A collection of inevitable jargon and acronyms helping you to understand the VC language.
Accelerated vesting is a form of vesting that takes place at a faster rate than the initial vesting schedule. This allows the option holder to receive the monetary benefit from the option much sooner. The conditions or events upon which an accelerated vesting occurs are usually determined in the shareholders’ agreement. Typically, accelerated vesting is triggered by an exit, but an involuntary termination of employment can also be a trigger event. Acceleration triggered solely by the sale of the Company is called “single-trigger acceleration”, and results in some or all of the vesting restriction lapsing in connection with the sale (therefore providing an incentive for the employee to achieve an exit). “Double-trigger acceleration” requires two events to trigger acceleration – most typically an exit and the involuntary termination of the employee, usually within 6-18 months after closing. Typically the termination means termination by the company without “cause,” but can also include resignation by the employee for “good reason” (e.g. a cut in pay, mandated relocation or significant downgrade of duties).
Accelerators are institutions aimed at promoting and accelerating the development of startups by providing to the startups coaching, various support functions and facilities (e.g. office space, infrastructure) for a fixed period of time. In return, the accelerator usually receives an equity stake in the startup.
A program that is run by an accelerator. Usually, accelerator programs are structured and the more prestigious and successful an accelerator program is, the more rigorous the selection process can be.
An acqui-hire is when a company acquires a startup to obtain the startup's team, rather than to own its products or technology, which it often kills after the purchase. It has become an increasingly popular hiring method especially in silicon valley to gain access to talents that are not on the job market.
The process of taking over a controlling interest in another company is called an acquisition. The term also describes any deal where the bidder ends up with 50 % or more of the company taken over.
Acquisition finance is the external finance that companies use to fund an acquisition. This can be in the form of debt financing (e.g. bank debt) and/or equity financing.
An add-on (acquisition) or bolt-on (acquisition) is a private equity transaction where the acquired company is “added on” to an existing portfolio company. In add-on deals, the acquiring company is called the platform and the private equity firm is referred to as the sponsor. Ad-on acquisitions can be part of a buy-and-build strategy.
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, to refine the business strategy, to market the products, etc.
An advisory board is common among smaller companies. It usually consists of people, chosen by the company founders or investors in the company, whose experience, knowledge and influence can benefit the growth and direction of the business. Sometimes, the responsibility for certain decisions, e.g. the appointing of managing directors and the approval of certain management decisions, is transferred from the shareholders' meeting to the advisory board.
AI is short for artificial intelligence.
The first limited partner to commit to a fund is sometimes called the anchor tenant.
An angel investor is a person who provides a small amount of capital to a startup for a stake in the company. Such an angel investment typically precedes a seed round and usually happens when the startup is in its infancy. Although angel investors are rarely involved in the management of the startup, they often add value through their contacts and expertise.
Annex funds are side funds that can provide an extra pool of money to supplement the original venture capital funds.
Anti-dilution provisions are provisions in the shareholders’ agreement that are intended to protect the investor by preventing a subsequent issue of shares from being made at a lower price than the investor originally paid. This protects the original investment or value from being diluted. Examples of commonly-used anti-dilution protection include broad-based weighted average ratchet, narrow-based weighted average ratchet, and full ratchet anti-dilution.
See anti-dilution provisions.
An asset deal is an acquisition in which the buyer aquires from a company (essentially) all assets of the business or a part of its business (instead of acquiring the majority of shares in the company from its shareholders in a share deal).
When a company is acquired with the aim of splitting up its business divisions or assets and divesting them, this is called asset stripping.
B2B is short for "Business to Business" and describes a business that involves selling products or services to other businesses. B2B technology is also sometimes referred to as "enterprise technology". The conterpart to B2B is B2C which is short for "Business to Consumer" which is a business targeted at selling products or services directly to individual customers.
A balanced fund is a venture capital or private equity fund that has no special focus (e.g. on an industry or geography) but a strategy that covers a broad spectrum of the investment opportunities.
barriers to entry
Barriers to entry describes the obstacles that companies face when entering a given market, created by companies that are already established, with the purpose of preventing new companies from establishing themselves and reducing the sector´s profitability. Barriers to entry can include, for example, brands, patents, exclusive rights to a distribution channel, large investments required to get established.
A basis point (or BP) is one hundredth of one percent. Thus, 60 basis points is 0.6%, and so on.
A batch is a group of startups that is mentored under an accelerator program over a certain period of time, e.g. “Y Combinator runs a program with 2 batches each year and around 2.500 applicants for each batch”.
A bear hug is an acquisition offer that is so attractive that the company’s management must accept it, unless it is willing to risk protest by the shareholders.
A beauty contest (aka beauty parade) is a competitive pitch in which several investors or service provider (e.g. law firms, investment banks) present their offer or services to a company.
See beauty contest.
Benchmarking it the process of comparing the returns of a company or of a portfolio against a group of its peers.
Benchmarks are performance goals against which a company's success is measured. Investors often use benchmarks to help determine the performance of a company (also compared to competitors or similar companies) and whether to invest or to provide follow-on funding.
The Berkus method is a method for valuing pre-revenue startups. According to Berkus, the value depends on five main drivers: soundness of idea, quality of the management team, quality of the board, prototype, and product sales. Typical valuations range from € 1-6m. See also Modified Berkus method.
BIMBO is short for buy-in management buy-out.
A blind pool is a form of limited partnership which does not specify what investment opportunities the general partner plans to pursue.
The term “blow-out round” (or cram-down round) is sometimes used to describe a financing round upon which new investors with substantial capital are able to demand and receive contractual terms that effectively cause the issuance of sufficient new shares by the startup company to significantly dilute previous investors. See also washout round.
A person, project or activity that hinders the growth of a company is sometimes called a “boat anchor”.
See add-on (acquisition).
The book runner is the lead bank that manages the transaction process for an equity or debt financing, including documentation, syndication, pricing, allocation and closing.
The term "bootstrapped" evolved from the phrase "pulling oneself up by one's bootstraps". A bootstrapped company is a company that is funded by an entrepreneur's personal resources or the company's own revenue.
BP is short for basis point.
break-even (or break-even point or critical point) describes the point from which a startup begins to show positive operating results, i.e. when the turnover has reached a level where the results cover the fixed costs and the running costs so that the company is no longer loss-making but not yet profitable.
A break-up fee (or walkaway fee) is a contractually agreed fee the seller must pay to the purchaser if the seller breaches or decides to terminate a definitive acquisition agreement, e.g. if the seller decides to sell the business to a third party instead. The break-up fee usually arises where there has been a breach of an exclusivity provision, or under a go shop provision.
A bridge loan (sometimes referred to as a swing loan) is a short-term loan that is used until a company can arrange a more comprehensive longer-term financing (it "bridges" the gap between major financings). Bridge loans are typically sought when a company runs out of cash before it can obtain more capital investment through long-term debt or equity.
Burn rate (also referred to as cash burn rate) describes the rate at which a startup uses up its funding before it begins earning any revenue.
See angel investor.
business model canvas
Nearly every venture capital firm requires a business plan before even considering investing. A business plan typically starts with an executive summary which is the key to getting an investor’s attention (remember that venture capital firms can receive a lot of proposals every day so be clipped and precise!). The executive summary usually gives a brief synopsis of the business concept and history, industry, market, competition, management, marketing plan, as well as the financial projections. The rest of the business plan explains the contents in the executive summary in much more detail.
buy to sell
Investors that invest with the aim to eventually sell their investment to a third party have a buy to sell investment strategy. While this is true for most venture capital investors, corporate venture capital investors usually (also) have strategic reasons.
An investment strategy where a private equity firm or a company acquires several (complimentary) businesses in order to establish a larger group/holding.
buy-in management buy-out
A buy-in management buy-out (or BIMBO) is a combination of a management buy-in and a management buy-out. In this form of buyout, a group of existing managers acquire shares to ‘buy out’ the company from within and, simultaneously, an outside team of managers ‘buy in’ to the company management. Both parties may require financial assistance from private equity firms or venture capitalists in order to achieve this end.
The term "buy-out" generally refers to the purchase of a company or a controlling interest of a corporation's shares. Buyouts can have various forms, depending on who is buying and how the acquisition is structured, see e.g. management buy-out, management buy-in, leveraged buy-out, Institutional buy-out.
BVK is short for “Bundesverband Deutscher Kapitalbeteiligungsgesellschaften e.V.”. which is the German Private Equity and Venture Capital Association.
Canvas is a business-plan template often used by startup companies. It is a short and visual alternative to the traditional business plan and can be specifically geared towards startups. Specific variants include the business model canvas, the lean canvas, and the startup canvas.
A cap table (or capitalization table) is a document (usually an excel spreadsheet) that shows who the shareholders in a company are, how many shares each shareholder holds and what they each shareholder paid to attain that ownership. In addition to the total number of shares issued by the company, the cap table also shows for each financing round the class of the shares issued (e.g. series A preferred shares), any options granted, e.g. under an ESOP, and other equity instruments e.g. convertible loans, as well as the amount of investment received in each case.
When a venture capital fund has decided that it would like to invest in a startup, it will approach its own investors in order to draw down the money to be invested. The investors in the venture capital fund have promised to make a certain contribution to the fund but the capital call (also referred to as capital drawdown, drawdown or take downs) is the actual act of transferring the money so that it reaches the startup. See also capital commitment.
Every investor in a venture capital fund commits to investing a specified sum of money in the fund partnership over a specified period of time. The fund records this as the limited partnership's capital commitment. The sum of capital commitments is equal to the size of the fund. The actual transfer of the money is made in a capital call.
Capital distributions typically means the returns that an investor in a venture capital fund receives. It is the income and capital realised from investments less expenses and liabilities. Once a limited partner has had their cost of investment returned, further distributions are actual profit. The partnership agreement determines the timing of distributions to the limited partner. It will also determine how profits are divided among the limited partners and the general partner (this mechanism of allocation of capital realised from investments and profits is usually referred to as the waterfall).
See capital call.
When an asset is sold for more than the initial purchase cost, the profit is known as the capital gain. This is the opposite to capital loss, which occurs when an asset is sold for less than the initial purchase price. Capital gain refers strictly to the gain achieved once an asset has been sold – an unrealized capital gain refers to an asset that could potentially produce a gain if it was sold (sometimes also referred to as hidden reserves - because they are not shown on the company's balance sheet and are therefore "hidden"). An investor will not necessarily receive the full value of the capital gain – capital gains are often taxed; the exact amount will depend on the specific tax regime.
See capital gain.
See uninvested capital.
capital under management
Capital under management is the amount of capital that a venture capital fund has at its disposal, and is managing, for investment purposes.
See cap table.
A captive firm is a private equity firm that is tied to a larger organisation, typically a bank, insurance company or corporate group.
Carried interest (also simply referred to as carry or the promote) is the share of profits that the manager of a venture capital or private equity fund receives once the fund has returned the cost of investment to the fund investors. Carried interest is normally expressed as a percentage of the total profits of the fund. The industry norm is 20 %. The manager of a venture capital fund will normally therefore receive 20 % of the profits generated by the fund and distribute the remaining 80 % of the profits to investors of the fund.
See carried interest.
cash burn rate
See burn rate .
See catch-up clause.
The catch-up clause is a provision that allows the general partner of a venture capital fund to take, for a limited period of time, a greater share of the carried interest than would normally be allowed (such share also referred to as the catch-up. This continues until the time when the carried interest allocation, as agreed in the LPA, has been reached. This usually occurs when a fund has agreed a preferred return to investors – a fund may return the cost of investment, plus some other profits, to investors early.
change of control
A change of control occurs when (a) a majority stake is acquired by a party that held no or a minority interest before the acquisition, (b) a company is merged into another entity, or (c) a majority of the voting power of a company changes hands.
change of control bonus
A change of control bonus is a bonus of cash or shares given by private equity investors to members of a management group if they successfully negotiate a sale of the company for a price greater than a specified amount.
A service provider such as a law firm or investment bank usually cannot represent two competing parties in a transaction (e.g. two bidders wanting to acquire the same company) because of a possible conflict of interest, unless both parties agree to be represented by the same firm. In this case information barriers are set up within the firm of the service provider (e.g. separate file servers, separate teams of consultants) to prevent a conflict of interest. These barriers are called Chinese walls.
The churn rate (a.k.a. rate of attrition), is the percentage of customers or subscribers to a service who cut ties with the service or company during a given time period. These customers have “churned.”
The clawback is a provision often found in the limited partnership agreement of venture capital funds. Its purpose ist o ensure that the general partner does not receive more than its agreed percentage of carried interest over the life of the fund. So, for example, if 23 % of the partnership's profits are paid out tot he general partner instead of the agreed 20 %, the limited partners can clawback the extra 3 %.
In the context of a financing round, the term closing usually describes the final event to complete the investment, at which time all the legal documents are signed, the closing conditions are fulfilled and the funds are transferred. In the context of setting up a venture capital fund, the term closing can have a different meaning. E.g. when a venture capital fund announces it has reached its first or second closing, that does not mean that it is not seeking further investment but that it is ready to make a capital call for the money raised so far so that it can start investing. A venture capital fund may have many closings, but the usual number is around three. Only when a fund announces a final closing is it no longer open to new investors.
As the term suggests, closing conditions are conditions that must be satisfied (or waived) before the closing of a financing can occur (e.g. before the investors transfer their investments to a startup). The closing conditions can vary depending on the individual situation of the startup and the financing round; common examples of closing conditions include legal opinions, the completion of certain milestones by the startup or passing shareholders' resolutions (e.g. for changing the articles of association).
Closing date is the date when a transaction is brought to completion, i.e. the date on which the closing occurs.
A private equity transaction involving two or more firms is called a club deal.
The term is sometimes used to describe any two parties that invest alongside each other in the same startup, however, when referring to limited partners in a venture capital fund, this term has a special meaning: If a limited partner in a fund has co-investment rights, it can invest directly in a startup that is also backed by the venture capital fund. The investor therefore ends up with two separate stakes in the venture - one indirectly through the fund and one directly in the startup.
See tag-along right.
CoC is short for change of control.
Common shares are shares that represent ownership rights in a company. Usually, founders, members of the management and employees or a startup own common stock while investors own preferred shares. In the event of a liquidation of the company, the claims of secured and unsecured creditors, bondholders and holders of preferred shares take precedence over common shareholders.
Company building is an investment approach where the investor is pro-actively involved in the formation of a startup at a very early stage. Company builders provide a significant contribution to the establishment of a startup, e.g. by helping to assemble a management team, providing business ideas or actively getting involved in the operative business. Well known German company builders or venture capital investors with a company building approach include Team Europe, Rocket Internet and Project A Ventures.
A company buy-back is a process by which a company buys back the stake held by a financial investor, such as a private equity firm. A company buy-back is one possible exit route for private equity funds, it extremely rare in the venture capital environment.
Conditions precedent are tasks that must be completed before an investment occurs, an acquisition is closed, an option can be exercised, and so on.
Conditions subsequent are tasks that must be completed within a certain period of time after completion of an investment or acquisition. Failure to fulfill the conditions subsequent will usually trigger contractual rights or an automatic mechanism (in the worst case the recission of the transaction).
See convertible loan.
Convertible loans (sometimes also referred to as convertible notes) are often used by business angels who provide financing to a startup without an explicit valuation of the business. Convertible notes are structured like a loan when the financing is granted but can converted into equity (= shares in the startup) when certain events occur, e.g. an equity financing in which a venture capital firm invests in the startup. The rate at which the loan amount is converted into equity (the conversion rate) usually matches the conditions of the equity financing less a discount (usually in the range of 10 to 20%).
See convertible loan
corporate venture capital
Corporate venture capital or corporate venturing refers to large corporations making venture capital investments. Usually, this is done for strategic reasons (so called strategic investments). However, there are also corporate venture capital fonds that stress their independance from their parent company. Corporate venture capitalist sometimes provide access to the existing cutomer base and know how of their parent which can be of benefit for startups.
See corporate venture capital.
A covenant is a legal promise to do or not do a certain thing. For example, in a financing arrangement, company management may agree to a negative covenant, whereby it promises not to incur additional debt. The penalties for violation of a covenant may vary from repairing the mistake to losing control of the company.
Coworking (space) is office space shared by entrepreneurs/startups. Unlike in a typical office environment, those co-working are usually not employed by the same organization. The aim is to share all the resources a company or project needs to operate. However, co-working is not only about the physical place, but also about the co-working community. Its benefits can already be experienced outside of its places, and it is recommended to start with building a coworking community, i.e a group of people who, albeit working independently, share values and are interested in the synergy that can happen from working with people who value working in the same place alongside each other.
See blow-out round.
CRM is short for Customer Relatinship Management. CRM is a strategic approach in which internal procedures are focused on the interaction with a customer (rather than merely the product) with the goal to establish a lasting customer relationship.
Where a private equity/venture capital firm invests in the same company at different times from different funds, i.e. uses its current fund towards a financing round in a company which forms part of the portfolio of one of its earlier funds.
When the holders of preferred shares have the right to receive accrued (previously unpaid) dividends in full before dividends are paid to any other classes of shares, these are called “cumulative dividends”.
CVC is short for corporate venture capital.
The data room is a specific location where potential buyers / investors can review confidential confidential data and information about a target company as part of the due diligence process. This information may include detailed financial statements, client contracts, intellectual property, property leases, compensation agreements, and so on.
DCF is short for discounted cash flow.
Deal breakers are legal, commercial or other circumstances that prevent a transation (e.g. a financing round or an acquisition) from going through.
A deal counsel is a lawyer representing the company that is singnificantly involved in a transaction such as a financing round or acquisition, often times not only handling the legal aspects but also advising on strategic and commercial aspects or the transaction.
Deal flow describes the rate at which investment offers are presented to funding institutions such as venture capital funds.
Deal screening is the process of investors to quickly reduce the (usually very large) number of received investment opportunities (deal flow) down to the few most promising ones which warrant further effort. To achieve this, professional investors usually apply a pre-determined set of criteria that define their investment strategy.
See valley of death.
Debt financing descripes raising money for working capital or capital expenditure through some form of loan. In return for lending the money, the individuals or institutions become creditors and receive a promise to repay principal and interest on the debt. Startups usually do not receive traditional bank loans because banks require a solid business plan and/or colleteral which startups are typically unable to provide. A more common form of debt financing for startups are convertible loans. The counterpart of debt financing is equity financing.
When a company fails to comply with the terms and conditions of a (financing) arrangement, it is “in default”.
When the shares of a company are taken off the public stock exchange, they are delisted.
Dilution occurs when the percentage share of an original stake in a company decreases due to a new financing round where new shares are issued.
See anti-dilution provisions.
discounted cash flow
Discounted cash flow (or DCF) is a valuation methodology whereby the present value of all future cash flows expected from a company is calculated.
Also known as disruptive innovation. An innovation or technology is disruptive when it "disrupts" an existing market by doing things such as: challenging the prices in the market, displacing an old technology, or changing the market audience.
Distressed debt (otherwise known as vulture capital) is a form of finance used to purchase the corporate bonds of companies that have either filed for bankruptcy or appear likely to do so. Private equity firms and other corporate financiers who buy distressed debt do not asset-strip and liquidate the companies they purchase. Instead, they can make good returns by restoring them to health and then prosperity. These buyers first become a major creditor of the target company. This gives them leverage to play a prominent role in the reorganisation or liquidation stage.
See capital distribution.
distribution in kind
A distribution in kind (sometimes also referrred to as a distribution in specie) is a distribution that is not cash but shares in portfolio companies. Distribution in kind by a venture capital fund is an exception as most investors have no interest in receiving a direct minority stake in a portfolio company (costs of administration, does not fit investor's investment strategy, cannot be sold easily, etc.). Therefore, a distribution in kind usually only happens if an investment has resulted in an IPO and the fund distributes securities that are listed on a stock exchange (and therefore can generally be sold by the receiving investor). However, this can be controversial as the securities may not be liquid and limited partners can be left with shares that are worth a fraction of the amount they would have received in cash.
distribution in specie
See distribution in kind.
A dividend is an amount paid to shareholdersout of the profits of a company.
double trigger accelerated vesting
See accelerated vesting.
A down-round occurs when a valuation of a startup is set at one point in time (e.g., in a financing round) and then is reset at a lower value at a later date (e.g., in a new financing round that occurs later). Essentially, it means that the value in the company between two points in time has decreased (at least in the eyes of the investors). See also down-round protection.
The concept behind down-round protection for investors is simple: If investors provide financing based on an agreed upon valuation and then at a later time (e.g. in a follow-on funding) the company is worth less money or valued lower than when they invested, one of two things happened (from the investors’ perspective): (a) The founders took the investors’ money and used it so foolishly that they actually decreased the value of the company or (b) the valuation that was agreed to in the first place was too high. If the initial financing terms include a down-round protection mechanism, then the investors get issued additional shares in the follow-on funding to compensate the decrease in value of their shareholding.
A drag along-provision is a contractual provision that is often found in shareholders' agreements of startup companies. It obligates the parties to vote in favor of the sale of the startup if a key group of shareholders vote in favor of the sale, i.e. if the key group votes for the sale, then everyone else is "dragged along" and forced to vote in favor of, support and not oppose/disrupt the deal. The trigger for such a drag-along provision could for example be that a majority of stock (or a majority of each class of shares) approve the sale (with the consequence that everyone else must also vote to approve). The purpose of this mechanism is to enable a defined majority of shareholders to enforce the sale of the entire company (as a potential buyer will likely not be interested in aquiring less than 100% of the shares). The conterpart to a drag-along provision is a tag-along provision.
See drag-along provision.
When a venture capital fund is invested in a company and the exit proceeds from this investment return the entire fund, this company is called a dragon or a fund maker.
See capital call.
A drive-by deal is a slang term often use when referring to a deal in which a venture capitalist invests in a startup with the goal of a quick exit strategy. In this scenario, the venture capitalist takes little to no role in the management and monitoring of the startup.
A dry close (or dry closing) is when a venture capital or private equity firm raises money for a fund early on in the cycle, but then agrees to not levy any management fees on the money raised from its limited partners until it actually begins investing the fund. Most private equity firms will start raising a new fund when their current fund is around 70% invested. Venture firms tend to raise new funds earlier than buy-out firms, because they usually need to invest in follow-on rounds for their portfolio firms.
See uninvested capital.
Investing successfully in a startup or in a venture capital fund involves thorough investigation. As a long-term investment, it is essential for an investor to review and analyse all aspects of the deal before signing. Investors for that matter carry out a due diligence before investing in a business. In due diligence, analysts conduct in depth research, analysis, and forecasts of a business concept and revenues in order to determine the viability and value of a business. The scope of the due diligence will depend on the stage of the company and the business concept (e.g. when the business concept is based on certain intellectual property, an investor will review whether the company owns the relevant intellectual property or has the right to use it for the intended purpose). When the investment is in a venture capital fund, examples of areas that are fully examined during the due diligence process are the capabilities of the management team, its performance record, deal flow, investment strategy and legal aspects (e.g. the provisions of the limited partnership agreement).
A Dutch auction is a method of conducting an IPO whereby newly issued shares are committed to the highest bidder, then, if any shares remain, to the next highest bidder, and so on until all the shares are committed. The price per share paid by all buyers is the price commitment of the buyer of the last share.
After the seed stage comes the early stage of a startup. In the early stages of a company, a prototype or concept has been tested and proven and a management team has been formed. However, financing will still be needed for the next stage in order to start production and get the business to a self-sustaining level where retained earnings can fund future projects. Early stage financing rounds are usually the Series A and Series B rounds.
early stage finance
Early stage finance is the realm of the venture capital firm – as opposed to the private equity firm. A venture capitalist will normally invest in a company when it is in an early stage of development. This means that the company has only recently been established, or is still in the process of being established – it needs capital to develop and to become profitable. Early stage finance is risky because it’s often unclear how the market will respond to a new company’s concept. However, if the venture is successful, the venture capitalist’s return is correspondingly high.
An earn-out provision is an arrangement in which sellers of a business receive additional future payments, usually based on financial performance metrics of the company sold such as revenue or net income. Earn-out provisions are often seen as a solution if seller and buyer cannot agree on the valuation of the company. In practice, however, earn-outs are often risky for the sellers because they usually lose control over the company and are no longer involved in the company’s management after the sale and therefore have limited influence on its future development. Mechanisms to protect the sellers – such as veto rights against measures by the buyer that could affect the earn-out – are hard to negotiate as they will be seen by the buyer as a restriction on how they can develop their new asset.
EBIT is short for „Earnings Before Interest and Taxes“.
EBITDA is short for „Earnings Before Interest, Taxes, Depreciation and Amortization“.
EIF is short for European Investment Fund that is European Union agency for the provision of finance to SMEs (small and medium-sized enterprises), headquartered in Luxembourg. The EIF is a major investor in Venture Capital Funds. Its shareholders are the European Investment Bank (62%); the European Union, represented by the European Commission (29%); and 30 privately owned EU financial institutions (9%).
EIR is short for entrepreneur in residence.
Elevator pitch describes a scenario where an entrepreneur rides an elevator with a potential investor and uses the time between floors to pitch his business idea to the investor. Although this scenario has probably never occured in real life, it is commonly used when it comes to acquiring funding for a venture. What it boils down to is this: You should be able and prepared to present your business concept and capture the interest of a potential investor in a short time (i.e. before the investor gets to their floor and steps out of the elevator).
employee stock option program
entrepreneur in residence
An entrepreneur in residence (or EIR) refers to a seasoned entrepreneur who is employed by a venture capital firm to help the firm vet potential investments and mentor the firm's portfolio companies.
EPS is short for earnings per share.
Equity financing is a term used for company's issuance of new shares of common or preferred stock to raise money (instead of or in addition to debt financing). The new share owners become part-owners of the company and share in the risks and rewards of the company’s business. Equity financing is the common form for venture capital investments. An equity investor – as opposed to a debt investor –has no claim against the company to have his investment returned.
An escrow account is a legally defined account, the contents of which may not be dealt with save with the consent of both parties, or by an escrow agent in accordance with pre-agreed conditions. In the context of venture capital / private equity funds, an escrow is often used as a mechanism to give LPs some measure of security against possible clawback (i.e. some part of the carried interest is paid not to the GP, but into an escrow account). In the context of an acquisition, escrows are sometimes used to secure claims of the purchaser (i.e. some part of the purchase price is paid not to the seller, but into an escrow account and only paid out if there is not breach of a warranty).
ESOP is short for Employee Stock Option Program (or Employee Stock Option Plan) and describes a plan established by a company to reserve shares for long-term incentive compensation for employees. The granting of stock options to employees has become a standard tool by startups for incentivising employees while at the same time cutting down costs. Investors usually expect an option pool of approx. 10% of the shares.
European Venture Capital Association, now called Invest Europe.
event of default
An event of default is a specific event, such as failure to pay an amount due under a loan, which will give a party (usually the lenders) specific rights, such as the ability to demand full payment of outstanding debts or the ability to enforce any security the lender may have.
Evergreen fund describes a fund in which the returns generated by its investments are not distributed back to investors but are channelled back into the fund. The aim is to keep a continuous supply of capital available for further investments.
See no-shop provision.
See strike price.
An exit (sometimes referred to as harvest) is the means by which a venture capitalist is able to realise its investment in a startup. Venture capitalists often have their eye on the exit from the moment they first see a business plan. There are various exit options: an initial public offering, a trade sale, selling to another venture capital fund or to a private equity fund. It is essential for a fund manager to see an obvious exit route in a potential investment. The shareholders' agreement usually provides a mechanism for venture capital funds and other investors in a startup with a certain majority stake to enforce an exit even against the company and the minority shareholders but usually the exit is agreed with all shareholders and the company's management team.
Extension is the right of a GP to prolong the life of a fund beyond its originally specified length. A common provision is that the GP has the right to extend the fund twice, for one year each time, but that any further extensions require the consent of the limited partners.
Extension can refer to a period of extension, but can also mean the state of existence of a fund once the first such extension has occurred. See also run-off.
fair market value
The fair market value (or FMV) of an asset or a business is the acceptable selling price to an independent third party or, in other words: the price that a willing buyer would pay a willing seller on a transaction negotiated at arm’s length.
A fairness opinion is a letter issued by an investment bank or an accounting firm that states that the price negotiated for an acquisition is – based upon the investment banks/accounting firms research and analysis - “fair”.
A family office is a firm that manages assets, investments and trusts for a wealthy family.
A feasibility study is an analysis whether a project can be realized technically and/or economically.
Startups typically raise capital from Investors such as venture capital firms in individual rounds, depending on the stage of the company. Traditionally, the first round is usually referred to as the seed round followed by Series A, B, and C rounds and so on. There is no rule as to how many financing rounds a startup can go through and this number and the amount of capital raises depends on the size and capital requirements of the startup.
first time fund
A first time fund is the first fund a venture capital or private equity firm ever raises. When the new firm is made up of managers who have never raised a fund before, the managers do not have a track record (unless they were active business angels) so investing with them can be risky. In many many cases the new firm is a spin-off where managers from different, established funds join forces to create their own, new fund. In this instance the managers will have track records from their previous firms, but the investment can still be risky because the individuals are unlikely to have worked together as a team before.
Time until flame out is the time that a startup has before it runs out of cash and "flames out". It can be estimated by taking cash on hand and dividing it by the burn rate.
A flat round is a financing round with the same valuation as in the previous financing round.
When shares are sold immediately after an IPO, this is called “flipping”. Management and venture investors are often prohibited from “flipping” until the lock-up period has expired.
FMV is short for fair market value.
follow on funding
Startups usually require several rounds of funding. If a venture capital firm has invested in a startup in the past and then provides additional funding at a later stage, this is known as "follow on funding". Entrepreneurs who seek financing from a venture capital fund should inquire about the fund's capability and policy about follow on funding.
The founder lock-up is a provision in the shareholders’ agreement pursuant to which the founders must remain with the company and must not sell their shares in the company for a certain period after investors have made their investment. See also lock-up period.
Freemium is a business model where a basic version of a service or product is available for free, but if users want to use enhanced features, they have to upgrade to a paid version (the "premium" version).
A French auction is an auction (e.g. for the acquisition of a company) in which there is no guarantee that the highest bidder will win, and that may be re-opened to allow the preferred bidder to re-bid.
friends and family
When the startup is in its earliest phase (often still at ideation), it is too early to raise capital from professional angel or seed investors, but needs capital to get started. In this scenario, capital is often provided by the friends and family of the founders – this first outside capital financing is called the friends and family round.
fully diluted basis
Fully diluted basis is a methodology for calculating any per share ratios whereby the denominator is the total number of shares issued by the company on the assumption that all warrants, options/shares to be granted (e.g. under an ESOP) are exercised.
The fund cycle describes the natural rhythm of a venture capital or private equity fund’s operations. Usually, the fund cycle can be broken down in three segments: the investment period (typically about three years, though Venture funds will usually continue to invest money into companies follow-on funding for some years), followed by a development period and a harvest period, when exits are effected. Sometimes, there can also be an extension period.
fund of funds
Fund of funds describes a venture capital / private equity fund that does not invest directly in portfolio companies but distributes its investments among a selection of venture capital / private equity fund managers, who in turn invest the capital directly. Fund of funds may be able to provide investors with a route to investing in particular funds that would otherwise be closed to them. Investing in fund of funds can also help investors to spread the risk of investing in venture capital because they invest their capital in a variety of funds.
Fundraising describes the process by which a venture capital firm solicits financial commitments from limited partners for a fund. Firms typically set a target when they begin fundraising and ultimately announce that the fund has closed at such-and-such amount (this event is the final closing of the fund). This may mean that no additional capital will be accepted. Until the target amount is reached, the firms usually have multiple interim closings each time they have hit particular targets (first closings, second closings, etc.).
Gatekeepers are specialist advisers who assist institutional investors in their investment decisions. Gatekeepers are mostly used by institutional investors with little experience of the asset class (e.g. venture capital or private equity) or those with limited resources to help manage their fund allocation. Often gatekeepers offer a broad range of services tailored to their clients’ needs, e.g. venture capital/private equity fund sourcing and due diligence through to complete discretionary mandates. Many gatekeepers also manage funds of funds.
The term general partner (or GP) usually refers to one of the top-ranking partners at a venture capital firm or the firm managing the venture capital fund.
general partner commitment
See general partner contribution.
general partner contribution
Investors in a venture capital fund need to ensure that the interests of the general partners of the fund (the fund managers) are alligned with their interests. To achieve this, Investors require the general partners to make an investment to its own fund. This investment is referred to as the gerneral partner contribution.
go shop provision
A go shop provision is a provision in an acquisition agreement which provides that for a certain period the seller of a business can solicit offers for its sale at a price in excess of that already agreed with a purchaser, in default of which the sale to the purchaser will proceed. If the seller is successful in soliciting a higher offer, then a break-up fee will usually be payable.
A company is going private when it has its shares listed on a public stock exchange and is then taken into private ownership (e.g. when a private equity firm acquires all shares in a company and the company is then delisted).
In an acquisition scenario, the acquirer often tries to discourage founders and employees from leaving a company before certain dates or before certain milestones are achieved by offering them a strong incentive (such as a cash or equity payout) that is earned over time.
A golden parachute describes a clause in an executive's employment contract pursuant to which he/she will receive substantial benefits (e.g. severance payments, a bonus or stock options) in the event that the company is acquired and the executive's employment is terminated.
See general partner.
The term grossing up describes an adjustment of an option pool which increases the number of shares available over time. This usually occurs after a financing round whereby one or more investors receive a relatively large percentage of the company. Without a grossing up, managers and employees would suffer the financial and emotional consequences of dilution, thereby potentially affecting the overall performance of the company.
A hackathon is a fun, intense, and caffeine-filled gathering of programmers and others involved in software development, ans often subject-matter-experts, to collaborate intensively on software projects. Hackathons can easily last 48 hours with little or no sleep.
An investor with a hands off approach grants a company that he invested in much leeway with regard to its development operations and is more passive in its support and supervision.
An investor with a hands on approach is very actively involved in the development of a company (albeit not getting directly involved in the company’s day to day operative business) because he has a high interest in a quick growth and increase in value of the company.
The period in which a venture capital / private equity fund begins to see returns from its investments through M&A, IPOs, technology licensing agreements, and other exits.
heads of terms
Heads of terms is another expression used for a term sheet or a letter of intent.
See capital gain.
A hockey stick refers to a chart that resembles a hockey stick and projects fast growth.
The holding period is the length of time that an investment is held; e.g. if a venture capital fund invests in a company in January 2013 and then sells its stake in January 2017, the holding period is four years.
Home run is a baseball term that has been imported into venture capital jargon. In baseball it is when the batter hits the ball out of the park into the crowd. In the venture capital contect it means an investment that returns the entire capital of the investing fund all by itself (also referred to as a dragon or fund maker), but as a matter of practice, this has come to be generally accepted as being any investment which returns at least 25×.
See hurdle rate.
The hurdle rate is the minimum rate of return required before an investor will make an investment. In the context of a venture capital or private equity fund, the term “hurdle rates” is also used to describe the return which a GP must achieve before he is allowed to claim carried interest.
IaaS is short for Infrastructure as a Service, a buiness model which is based upon the provision of fundamental IT-ressources such as computing power, storage or network capacity to the customer.
IBO is short for institutional buy-out.
IM is short for information memorandum.
The term incubator refers to a company or facility that is designed to foster entrepreneurship and nurture business ideas or new technologies to the point that they become attractive to venture capitalists. Typically, an incubator provides a startup with physical space, some or all of the services needed for a business idea to be developed (e.g. legal, managerial, technical) and help with things like building a management team, strategizing growth, etc. In return, the incubator usually receives an equity stake in the startup.
The information memorandum (or IM or teaser) is a document detailing the investment proposition offered to an investor which usually includes the key financials of the company. The term is usually used for more mature companies whereas early stage companies usually present themselves using a pitch deck.
Infrastrutcture as a Service
initial public offering
A financing round in which the investors are the same investors as in the previous round is called an “inside round”.
If a private equity firm takes a majority stake in a management buy-out, the deal is referred to as an institutional buy-out (or IBO). This is also the term given to a deal in which a private equity firm acquires a company out right and then allocates the incumbent and/or incoming management a stake in the business.
The term 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. Many venture capital firms receive investment from institutional investors since venture capitalists are constantly looking for growth opportunities and investment ideas.
The term intellectual property (or IP) is used for rights or other intanbable (non-physical) resources such as knowledge, techniques, writings and images. A startup's IP sometimes represents an advantage to its position in the marketplace and therfore, the protection of IP (e.g. by law via patents, copyrights, and trademarks and licenses) is of great importance, especially when raisng funds.
See interim closings.
Private equity or venture capital funds that are currently fundraising may have a series of interim closings (or interim closes) as limited partners make commitments. Investing can begin as soon as the fund holds its first interim closing.
Invest Europe is the European venture capital association which inter alia publishes valuation guidelines for portfolio companies.
Investment Banks act as financial intermediaries and perform a variety of services such as underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and acting as a broker for institutional clients.
See limited partnership.
Investor put-option is the right of an investor, to sell and transfer the shares in a company to the company or to the other shareholders. Usually, the investor put-option can only be exercised when certain events occur that are defined in the shareholders’ agreement, e.g. corporate venture capitalists sometimes ask for an investor put-option in case of an insolvency of the startup so that they can cut this association with the startup in this scenario to avoid possible negative perception.
IP is short for intellectual property.
An initial public offering (or IPO) is the official term for "going public". It is the first offering of a company's shares to the public, i.e. when a privately held company - owned, for example, by its founders plus perhaps its venture capital investors - lists a proportion of its shares on a stock exchange. An IPO is one way for investors to cash in on their investment but it is typically also used for raising money for the company (in this instance, a portion of the shares that are offered to the public are shares held by the investors and the remaining shares are newly issued by the company meaning that the price paid for these shares will go the the company and can be used by the company for expanding its business). Consequently, companies that do an IPO are often smaller, younger companies seeking capital to expand their business.
IRR is short for internal rate of return.
J-Curve describes the shape of the IRR curve over the course of a venture capital or private equity fund’s lifecycle, encompassing both the investment period and the harvest period. Typically, fund performance and cash flows are negative in early stages due to capital expenditures and other expenses, but rise over time as exits occur. The phenomenon causes a “J-curve” (resembling the capital letter “J”) when looking at a chart of the fund’s performance, with a slight dip at the onset followed by steady growth.
key performance indicator
KPI stands for “key performance indicator”. There is no strict rule as to what data forms part of the KPIs. For early stage companies, “classic” financial data (e.g. turnover, EBITDA, earnings, cash-reserves, orderbook, number of employees) are typically not the main focus, simply because of lack of relevant data. KPIs can vary depending on the stage of the company, the business model and the availability of data and can include, e.g. monthly recurring revenue (MRR), churn rate and customer acquisition costs (CAC) (for a SaaS-startup) or volume of first time order, conversion rate on website, average basket size and return-ratio (for an e-commerce startup). Knowing its relevant KPIs is important for a startup in order for it to focus on and prioritize the relevant aspects of the business and to measure its progress in an objective way that third parties (such as investors) can comprehend and verify. VCs require KPIs to understand what factors make a business a success or cause problems in order to support the startups solving these issues. Finally, KPIs are a source of information for existing investors in the startup and allow them a better understanding of how the company and their investment have developed and will develop in the future.
At the later stage, a company is usually breaking even or trading profitably but needs more capital to finance strategic moves, e.g. expand more rapidly in order to increase production or expand to new markets. At this stage companies have typically shown that their products or services have traction in the market and that they require financing to "run" with their concept. Later stage financing rounds are usually the Series C, D, etc. rounds.
LBO is short for leveraged buy-out.
A venture capital firm or individual investor that organizes a specific financing round for a company is referred to as the lead investor. The lead investor usually invests the most capital in that financing round (he is therefore "leading the round").
Lean startup is a method of starting a business made famous by author Eric Ries and his book “The Lean Startup”.
A legal opinion is a formal legal assessment by a lawyer or law firm with respect to certain legal aspects of a transaction or structure; e.g. foreign investors may request a legal opinion on the structure of a venture capital fund before making an investment.
letter of intent
A letter of intent (or LOI) is a document confirming the intent of a buyer to acquire a company. By signing this document, the subject company or its shareholders agree to begin the legal and due diligence process prior to the closing of the transaction. Letters of intent can also relate to financing rounds, but In financing rounds it is more common to call them term sheet.
A leveraged buy-out is an acquisition of a business using mostly debt and a small amount of equity. The debt is secured by the assets of the business. In a leveraged buy-out, the acquiring company typically uses its own and/or the target company's assets as collateral for the loan in hopes that the future cash flows will cover the loan payments (the target company's assets or revenue is used as "leverage" to pay back the borrowed capital).
The investors of a venture capital fund are also referred to as limited partners (or LPs).
A limited partnerhip is the standard vehicle for venture capital funds. In this case, the limited partnership has a fixed life (usually ten years). The partnership's general partner makes investments, monitors them and finally exits them for a return on behalf the investors (the limited partners). The general partner usually invests the partnership's funds within three to five years (this time period is called the investment period of the fund) and for the fund's remaining life attempts to achieve the highest possible return for each of the investments by an exit. If the general partner is unable to achieve an exit before the end of the fund's life, the partnership can be extended to ensure that all investments are realized (this period is then called the extension period). In seldom cases there may also be a there may be a distribution in kind, in particular if portfolio companies have made an IPO so that the shares held by the fund are listed on a stock exchange).
Liquidation is the process of dissolving a company by selling off all of its assets (making them “liquid”).
The proceeds of an exit are usually not distributed on a pro rata basis between the shareholders of a startup but the investors holding preferred shares are entitled to receive a certain portion of the proceeds prior to the holders of common stock, hence they have a liquidation preference. For example, a venture capital investor with a “2x liquidation preference” has the right to receive two times its original investment upon liquidation.
Startups which, towards the end of a venture capital fund’s life, have done neither badly enough to be killed nor well enough to be sold are sometimes called living dead. See also tail.
See lock-up period.
The lock-up period is the period an investor or existing shareholder must wait before selling or trading company shares subsequent to an exit, usually in an IPO the lock-up period is determined by the underwriters and part of the underwriting agreement between an investment bank and existing shareholders. Such lock-up provision is sometimes also referred to as the market standoff provision. The reason for the lock-up is that sales by the existing shareholders could depress the stock price and that new investors fear the prospect of insider selling immediately following the IPO which would make the IPO less attractive to potential buyers. Lock-up periods are typically 180 days in the case of the company's IPO and 90 days for other public offerings.
LOI is short for letter of intent.
See limited partner.
LPA is short for limited partnership agreement.
M&A stands for “Mergers and Acquisitions” and describes transactions in which a company is sold for either cash or shares in another company.
Management Buy-in (or MBI) 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. A management buy-in is likely to happen if the internal management lacks expertise or the funding needed to ‘buy out’ the company from within. It can also happen if there are succession issues – in family businesses, for example, there may be nobody available to take over the management of the company. A management buy-in can be slightly riskier than a management buy-out because the new management will not be as familiar with the way the company works.
A management buy-out (or MBO) is the purchase of a business (or at least 50 % of the business) by its current operating management. Often times, the management does not have the sufficient funding for the transaction in which cases a private equity firm will often provide the required financing. In return, the private equity firm usually receives a stake in the business. This is one of the least risky types of private equity investment because the company is already established and the managers running it know the business – and the market it operates in – extremely well. Following a management buy-out, the management holds at least 50 % of the shares in the business. If the majority is held by the private equity firm financing the transaction, it is referred to as an institutional buy-out.
The management fee is the annual fee that the general partner of a venture capital fund receives. The management fee is meant to cover the basic costs of running and administering a fund; it is not intended to incentivise the management team of the fund (that is what the carried interest is for). Typically, the management fee is a percentage of the capital commitments which the limited partners have made to the fund (usually in the 1.5 % to 2.5 % range, scaling down in the later years of a partnership to reflect the general partner's reduced workload).
Market capitalization is the value of a publicly traded company as determined by multiplying the number of shares outstanding by the current price per share.
market standoff provision
See lock-up period.
MBI is short for management buy in.
MBO is short for management buy-out.
Mezzanine financing is a form of hybrid capital which is a form of debt financing, but also includes embedded equity instruments or options. Mezzanine financing is typically used to fund adolescent and mature cash flow positive companies that are no longer considered a startup but is in very good shape (sometimes referred to as “mezzanine level companies”). Consequently, mezzanine financing is much less riskier than seed stage, early stage, and later stagelater stage financing. In a buy-out scenario, the term is associated with the middle layer of financing in leveraged buy-outs. In its simplest form, this is a type of loan finance that sits between equity and secured debt. Because the risk with mezzanine financing is higher than with senior debt, the interest charged by the provider will be higher than that charged by traditional lenders, such as banks. However, equity provision– through warrants or options – is sometimes incorporated into the deal.
mezzanine level company
See mezzanine financing.
Micro-VCs are smaller venture capiral firms (sometimes set up by super angels) that primarily invest in seed stage startups. Micro VCs often have a fund size of less than € 50m and usually invest between € 25,000 and € 2.500,000 in a given company.
Milestones are defined (planned) major achievements. In the context of financing rounds, they can be used as conditions for tranches or financing.
Minimum viable product
Modified Berkus method
The Modified Berkus method is a variation of the Berkus method for placing a financial value on pre-revenue startups. A major motivation is to take changed market conditions into account by reducing each driver to a maximum of € 500k. The method has also been modified to include entry barriers and strategic alliances.
MOIC stands for “multiple on in invested capital” and is a common benchmark for the performance of an investment.
multiple on invested capital
Investors and venture capitalists will often talk about multiples when discussing a prospective investment. Although valuation and complex analysis will take place prior to the funding of a startup, multiples are a language everyone speaks and are used as a way to gut check forecasts and valuations of financial projections. For instance the most commonly used multiple is usually the EBITDA multiple, which is [enterprise value / EBITDA]. Companies in certain industries will usually have EBITDA multiples within a certain range and investors can use these to assess whether to invest in a certain company. As early stage companies usually lack a financial track record, venture capitalists cannot apply “traditional multiples” (such as an EBITDA multiple) but need to apply different methods for assessing and evaluating an investment opportunity.
MVP is short for “Minimum Viable Product”, i.e. a product that meets the minimum performance/feature/quality requirements.
NDA is short for non-disclosure agreement and refers to an agreement between two parties to protect sensitive or confidential information, such as trade secrets, from being shared with outside parties.
The term NewCo is sometimes used in structuring discussions and diagrams by lawyers, accountants, investment bankers and Private Equity professionals to describe a new company that will be formed specially to take some defined role in a corporate transaction or series of transactions. A NewCo that is used as an acquisition vehicle in an acquisition is sometimes referred to as AcquiCoCo, a NewCo that assumed the role of a holding company in a transaction is sometimes referred to as HoldCo.
A no-fault divorce is when investors of a venture capital/private equity fund exercise theit right to terminate the manager's appointment by a vote of the investors and without having to establish fault. This right is rarely exercised but investors might consider having such a right anyway as a useful backdrop to discussions with under-performing GPs. Normally, when exercising this right, the GP remains elligible to obtaining the management fee, so exercising this right is expensive because of a new manager will have to be implemented and paid (in addition to the divorced GP). Sometimes, the level of compensation payable on removal is reduced.
A no-shop provision (also referred to as an exclusivity provision) is a provision which is often included in term sheets and which prohibits the company that is the target of the investment and its founders from shopping the deal around to other potential investors. The length of the exclusivity period under a no-shop provision varies depending on the deal dynamics and the leverage of the investor negotiating the deal but typically ranges from 30-45 days.
A non-compete agreement provides that the employee or member of management signing it agrees not to work for a competing company or to form a new competing company within a certain time period after termination of employment.
A non-interference agreement is an agreement sometimes signed by employees and management whereby they agree not to interfere with the company’s relationships with employees, clients, suppliers and sub-contractors within a certain time period after termination of employment.
A non-solicitation agreement is an agreement not to solicit employees or consultants of a company to leave their current positions. A non-solicitation clause is a standard provision in service agreements with founders and employment agreements of key employees, since an employer would not want any person to be able to leave and encourage the remaining employees to join the departed person's business.
An option pool describes the group of options set aside for long term, phased compensation to management and employees. See also ESOP.
Startup companies that do not have a venture capitalist as an investor are sometimes called “orphans”.
See uninvested capital.
PaaS is short for Platform as a Service - a business model where the customer is provided with a model program and developer tools to develop and execute cloud-based applications.
Pari passu is a Latin term that means "of equal step" or "without partiality", e.g. when a term sheet states that “…the Series A Shares are pari passu with the Series B Shares…” this means that the Series A Shares will have the same rights and privileges as the Series B Shares.
A party round is a financing round where generally a small amount of money is raised from a large number of investors (commonly between 10 and 20). The opposite of a party round is a piggy round.
pay to play
A pay to play provision is term in a financing agreement where an investor who does not participate in a future financing round will lose certain rights (e.g. anti-dilution rights.). Pay to play provisions are very rare in German financing rounds.
Performance-based vesting is a type of vesting where options vest only if specified milestones or performance criteria are met, e.g., options may vest if the company’s turnover exceeds a certain target by a specified date.
Usually, the shareholders’ agreement or the articles of association of a startup company contain restrictions on the transfer of the shares in the company (e.g. no shareholder is allowed to sell shares to a competitor of the startup) and provide that all transfers are subject to approval by the shareholders’ meeting in order to monitor transfers and prevent prohibited transfers. Typically, investors ask for exceptions from this rule – so called “permitted transfers” – which e.g. allow them to transfer their shareholding to affiliated entities without triggering the approval requirement.
A piggy round is a seed round in which a larger early-stage fund offers to do 80-100% of a company’s seed round. A piggy round is the opposite of a party round.
Aside from business plans, venture capital firms require the management team of a startup to present a pitch deck (sometimes also referred to as slide presentation) in which they show their business concept and a summary of their financial projections. Whereas business plans are usually mailed or e-mailed, pitch decks have question and answer sessions in which potential investors will prod the management team with questions and ascertain whether the business is of interest to them.
“Pivoting” is a familiar term in the startup space. When a startup’s first business model is not working (and this happens more often than not), the founders and team pivot to plan B. Pivoting doesn’t necessarily mean desperation, it can be a tool to discover additional growth.
Placement agents are specialists in marketing and promoting venture capital and private equity funds to institutional investors. Typically they charge 2 % of any capital they help to raise for the fund.
See add-on (acquisition).
Platform as a Service
See portfolio company.
A venture capital firm will invest in several companies, each of which is referred to as a portfolio company. All of the companies currently backed by a venture capital firm can be spoken of as the firm's portfolio.
Post-money valuation is a term used in financing rounds and refers to the valuation of a company after the investors have made their investment. Typically, the post-money valuation is the pre-money valuation plus the total amount of investment in the financing round.
PPM is short for private placement memorandum.
Pre-money valuation is a term used in financing rounds and refers to the valuation of a company before the investors make their investment. The sum of the pre-money valuation plus the total amount of investment in the financing round equals the post-money valuation.
The preferred return is the minimum amount of return that is distributed to the limited partners of a venture capital fund until the time when the general partner is eligible to deduct carried interest. Typically, the preferred return is equal to the capital contribution of the limited partners plus interest at a certain rate. The preferred return ensures that the fund's management Team receives a share in the profits of the fund only after investments have performed well and the limited partners have received back their investment.
Preferred shares are shares that have certain rights that common shares do not have. These special rights may include dividends, participation, liquidation preference, anti-dilution rights and veto provisions, among others. Venture capital and private equity investors usually purchase preferred shares when they make investments in companies.
Private equity refers to the holding of stock in unlisted companies – companies that are not quoted on a stock exchange. Since private equity is not traded at volumes anywhere near volumes of publicly held companies, it is highly illiquid and requires a higher rate of return. However, the upside of private equity is that it does not need to follow regulations at the level publicly held companies do, thereby reducing compliance costs. Technically, venture capitalventure capital is a type of private equity, however, whereas venture capital firms invest at an early stage, private equity firms usually invest in businesses that are well developed, established in their markets and provide stable cash flow. Another distinction between early stage venture capital firms and private equity firms is their business model: Private equity firms generate their returns by (i) a high leverage (large parts of their investments are usually made with bank financing) which results in a leverage effect on the own funds invested) and (ii) streamlining the business and improving efficiency of the business (e.g. improving the cost structure, internal procedures, restructuring business operations). Early stage venture capital firms usually generate their returns by (i) building an attractive technology/product portfolio and (ii) helping their portfolio companies to conquer a large market within a short time period, to grow sales and to achieve profitability.
When securities are sold without a public offering, this is referred to as a private placement. Generally, this means that the stock is placed with a select number of private investors.
private placement memorandum
Private placement memorandum (or PPM) is a document that explains the details of an investment to potential investors. For example, a private equity fund will issue a PPM when it is fundraising from institutional investors.
Pro forma financial statements are financial statements that have assumptions or hypothetical conditions built into the data. The term is sometimes also used to describe a financial projection based on certain assumptions.
See carried interest.
proof of concept
Proof of concept refers to a demonstration of the feasibility of a concept or idea that a startup is based on. Many venture capitalists require proof of concept if you wish to pitch to them.
public to private
Public to private (aka going private) describes a scenario when a company that has its shares listed on a public stock exchange is taken into private ownership (e.g. when a private equity firm acquires all shares in a company and the company is then delisted).
QA is short for quality assurance.
Quality assurance (or QA) describes the process of checking recently-developed goods to see whether specific requirements and standards are met. The aim is to identify defects before they reach customers.
A startup is raising capital when it is obtaining capital from investors or venture capital sources.
In the US, companies that make just enough profit for the founders to afford to eat instant ramen noodles (which are usually purchased by the case or even a pallet from a “cash and carry” store) with such profits are sometimes called “ramen profitable”.
Generally speaking, a ratchet is a mechanism to prevent dilution, but it can have different meanings depending on the context: In connection with a private equity investment, a ratchet is a structure that enables a management team to increase its share of equity in a company if the company is performing well. A ratchet provision provides that the equity allocation in the company varies, depending on the performance of the company and the rate of return that the private equity firm achieves. In a venture capital / financing scenario, a ratchet is a provision that provides an investor with down-round protection (i.e. where the company raises a subsequent round of financing, which can include IPO, at a lower price) by providing for the issuance of additional shares in the subsequent round. In the IPO context, a ratchet provision provides that if the IPO price does not meet a certain level, e.g. at least the price paid by the investor in the last round of financing plus some rate of return above that price, the IPO conversion of those shares to common shares is adjusted such that an additional number of shares are issued to investors which would meet the predetermined level.
rate of attrition
See churn rate.
The term realized investment refers to returns on private equity investments which are typically achieved through an IPO, an M&A transaction or a recapitalization.
The term „recapitalization” refers to a change in the way a company is financed. It is the result of an injection of capital, either through raising debt or equity. By recapitalization, a company restructures its debt and equity mixture without affecting the total amount of balance sheet equity. A recapitalization is sometimes a method to allow the distribution of cash to the shareholders by generating cash flow generated through raising debt or other securities to fund the distribution.
return on investment
Reverse vesting is a common vesting schedule for founders of startups. Under this arrangement, a founder holds all shares at the outset, but is obliged to transfer a certain number of shares to the company or the shareholders when leaving the company before the end of the vesting period. The number of shares to be transferred decreases over the term of the vesting period (hence “reverse” vesting).
A road show describes presentations made in several cities to potential investors and other interested parties. For example, a company will often make a road show to generate interest among institutional investors prior to its IPO.
ROE is short for Return on Equity.
ROI is the much-talked-about "return on investment." It's the money an investor gets back as a percentage of the money he has invested in a venture. Simply speaking, for example, if an investor invests €2 million for a 20 % share in a company and that company is bought out for €40 million after 4 years, the VC's return is €8 million (equalling a ROI of 100% p.a.)
A rollup is the purchase of relatively smaller companies in a sector by a rapidly growing company in the same sector. Rollup is a strategy is to create economies of scale and also to take competitors off the market.
A venture capital or private equity fund is in “run-off” after an extension has occurred, i.e. during the extension period.
Runway describes the amount of time a startup has until it goes runs out of money given its funding situation and assuming that income and expenses stay constant. It is calculated by dividing current cash reserves by the current monthly burn rate.
SaaS is short for “software as a service”, which is a software product that is hosted remotely, usually over the internet (a.k.a. "in the cloud").
A business concept is “scalable” when it can grow sales and revenues with at a much faster rate than its will have to grow its organizational complexity and expenses to keep up. Scalability is important if a startup wants to attract money from venture capitalists.
See sliding fee scale.
Secondary public offering
Secondary public offering refers to a public offering subsequent to an initial public offering. A secondary public offering can be either an issuer offering or an offering by a group that has purchased the issuer's securities in the public markets.
The market that a startup companies product or service fits into. Examples include: consumer technology, cleantech, biotech, and enterprise technology. Venture capital firms tend to have experience investing in specific related sectors and thus tend not to invest outside of their area of expertise.
See seed round.
seed financing round
See seed round.
The first official financing round for a startup is usually referred to as the seed round (or seed financing round or seed financing). At this point, a company is usually raising funds for proof of concept and/or to build out a prototype and is referred to as a seed stage company. Seed rounds often occur before venture capitalists become involved (even though some venture capitalists do provide seed capital) and seed stage financing is typically provided by angel investors or friends and family.
The seed stage is usually the earliest stage of the company. A seed stage company usually has a business venture or idea that has not yet been established and is raising capital for proof of concept and/or to build out a prototype. Seed stage financing is typically provided by angel investors or friends and family.
Series refers to the specific round of financing a company is raising. For example, company X is raising their Series A round.
Series A refers to the first investment of institutional capital in a company.
SHA is short for shareholders’ agreement.
A share deal is an acquisition in which the buyer aquires from the shareholders of a company the majority of shares. The counterpart to a share deal is an asset deal.
Shareholder pooling is the grouping of (usually minority) shareholders to ensure the uniform exercise of their shareholders’ rights (e.g. voting rights in shareholders’ meetings – vote pooling). This is sometimes done when a company has a many shareholders which can make communication with the shareholders and the passing of resolutions cumbersome and time consuming, Shareholder pooling can also be done by minority shareholders with the aim of combining their shareholders rights to meet certain majority requirements so that e.g. the pooled shareholders have veto rights that they would not have individually.
The shareholders’ agreement (or “SHA”) is an agreement between the shareholders of a startup (and sometimes the startup itself). It is the key document governing the rights and obligations of the founders, venture capital investors and other shareholders and determines the shareholders’ interactions and dealings with each other in the company. Typically, the SHA includes details of the corporate governance (e.g., the competences of the management, the shareholders’ meeting and the advisory board, approval requirements, information rights, majority requirements for resolutions, veto rights, etc.), provisions for anti-dilution and down-round protection, (positive and negative) incentives aimed at strengthening the commitment of the company’s management and the founders (e.g., vesting provisions, lock-up provisions, leaver provisions and non-competition provisions) and for an ESOP, regulations for the transfer of shares (e.g. drag-along/liquidation preferencetag-along rights and rights of first refusal) and provisions relating to an exit, (e.g., liquidation preference).
side letter (agreement)
Side letter (agreements) are side agreements that complement an existing “main” agreement, e.g. it is quite common that major investors in a venture capital fund enter into side letters that provide them with special rights.
If a previous investor chooses not to invest in the follow-on round, this can be interpreted as a bad signal by future investors because the previous investor usually has more intimate knowledge of the company than the new investors and if he has opted not to deepen their investment.
single trigger accelerated vesting
See accelerated vesting.
skin in the game
Limited partners in a venture capital fund usually expect the management team to have some “skin in the game” which means that the GPs must make a significant financial contribution and commitment to the fund. The same principle applies to entrepreneurs, e.g. that investors expect the entrepreneurs to leave their existing jobs to start up the company before they provide financing.
See pitch deck.
sliding fee scale
It is customary that the management fee that managers of venture capital funds receive from the fund varies over the life of the fund. This is called a sliding fee scale or scale-down.
Special Purpose Vehicle
The term spin-out firm refers to a captive firm that has gained independence from its parent organization.
See add-on (acquisition).
SPV is short for Special Purpose Vehicle and refers to a new company that is created for a certain “special” purpose, e.g. to serve as the holding company in a buy-out structure.
A stacked liquidation preference is when different classes of preferred shares have senior rights to payment over other classes of preferred shares; e.g. Series B preferred shares that an investor in a Series B financing round receives will have a liquidation preference senior to the liquidation preference of the Series A preferred shares that investors in the previous Series A financing round have received.
Stage (also referred to as financing stage) describes the stage of development a startup company is in. There are no exact rules for what defines each stage of a company, but during their life startups are most often categorized in the following stages: seed stage, early stage, mid-stage, and late stage. Most venture capital firms focus on specific stages and only invest in companies in one or two stages. Some firms, however, manage multiple funds geared toward different stage companies.
Technically, a startup is a new business venture in its earliest stage of development, but lately even more mature companies that once were startups continue to carry this label.
A startup that is operating in stealth mode is either developing a product or service that is kept secret or is itself kept secret until the product/service is pipe for the market. Stealth mode is chosen when there is a high risk that the product/service will by copied or imitated by a competitors, which must be avioded.
A strategic investment is an investment that a corporation makes in a startup that can bring something of value to the corporation itself. The aim can be to gain access to a particular product or technology that the startup is developing, or to support young companies that could become customers for the corporation's products. In venture capital financing rounds, strategic investors are sometimes distinguished from venture capitalists and others who invest primarily with the aim of generating a large return on their investment (such investment are also referred to as financial investments). Corporate venture capital is an example of strategic investing.
Strike price (or exercise price) is the amount that must be paid by an employee to execute the options granted under an ESOP. Typically, the strike price is pegged to the "fair market value" on the date of issuance, rather than the vesting date.
Very active and experienced buisiness angels are someteimes called super angels.
Sweat equity is the ownership of shares in a company resulting from work rather than investment of capital.
See bridge loan.
When two or more investors share a deal between them, this is referred to as syndication. This allows venture capitalists to pool their resources and share the risk of an investment. Normally, one firm of the syndicate is serving as the lead investor and will negotiate the deal terms for all investors that form the syndicate.
tag along provision
A tag-along provision (in the US more often referred to as a co-sale-provision or co-sale right) is a provision that gives investor a contractual right to sell some of their shares along with the founders or other investors it they elects to sell shares to a third-party.
See tag along provision.
Companies which still remain within a venture capital or private equity fund’s portfolio as it enters, or draws close to, an extension period are called the tail or – in case of venture capital funds – living dead.
See capital call.
See information memorandum.
A tender offer is a takeover bid in the form of a public invitation to shareholders to sell their listed stock, generally at a price above the market price.
A term sheet is a non-binding agreement that outlines the major aspects of an investment to be made in a startup company. As the term sheet sets the foundation for further discussions and for building out detailed legal documents, it is the cornerstone of each financing round.
The amount of money that goes into an investment transaction is sometimes referred to as the ticket size.
When a private equity firm has raised a fund, or it wishes to announce a significant closing, it may choose to advertise the event in the financial press - the ad is known as a tombstone. It normally provides details of how much has been raised, the date of closing and the lead investors. Sometimes tombstones with this information are cast in acryl and can then be found on the office desks of investment bankers and lawyers who advised on the transaction.
Track record is the experience, history and past performance of a private equity/venture capital fund or its individual managers.
If a startup is gaining traction, it is getting somewhere with customers: people are buying the startups's product, subscribing to its service, or otherwise engaging with it. Traction is quantitative evidence of market demand for a product or service It can be expressed, as appropriate, using different metrics (revenues, margins, active members, registered users, traffic).
A trade sale is the sale of a company’s shares or assets (in whole or in part) to a strategic buyer for cash or shares.
Treasury shares are shares in a company that have been purchased and are held by the company itself.
Two x is an expression referring to 2 times the original amount. For example, preferred shares may have a “two x” liquidation preference, so in case of liquidation of the company, the holders of such preferred shares would receive twice his or her original investment.
Underwriting is the issuance of debt and equity securities by investment banks on the behalf corporations and governments in order to generate investment capital.
If a startup is valued at $ 1 billion / € 1 billion or more by public or private market investors, e.g. in a financing round, it is referred to as a unicorn. Being invested in a unicorn sounds great but it does not necessarily mean that the investor will make a great profit from this investment (e.g. if the investment was made at a late stage). Finding a dragon is what really counts for venture capital investors, but dragons are much harder to find than unicorns. As saying goes: "Unicorns are for show. Dragons are for dough."
Uninvested capital (also referred to as dry powder or capital overhang) is capital which a venture capital or private equity fund may still call in from its investors in a drawdown, so it is available for investment but has not yet been utilized. Uninvested capital can become acute when levels of investment fail to keep pace with levels of fundraising. Uninvested capital will tend to put upward pressure on valuations, raise suspicions that deal quality may be sacrificed in order to put money to work, and may also stretch out the fund cycle.
unique selling proposition
A unique selling proposition is what investors look for in a startup: a unique customer benefit of a product or service that clearly differentiates it from competitors.
Up-round financing is the opposite of a down-round and refers to a financing round in which a company's worth increased since its prior valuation.
Upside is the increase in the value of an investment. It may be realized upon an exit.
USP is short for unique selling proposition.
valley of death
The period between the initial funding of a startup and the end of the runway is sometimes referred to as the “valley of death” / “Death Valley”. Navigating through death valley is essential to the long-term survivial of a startup.
Valuation describes the process by which a company’s worth or value is determined. An investor will look at capital structure, management team, and revenue or potential revenue, among other things. See also pre-money valuation, post-money valuation and multiples.
The term value add refers to the ability of an investor to contribute company-building skills gained at first hand to the development of a startup. As more and more venture capital funds are established and plain money becomes more and more a commodity, the value add a venture capital fund can bring to the startup becomes increasingly important.
The value proposition of a business is the value perceived by the clients or potential clients related to a differentiated product/service, that addresses a problem and satisfies an identified need. May be applied by to an organisation or just to some products/services, defined through the identification and creation of benefits offered to the clients or potential clients, which determines its value positioning in relation to the competition or potential competitors.
VC is short for venture capital or venture capitalist.
A vendor loan is a loan provided by the vendor of a business to its purchaser partially to finance the acquisition.
The term venture is sometimes used for referring to a startup company.
Venture capital typically refers to early-stage investments. However, many people use the term very loosely and actually mean private equity.
venture capital fund
A venture capital fund pools and manages money from investors (referred to as LPs or limited partners) seeking private equity stakes in startups and small and medium-size enterprises with strong growth potential.
Persons or entities that invest in early-stage companies are generally referred to as venture capitalists. Venture capital funds, angel investors, corparate venture capitalists are all venture capitalists.
A venture partner is an employee of or an advisor to a venture capital firm. Venture partners usually help the firm to do investments and manage them, but they are not full and permanent members of the partnership. Venture partners are often seasoned venture capitalists, experienced business angels or successful entrepreneurs or have a certain experience that the venture firm seeks (e.g. know-how in certain areas of technology). Venture partners might be thought of as something between an EIR and a GP within a venture capital firm; unlike an EIR, a venture partner will often source deals for the firm. The status venture partner can sometimes be an interim status until the venture partner progresses into being a GP or used for someone who has retired as a GP, but wishes to retain a part-time role within the firm.
Vesting is an instrument to keep founders (and other key persons at a startup company who hold shares) on board. The general idea is that instead of getting all of their stock (or the value of such stock) at the outset, they basically receive their stock in increments, according to a so called "vesting schedule". A typical vesting schedule for startup companies can run four years with a one year "cliff" and quarterly vesting thereafter. The one year cliff means that no vesting occurs during the first year of the startup. Consequently, if the person leaves the company during the first year, all of his stock will be unvested and there will be no compensation or reimbursements for the entire stock. On the date of the company's first anniversary, the persons will be vested in 25% of their stock. Thereafter, they vest every quarter at an amount equal to 1/16th of the total stock due to them. This gives founders and employees an incentive to perform well and stay with the company for a longer period of time.
Vesting period is the term over which shares of options vest according to the vesting schedule.
Vintage year typically refers tot he year in which a venture capital fund makes its first investment.
See shareholder pooling.
A voting trust is an entity to which one or more shareholders have transferred their voting rights (which sometimes may accompany the transfer of shares). This is usually done for a defined period of time. See also shareholder pooling.
See distressed debt.
See break-up fee.
A company is walking dead when it is not bankrupt, but will never succeed, and thus cannot be sold or otherwise exited. See also living dead and tail.
A washout round is a financing round whereby previous investors, the founders and management suffer significant dilution. Usually as a result of a washout round, the new investor gains majority ownership and control of the company. Sometimes a washout round is followed by a grossing up.
See capital distribution.
See washout round.
Write-down is a decrease in the reported value of an asset or a company.
Write-off is a decrease in the reported value of an asset or a company to zero.
When a fund has retained all or some of its assets beyond its intended holding period because it struggles to create value in these assets and realize them for a profit, the fund becomes a so called zombie fund. The term is also used to describe a venture capital firm that can’t raise a new fund, and thus can’t make new investments.
zombie fund manager
A fund manager who manages a zombie fund.
zone of misalignment
The zone of misalignment is the range of exit values were the interests of the holders of common shares and preferred shares are misaligned due to the effects of the liquidation preference.