholders have the right to purchase additional shares issued by the company.2 The right of first refusal gives the holder the right to meet any other offer before the proposed contract is accepted.3

Rights Offering -  Issuance of “rights” to current shareholders allowing them to purchase additional shares, usually at a discount to market price. Shareholders who do not exercise these rights are usually diluted by the offering.  Rights are often transferable, allowing the holder to sell them on the open market to others who may wish to exercise them. Rights offerings are particularly common to closed-end funds, which cannot otherwise issue additional ordinary shares.3

Risk - 
  • The chance of loss on an investment due to many factors, including inflation, interest rates, default, politics, foreign exchange, call provisions, etc. In Private Equity, risks are outlined in the Risk Factors section of the Placement Memorandum.8
  • This word refers to the probability of loss on an investment. For example, venture capitalists tend to invest in later-staged companies because of its stability and established generated cash flow. Their investment is considered to be “less risky” than that of angel investors, who enjoy investing in early- stage enterprises with no proven establishment of success.4
  • Risk is the quantifiable likelihood of loss or less-than-expected returns. Risk includes the possibility of losing some or all of the original investment. Risk is usually measured using the historical returns or average returns for a specific investment.5

Royalty Based Financing -  Royalty based financing presumes a fundamental trade-off between the investor and the business owner. In lieu of an equity ownership stake given to the investor, business owners agree to return to the investor the original principal plus either a predetermined multiple of the original investment (fixed dollar payback) or payment of the royalty until a fixed period of time has elapsed (fixed time payback). In some cases the royalty is based on a percentage of sales of a specific product or set of products.9

Rule 144 -  Rule 144 provides for the sale of restricted stock and control stock. Filing with the SEC is required prior to selling restricted and control stock, and the number of shares that may be sold is limited.4

Rule 144A -  A safe-harbor exemption from the registration requirements of Section 5 of the 1933 Act for resales of certain restricted securities to qualified institutional buyers, which are commonly referred to as “QIBs.” In particular, Rule 144A affords safe-harbor treatment for reoffers or resales to QIBs — by persons other than issuers — of securities of domestic and foreign issuers that are not listed on a U.S. securities exchange or quoted on a U.S. automated inter-dealer quotation system. Rule 144A provides that reoffers and resales in compliance with the rule are not “distributions” and that the reseller is therefore not an “underwriter” within the meaning of Section 2(a)(11) of the 1933 Act. If the reseller is not the issuer or a dealer, it can rely on the exemption provided by Section 4(1) of the 1933 Act. If the reseller is a dealer, it can rely on the exemption provided by Section 4(3) of the 1933 Act.3

Rule 144A Exchange Offer -  A transaction in which one class of securities that were issued in a private placement are exchanged for another, unusually almost identical, class of securities, in a transaction registered with the SEC on a Form S-4 Registration Statement.3

Rule 501 -  Rule 501 of Regulation D defines Accredited Investor, among other definitions and regulations.3

Rule 505 -  Rule 505 of Regulation D is an exemption for limited offers and sales of securities.3

Rule 506 -  Rule 506 of Regulation D is considered a “safe harbor” for the private-offering exemption of Section 4(2) of the Securities Act of 1933. Companies using the Rule 506 exemption can raise an unlimited amount of money if they meet certain exemptions.3

SaaS -  SaaS refers to Software as a Service, a cloud based software application where users are charged on a subscription basis.6

SBIR -  Small Business Innovation Research Program. See Small Business Innovation Development Act of 1982.3 

Secondary Purchase -  Secondary Purchase is purchase of stock in a company from a shareholder rather than purchasing stock directly from the company.5

Secondary Sale -  The sale of private or restricted holdings in a portfolio company to other investors.3
Securities -  Includes all types of equity and debt instruments and rights in and to them.3

Securities Act of 1933 -  The federal law covering new issues of securities. It provides for full disclosure of pertinent information relating to the new issue and also contains antifraud provisions.3

Securities Act of 1934 -  The federal law that established the Securities and Exchange Commission. The act outlaws misrepresentation, manipulation, and other abusive practices in the issuance of securities.  Securities and Exchange Commission: The SEC is an independent, nonpartisan, quasi-judicial regulatory agency that is responsible for administering the federal securities laws. These laws protect investors in securities markets and ensure that investors have access to all material information concerning publicly traded securities. Additionally, the  SEC regulates firms that trade securities, people who provide investment advice, and investment companies.3

Seed Capital -  Seed Capital is the money used to purchase equity-based interest in a new or existing company. This seed capital is usually quite small because the venture is still in the idea or conceptual stage.5 

Seed Money - 
  • The first round of capital for a start-up business. Seed money usually takes the structure of a loan or an investment in preferred stock or convertible bonds, although sometimes it is common stock. Seed money provides startup companies with the capital required for their initial development and growth. Angel investors and early-stage venture capital funds often provide seed money.3
  • (Seed Capital) This is the initial set of capital for newly-formed or start-up companies. Angel investors are usually the primary source of seed capital for new businesses.4

Seed Stage - 
  • The key characteristic is product development. A venture in this stage is unlikely generating revenue, but customers are interacting with the product. The business model is not yet fully developed, and Seed capital is needed for research and development. This stage generates the first round of capital for the venture.2
  • (Start-up Stage) This is the initial phase of a company's development whereby a prospective business is currently developing new products and services which have not been fully tested and introduced to the public. This company phase usually lasts an average of 18 -24 months before entering into its early stage of development.4

Seed Stage Financing -  An initial state of a company’s growth characterized by a founding management team, business-plan development, prototype development, and beta testing.3
Senior Securities -  Securities that have a preferential claim over common stock on a company’s earnings and in the case of liquidation. Generally, preferred stock and bonds are considered senior securities.3

Series A -  A company’s first significant round of venture funding (though angels often participate in this round).2

Series A Preferred Stock - 
  • The first round of stock offered during the seed or early-stage round by a portfolio company to the venture investor or fund. This stock is convertible into common stock in certain cases such as an IPO or the sale of the company. Later rounds of preferred stock in a private company are called Series B, Series C, and so on.3
  • Series A Preferred Stock is the first round of stock offered during the seed or early stage round by a portfolio company to the venture capitalist. Series A preferred stock is convertible into common stock in certain cases such as an IPO or the sale of the company. Later rounds of preferred stock in a private company are called Series B, Series C and so on.5

Shell Corporation -  A corporation with no assets and no business. Typically, shell corporations are designed for the purpose of going public and later acquiring existing businesses. Also known as Specified Purpose Acquisition Companies (SPACs).3

Silent Partner -  A silent partner is an investor who does not have any management responsibilities but provides capital and shares liability for any losses experienced by the entity. Silent partners are liable for in any losses up to the amount of their invested capital and participate in any tax and cash flow benefits.5

Small Business Administration (SBA) -  Provides loans to small-business investment companies (SBICs) that supply venture capital and financing to small businesses.3 

Small Business Innovation Development Act of 1982 -  The Small Business Innovation Research (SBIR) program is a set-aside program for domestic small-business concerns to engage in Research/Research and Development (R/R&D) that has the potential for commercialization. The SBIR program was established under the Small Business Innovation Development Act of 1982, reauthorized until September 30, 2000 by the Small Business Research and Development Enhancement Act, and reauthorized again until September 30, 2008 by the Small Business Reauthorization Act of 2000.3
Small Business Investment Companies -  (SBIC) Small Business Investment Companies or SBIC are lending and investment firms that are licensed and regulated by the Small Business Administration . The licensing enables them to borrow from the federal government to supplement the private funds of their investors. SBICs prefer investments between $100,000 to $250,000 and have much more generous underwriting guidelines than a venture capital firm.5 

Society for Corporate Compliance and Ethics -  (SCCE) A non-profit professional organization dedicated to fostering law-compliant and ethical corporate behavior.  See http://www.corporatecompliance.org for more information.1 

Staggered Board -  This is an anti-takeover measure in which the election of the directors is split in separate periods so that only a percentage (e.g., one-third) of the total number of directors come up for election in a given year. It is designed to make taking control of the board of directors more difficult.3

Startup -  Startup is a new business venture in its earliest stage of development.5

Statutory  Voting -  A method of voting for members of the Board of Directors of a corporation. Under this method, a shareholder receives one vote for each share and may cast those votes for each of the directorships. For example: An individual owning 100 shares of stock of a corporation that is electing six directors could cast 100 votes for each of the six candidates. This method tends to favor the larger shareholders.3

Stock Option Pool -  Shares of stock reserved for employees of a company. The option pool is a way of attracting talented employees to a startup company - if the employees help the company do well enough to go public, they will be compensated with stock. Employees who get into the startup early will usually receive a greater percentage of the option pool than employees who arrive later.2

Stock Options -  1) The right to purchase or sell a stock at a specified price within a stated period. Options are a popular investment medium, offering an opportunity to hedge positions in other securities, to speculate on stocks with relatively little investment, and to capitalize on changes in the market value of options contracts themselves through a variety of options strategies. 2) A widely used form of employee incentive and compensation. The employee is given an option to purchase its shares at a certain price (at or below the market price at the time the option is granted) for a specified period of years.3

Strategic Investors -  Corporate or individual investors that add value to investments they make through industry and personal ties that can assist companies in raising additional capital as well as provide assistance in the marketing and sales process.3

Subordinated Debt - 
  • A loan that ranks below other loans in an event of Liquidation. This type of loan is riskier than unsubordinated debt because loan holders have claims to assets or earnings after senior debt holders are paid.2
  • [Note Debt]  Debt which by its terms has no right to be paid until another debt holder is paid. Also referred to as “junior” debt.3

Subscription Agreement - 
  • The application submitted by an investor wishing to join a limited partnership. All prospective investors must be approved by the General Partner prior to admission as a partner.3
  • An application under which an investor applies to acquire a specific number of shares or units of a company at a specific price, at a later date, assuming the investor can be determined to be qualified under SEC guidelines and the company’s meeting certain conditions. The agreement establishes the terms and conditions under which the investor will be bound if accepted.6

Syndicate -  Underwriters or broker/dealers who sell a security as a group.3
Syndication -  The process whereby a group of venture capitalists will each put in a portion of the amount of money needed to finance a small business.5

Tag-Along Rights / Rights of Co-Sale -  A minority-shareholder protection affording the right to include their shares in any sale of control and at the offered price.3

Takedown Schedule -  A takedown schedule means the timing and size of the capital contributions from the limited partners of a venture fund.3
Tax-free Reorganizations -  Types of business combinations in which shareholders do not incur tax liabilities. There are four types — A, B, C, and D reorganizations. They differ in various ways in the amount of stock/cash that can be offered.3
Tender offer -  An offer to purchase stock made directly to the shareholders. One of the more common ways hostile takeovers are implemented.3

Terms Sheet - 
  • A non-binding document that outlines the terms of the deal. Once the parties agree, more detailed legal documents are drafted consistent with the terms laid out in the terms sheet.2
  • A summary of the terms the investor is prepared to accept. A non-binding outline of the principal points which the Stock Purchase Agreement and related agreements will cover in detail.3
  • Term sheet is a non-binding agreement setting forth the basic terms and conditions under which an investment will be made. The term sheet is a template that is used to develop more detailed legal documents.5

Time Value of Money -  The basic principle that money can earn interest; therefore, something that is worth $1 today will be worth more in the future if invested. This is also referred to as future value.3
Treasury Stock -  Stock issued by a company but later reacquired. It may be held in the company’s treasury indefinitely, reissued to the public, or retired. Treasury stock receives no dividends and does not carry voting power while held by the company.3

Trust Indenture -  Agreement between the Company, the debt holders, and the trustee for the debt holders. Required for registered offerings of debt securities. (See Trust Indenture Act of 1939.)3

Turnaround -  Turnaround is the term used when the poor performance of a company or the business experiences a positive reversal.9

ULPA -  Uniform Limited Partnership Act, see also the RULPA, Revised Uniform Limited Partnership Act U.L.P.A. § 101 et seq. (1976), as amended in 1985 (R.U.L.P.A.).3

Underwriter - 
  • In jargon, the “underwriters” are the investment banks selling the securities in an underwritten registered offering. But beware, under the Securities Act, the class of persons who are considered “underwriters” is far more expansive and problematic.3
  • Underwriter is an investment banking firm committing successful distribution of a public issue, failing which the firm would take the securities being offered into its own books. An underwriter may also be a company that backs the issue of a contract, agreeing to accept responsibility for fulfilling the contract in return for a premium.5

Underwritten Offering -  Registered offering that is sold through a consortium of investment banks assembled by one or more lead investment banks.3
Unit Offering -  Private or public offering of securities in groups of more than one security. Most often a share of stock and warrant to purchase some number of shares of stock, but could be two shares of stock, a note and a share of stock, etc. Also used in some cases to refer to the sale of LP and LLC interests, since those interests are composed of more than one right.3

Venture -  Venture is often used for referring to a risky start-up or enterprise company.5

Venture Capital - 
  • Capital provided to early-stage, high potential, high risk, growth startups. Generally, venture capital investments are made after the Seed Stage.2
  • Venture Capital is the money and resources made available to startup firms and small businesses with exceptional growth potential. Most venture capital money comes from an organized group of wealthy investors.5

Venture Capital Financing - 
  • An investment in a startup business that is perceived to have excellent growth prospects but does not have access to capital markets. Type of financing sought by early-stage companies seeking to grow rapidly.3
  • This type of capital is obtained when a venture capitalist firm invests in a company.  Based on the amount needed, venture capital financing can be anywhere from $500,000 to $5 million, must be in its later stages of development, and show excellent financial potential.4

Venture Capital Firm -  Venture Capital Firm is an investment company that invests its shareholders' money in startups and other risky but potentially very profitable ventures.5

Venture Capital Funds -  Venture capital funds pool and manage money from investors seeking private equity stakes in small and medium-size enterprises with strong growth potential.5

Venture Capital Limited Partnership -  Venture Capital Limited Partnership is a limited partnership which is formed to invest in small startup businesses with exceptional growth potential.5

Venture Capitalist - 
  • This word refers to a group of high-net worth investors who invest in later stage companies. Unlike angel investors who use their own personal money, venture capitalists pool money from different sources for their investments.4
  • Venture Capitalist is a term used of an investor who provides capital to either start-up ventures or support small companies who wish to expand but do not have access to public funding.5

Vesting -  A process in which you “earn” your stock overtime. The purpose of vesting is to grant stock to people over a fixed period of time so they have an incentive to stick around. A typical vesting period for an employee or Founder might be 3 - 4 years, which would mean they would earn 25% of their stock each year over a 4 year period. If they leave early, the unvested portion returns back to the company.2

Voicemail Script -  A short, clear, crisp engaging message which provides a succinct overview of your startup concept and business model and can be shared via either email or telephone as a reply to potential investors who have expressed an interest in your opportunity.6

Voting Right -  The common stockholders’ right to vote their stock in the affairs of the company. Preferred stock usually has the right to vote when preferred dividends are in default for a specified amount of time. The right to vote may be delegated by the stockholder to another person.3

Warrant -  A type of security that entitles the holder to buy a proportionate amount of common stock or preferred stock at a specified price for a period of years. Warrants are usually issued together with a loan, a bond, or preferred stock and act as sweeteners, to enhance the marketability of the accompanying securities. They are also known as stock-purchase warrants and subscription warrants.3

Weighted Average Antidilution -  The investor’s conversion price is reduced, and thus the number of common shares received on conversion increased, in the case of a down round; it takes into account both: (a) the reduced price and, (b) how many shares (or rights) are issued in the dilutive financing.3

Williams Act of 1968 -  An amendment of the Securities and Exchange Act of 1934 that regulates tender offers and other takeover-related actions such as larger share purchases.3

Workout -  A negotiated agreement between the debtor and its creditors outside the bankruptcy process.3

World Business Angel Association -  (WBAA) A non-government organization whose direct members are national federations, which in turn represent business angel groups and networks in their respective countries.  Neither business angel groups themselves, nor individual business angel investors, are members of WBAA, although they may be involved with the organization in other ways and participate actively in its programs.  Countries whose national business angel federations are represented in the organization include Australia, Chile, China, France, Germany, India, Italy, New Zealand, Panama, Portugal, Scotland, Spain, United Arab Emirates, United Kingdom, and the United States, as well as the European Union.¹

Write-off -  The act of changing the value of an asset to an expense or a loss. A write-off is used to reduce or eliminate the value of an asset and reduce profits.3

Write-up/Write-down -  An upward or downward adjustment of the value of an asset for accounting and reporting purposes. These adjustments are estimates and tend to be subjective, although they are usually based on events affecting the investee company or its securities beneficially or detrimentally.3

Notes:  
  1. Source: Crowdfunding Professional Association website
  2. Source: 37 Angels website
  3. Source: Angel Capital Association website
  4. Source: Go4Funding rwebsite
  5. Source: FundingPost website
  6. Source:  FundingSage, LLC
  7. Source:  Angel Investing,  by David S. Rose
  8. Source: Institutional Limited Partners Association website
  9. Source: Venture Choice website

 

 

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