Great Funding Database - Funding Definitions

Venture Community Terms

Acceleration clause:

In legal investment or loan agreements, acceleration clauses advance the date of an obligation ahead of a previously agreed schedule. Within the venture community, acceleration clauses can cause investors to receive a greater equity stake in a business or more favorable investment terms if management fails to meet agreed performance milestones. Yikes!

Accredited Investor:

A SEC standard under Regulation D for determining the level of financial sophistication of investors that would not require a company to develop extensive investment disclosure documentation and government filings. In general, though other requirements may apply, accredited individual investors should have a minimum net worth of $1 million, annual income exceeding $200,000 in the two years prior to investment, and the expectation of continued annual income exceeding $200,000.

Accrual Accounting:

An accounting method used to report financial activity recognizing when income is earned and when expenses are accrued. Accrual accounting is typically preferred by the investment community. An alternative accounting method is cash basis accounting.

Acid-Test Ratio:

The calculation of a company's current assets (cash, accounts receivable, etc.) divided by a company's current liabilities. "Current" refers to assets that are relatively liquid and can be converted into cash in less than one year or liabilities that are due in less than one year. The Acid-Test is an important component of commercial bank lending decisions.

Angel:

A private individual who invests in a startup or early stage company. The most desirable angels also mentor management teams on technical, strategic and operational issues.

Asset-Based Finance:

Primarily a commercial bank loan that is secured or collateralized by tangible company assets.

Assignment:

A formal written notice or agreement that typically transfers ownership of certain assets to another party. Prior to raising money for a new company, founders often assign or transfer assets or technologies to the company.

Authorized Stock:

The maximum number of common stock or preferred stock shares that can be issued by a company pursuant to the company's articles of incorporation or organization charter.

Balance Sheet:

A summary of a company's assets, liabilities and net worth on a specific date. A balance sheet is one component of a company's financial statements.

Bandwidth:

A common term to describe the intellectual capacity of a management team. Business founders are often questioned about the bandwidth of other management team members.

Bank Reconciliation:

Often called a "bank rec." Bank recs compare management records to a bank's records to uncover errors in cash reporting.

Big Four:

The four largest accounting firms in the U.S. They are KPMG, PricewaterhouseCoopers, Deloitte & Touche, and Ernst & Young.

Blank-check:

Wouldn’t we all like the freedom of a blank check! To investment bankers, buy-out fund managers and venture fund partners, the term blank-check usually refers to a company that has been given considerable latitude to opportunistically go out and buy companies for longer-term financial gain. Often blank-check entities eventually seek to "roll up" or consolidate a group of companies within a specific industry once they achieve some "deal traction" or investment momentum.

Burn Rate:

A projection or actual amount of monthly expenses. Sometimes entrepreneurs are asked about their company’s burn rate in terms of how quickly a company will exhaust its working capital or cash resources.

Business Model:

A venture community phrase that describes the strategies to generate revenues and profits. Venture fund managers or "VCs" often ask entrepreneurs at the start of any conversation, "What’s your business model?" This doesn’t mean describing your cool new product idea, but how revenues and profits will flow to your company in ways that may outsmart the competition.

Business Plan:

Within the venture community, a business plan is a written description of a company’s plans for growth. Business plans serve as a marketing document to help growth-oriented companies raise debt or equity from investors or lenders. These plans typically include 2 year financial projections for raw startup companies; 4 to 5 year projections for Early Stage and Expansion Stage companies.

Buyout Funds:

A class of private equity funds that are organized to buy established companies with strong records of profitability. This class of private equity funds is different from a venture fund, which invests in earlier stage businesses and raw startups.

Buy-Sell Agreements:

A buy-sell agreement provides the specific terms and time table in which one partner can buy out another partner. These agreements can be structured between founding business partners, two or more companies, a company and an angel investor, etc. Good buy-sell agreements minimize guesswork, conflicts and the chance of costly litigation when one party no longer wishes to continue an equity ownership relationship.

Cap Table:

Also known as "capitalization table." A cap table is a summary of a company’s total number of authorized common and preferred shares, plus a summary list of all outstanding common and preferred shares. More detailed cap tables outline the different terms associated with each investment round. Well-prepared business plans include a cap table for easy reader reference.

Cash Basis Accounting:

An accounting method typically used in sole proprietorships that recognizes income when it is received and expenses when they are paid.

Cash-Flow Breakeven:

An estimate of the sales level required for a company to match costs. TakeCommand members are encouraged to work aggressively to reach cash-flow breakeven.

Clueless:

A behind closed doors VC and angel investor comment about an entrepreneur who has unrealistic valuation expectations, unrealistic views of the competition, or an unrealistic understanding of the process of soliciting, negotiating and closing venture funding. Synonym for "doesn’t get it."

Common Stock:

A form of equity ownership that typically enjoys voting rights in a corporation. Unlike certain preferred stock securities, common stock is permanent with no maturity date.

Conversion Price:

The price at which convertible debt, preferred stock, convertible bonds and other convertible securities can be "converted" or exchanged into another form of security – typically common stock.

Convertible Debt:

A form of debt that allows the debt holder to convert the balance of a loan into the equity securities of a company.

Covenants:

Certain provisions within a legal document or financing agreement that detail what a company agrees to do or not do in order to receive investment funding. Within lending documents, companies may agree to maintain a minimum net worth or face increased interest costs. Within equity investment deals, a management team may agree to produce and distribute financial statements on a monthly basis to investors or present certain decisions to a board of directors for approval.

Debt to Equity Ratio:

One measure of a company's financial health or weakness. The ratio is calculated as a company's total long-term debt divided by common stockholder’s equity. A relatively low debt to equity ratio indicates that a company may have the financial flexibility to take on more debt, if needed.

Debt:

Debt provided through the venture capital and private equity sources is typically not the same as debt provided by commercial banks or leasing companies. Private equity debt investors provide capital to help acquire companies or serve as a temporary funding arrangement while companies seek more permanent equity arrangements. Most companies that qualify for debt are revenue-generating and have established a consistent record of positive cash flow generation.

Dilution:

The reduction in percentage ownership that results when a company obtains a new round of equity investment. "After completing the Series B investment round, the founder’s ownership stake was diluted down to 45% from 80%."

Dividend Clawback:

An agreement in which dividend recipients agree to convert to equity prior dividends to help financially troubled or insolvent companies.

Down Round:

An investment round in which the overall value of a company is lower than a previous investment round. While all investment rounds dilute the ownership stake of founding entrepreneurs, a down round is especially costly to first investors and company founders.

Drill Down:

Deep dive discussion of a specific area of a company’s business plan. A VC can say to an entrepreneur, "Let’s drill down into your technology and why you believe it is patentable."

Due Diligence:

The investigative process of confirming information about a company, its organizational setup, its prospects for growth, its competition, and its management. A VC can say, "Our term sheet is subject to our successfully completing due diligence on your company. Our lawyers will give you a list of documents that we would like to review."

Early Stage:

Within the Great Funding Database, Early Stage companies have advanced beyond the concept stage and have developed a first generation prototype for their product or service, or may have started to generate revenues from first customers in well-defined sales distribution channels.

EBIT:

Short for "Earnings before interest and taxes." Also known as operating income in financial statement analysis.

Enterprise Value:

In general, the market capitalization of a company's equity and debt. Enterprise value calculations can also subtract cash and other cash equivalents to come up with a company's theoretical takeover price.

Executive Summary:

The first 3 to 5 pages of a business plan that briefly describe a company’s business objectives, management expertise, market and funding requirements.

Exit:

The event or time in which a company goes public or is sold to another company, allowing angel and venture fund investors to liquidate their investment, hopefully for a eye-popping profit. Frequently, VCs will ask entrepreneurs about the "exit strategy" for their business or the expected "timing of their exit." Most VCs expect to exit or sell their stake in a venture-backed business within 5 to 7 years from the date of investment.

Expansion Stage:

Within the Great Funding Database, Expansion Stage or "later stage" companies generally have already demonstrated strong sales and market penetration and seek equity funding as a foundation for more aggressive growth. Essentially all the technical risk associated with a company’s products or services is behind Expansion Stage companies.

Financial Institutions:

In the private equity world, financial institutions include pension funds and foundations that invest in venture capital funds and buyout funds. Most large venture funds such as Oak Investment Partners, Polaris Venture Partners, and TA Associates are funded by financial institutions. Financial institutions rarely make direct investments in growth-oriented companies.

Financials:

A short expression for a company’s financial statements including a profit and loss statement ("P & L"), balance sheet, statement of changes of working capital ("cash flow statement") and projections. A VC might say to an entrepreneur, "Once we have had a look at the financials then we’ll be in a better position to determine our funding interest."

General Partners:

The primary organizers and managers of a venture fund. General Partners or "GPs" are paid a salary for managing the day-to-day operations of a venture fund. In addition, GPs receive a percentage of the net profits that are derived from the sale of a fund’s portfolio companies. Within a venture fund, GP’s have more decision-making clout than venture partners, associates and analysts.

Going Public:

The process of selling shares of a privately-held company through the public markets and providing an active, public "market" for investors to buy and sell shares.

Heavy Lifting:

A casual expression that usually points to the person, professionals or entities that are doing the most amount of work. A VC might say, "Surprisingly the CTO is really the one who is doing the heavy lifting at the company, not the founding CEO."

Intellectual Property or "IP":

Trademarks, service marks, patents, copyrights and trade secrets are considered a company’s intellectual property. Intellectual property is considered an intangible asset, which may have growing financial and strategic value to a company. In contrast, tangible assets may consist of equipment or inventory.

Investment Banker:

A financial professional who assists growth-oriented companies to identify and solicit sources of funding, strategic partnerships, joint ventures, and companies to acquire. Investment bankers can also help sell a venture-backed company. Investment bankers serve as middlemen on transactions and are rarely sources of direct investment. Around Silicon Valley, one leading tech executive famously referred to investment bankers as nothing more than "potted plants."

Investment Round:

Companies can raise funds in separate traunches or "rounds." The first round is often called a "friends and family round" or a "seed round." Investment rounds can also be identified by their "series." The first round can be called a "Series A round." Subsequent investment rounds can be referred to as a Series B round, Series C round, Series D round, etc. Each investment round offers different investment terms to the investors.

Letter of Intent:

Also "LOI" or "term sheet" to venture community insider’s and lawyers. A letter of intent is a non-binding document that outlines primary terms of a venture investment in a company. All terms of a letter of intent or term sheet are negotiable. The most favorable position for an entrepreneur is to receive several terms sheets from competing venture funds to enhance negotiating strength.

Limited Partners:

Within the financial organization of a venture fund, its limited partners are investors in the fund. Unlike a fund’s general partners, a limited partner’s risk is "limited" to the amount of money invested in a fund.

Management Fees:

In the venture community, venture funds receive a management fee from their institutional investors to compensate them for the time and expense of identifying, negotiating, investing and working with their portfolio companies. In addition, some venture funds also charge their portfolio companies an annual fee for ongoing advisory services provided to the portfolio company.

Metrics:

Various measures of company performance that help members of a management team set individual and team goals. Useful operating metrics vary from one company to another. For example, a metric can be established to monitor the number of customer service calls that are converted into new product orders. An alternative metric that may help Internet entrepreneurs manage a business would be a metric percentage of site visitors who purchase a product or sign up for a newsletter. VCs are impressed when management teams monitor both financial and operating metrics on a daily, weekly, monthly, and quarterly basis.

Milestones:

Set operating targets or goals to measure management progress against projections and performance expectations. Frequently, Seed Stage investors distribute funds to entrepreneurs as the company achieves certain agreed operating milestones. In the venture community, funds for raw startups may be tied to management achieving certain operating milestones within a period of time. Also, management may work aggressively toward certain operating milestones that boost the underlying value of a company for a less costly funding round.

Multiple:

A multiple is simply a single numerical factor or multiplier. A multiple is relevant to venture investors in many ways. For example, a VC can ask an entrepreneur about the earnings multiples of companies within an industry. A "preference multiple" is the factor of the investor’s investment amount that is due at a liquidation or exit event before other shareholders (primarily common share holders) receive a payout. So if an investor receives a preference multiple of 2 times original invested capital of $2 million, then the investor would receive a minimum of $4 million plus any accumulated dividends before other shareholders participation in the liquidation event.

No-Brainer:

This term does not apply to startup management or small business fundraising.

Observer:

A non-voting guest at board meetings. Sometimes angels who take a large position in a company but do not want to accept the liability or time commitment of being a voting board member will request "observer board status."

Operating Margins:

Operating margins refer to a company’s earning performance. A gross profit margin is a company’s total revenues less cost of goods sold. A company’s operating margin, sometimes called EBIT (earnings before interest and taxes) refers to a company’s total revenues less cost of goods sold and all other sales and administrative costs. Venture funds prefer to invest in companies with gross profit margins that exceed 60% or 70% and operating margins that exceed 20% to 30%.

P&L

Short for "profit and loss statement" or a company's income statement.

PE:

Short for a company's price to earnings ratio. Publicly-traded companies calculate their price to earnings ratio by dividing the company's current stock price by the company's earnings per share. This ratio is important to investors when evaluating market sentiment of larger companies which operate in a similar industry.

PIPE:

A "PIPE" is an abbreviated term for a "private investment in a public entity."

Phantom Income:

A nasty tax obligation that results when a business or individual receives qualifying income without the cash benefit of such earned income. Frequently consultants or employees that receive common stock for services rendered may be obligated to pay phantom income tax on the securities.

Portfolio Company:

Companies that receive venture funding from a VC join the firm’s list of "active investments" or portfolio companies. Investments that have been fully liquidated are called "former portfolio companies."

Preferred Stock:

Owners of preferred stock have certain "preferences" or advantages over owners of common stock. Venture-backed companies that have completed several rounds of financing may have several different classes of preferred stock outstanding. Typically, preferred shares earn a cumulative or non-cumulative dividend that is payable in cash or additional shares of stock. In addition, preferred shareholders may also receive certain rights or "preferences" to receive a guaranteed multiple of their investment upon company sale, before other shareholders.

Private Placement:

The direct sale of securities (common stock, preferred stock or debt) to angel or venture fund investors. A private placement of securities is not a public market issue and therefore may not be subject to the same SEC regulations that govern public offerings.

Projections:

Forecasts of a company's expected financial results. Typically investors ask to review projections that consist of multi-year projected balance sheets, profit and loss statements, and cash flow statements.

Pro-rata:

A proportional allocation typically based on percentage ownership interests.

Proven Management Team:

To investors, "proven" means proven. It means that the one or more members of the management team has already founded or worked at a senior level capacity in a fast-growth company that provided a positive return for venture investors. Savvy first-time entrepreneurs are wise to add genuine proven talent to a company’s roster before seeking venture funding to potentially increase the overall appeal of a young company and its negotiated valuation.

R&D:

Short for research and development.

Rate of Return:

A calculation that considers the time value of money. Return calculations measure the change in value (can be positive or negative) of a company over a period of time, plus any payment of interest or dividends.

Recap/Buyout Stage of Development:

Within the management of the Great Funding Database, the Recap/Buyout Stage of Development broadly refers to privately or publicly-held companies that may be undergoing considerable strategic change due to fast growth, acquisition activity or financial distress. The most frequent areas of private equity investment activity involve providing funds to cash out company founders; spin-off or sell certain operating divisions of a company; acquire complementary companies possibly through leveraged transactions; turnaround financially distressed revenue-generating operations; recapitalize companies or their subsidiaries; recapitalize bankrupt companies, take public companies private; provide "bridge" or mezzanine capital; or help employees buyout a business from a larger corporate entity.

Sarbanes Oxley Act of 2002:

Legislation enacted by the U.S. Congress to improve the financial reporting of publicly-traded companies.

SEC:

The SEC is the acronym for the federal Securities and Exchange Commission.

Seed Stage:

Within the Great Funding Database, Seed Stage-oriented venture capital funds provide funding to pre-revenue companies that may only be at the raw concept stage of product or service development. Validating the investment value of an idea through highly focused research activities, often called "proof of concept," is an important operating objective to Seed Stage companies.

Slide Deck:

A tech and VC community expression for a Microsoft PowerPoint presentation. Increasingly, entrepreneurs send a brief introductory PowerPoint presentation and an executive summary to potential funding partners. Both documents are designed to complement, not repeat information provided within the other document.

Stock Option:

A form of investment security that gives the owner (often employees of a company) the right to purchase a certain number of shares of common stock at a fixed price, the "exercise price" or "strike price," for a specific period of time. Stock options can be "qualified" or "non-qualified" according to a company’s stock option plan terms and compliance with IRS regulations.

Strategic investor:

A company that invests in or buys a company for long-term financial gain plus other complementary "strategic" or operating benefits. Larger corporations may invest in a company for access to new technologies, share intellectual property rights, or jointly develop new products or services. For example, a well-established, large media and film production company may make a strategic investment in a young company that is developing new technologies for wireless film distribution.

Syndicate:

Within the venture funding community, a syndicate is a group of venture funds that invest together on the same terms in a company. Syndicates can be organized by a "lead fund investor" or by a company that actively solicits individual fund members for funding.

Traction:

Companies that have gained some favorable "traction" have demonstrated some amount of success in obtaining first customers or establishing a position in the marketplace. VCs often say to young startup companies, "Come back and see us once your company has some traction." This means they would like the entrepreneur to demonstrate more fully that a product works, a product serves a viable market need or a product can be sold successfully to content customers.

Valuation:

An estimate of a company’s current worth. Valuations of younger, privately-held companies are more likely to be based on qualitative factors than the quantitative factors that influence public company valuations. A "pre-money" valuation is the value of a business before new funds are invested in a company. A "post-money valuation" refers to the agreed value of a company plus the proceeds of an investment round.

Vaporware:

Typically, technology that is not likely to work despite the best wishful thinking of sales-oriented entrepreneurs. In VC-speak, vaporware is similar in low regard to an "empty suit" which refers to a no-substance member of a management team.

Venture Capital Funds:

A class of funds within the private equity community that invest in higher risk startup or early stage privately-held companies.

Vesting:

A period of time in which partial or complete ownership is established over an asset. Within the venture community, vesting most commonly applies to issuances of stock which "vest" or become the property of the recipient over a period of time or service to a company.

Warrant or "warrant kicker":

A warrant is another form of investment security. Much like stock options, a warrant gives its owner the right to purchase a number of shares of common or preferred stock before the warrant’s expiration date. Frequently banks and investors will ask growth-oriented companies for a "warrant kicker" or bonus compensation in addition to other lending or investment compensation.