1933 Act – see Securities Act of 1933.
1934 Act – see Securities Exchange Act of 1934.
§3(c)(1) – the section of the Investment Company Act of 1940 that exempts certain investment companies, such as private equity funds and venture capital funds, from standard registration requirements with the SEC if they have fewer than 100 U.S. investors and satisfy certain other requirements.
§3(c)(7) – the section of the Investment Company Act of 1940 that exempts certain investment companies from standard registration requirements with the SEC if all outstanding securities are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers, and if the investment company is not making and does not at that time propose to make a public offering of such securities.
§404 – general reference to the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 that requires most public companies and their auditors to report on the effectiveness of the companies’ internal controls over financial reporting.
§5 – the section of the Securities Act of 1933 that requires all offerings and sales of securities be registered with the SEC unless subject to a registration exemption.
§1045 – the section of the Internal Revenue Code that allows non-corporate taxpayers to roll over gain realized from the sale of qualified small business stock to the purchase of another qualified small business stock.
§1202 – the section of the Internal Revenue Code stating that the gross income of a non-corporate taxpayer may include only 50% of the gain from a sale of qualified small business stock held over five years.
“A” Round – an equity financing transaction in which venture capitalists or institutional investors invest in a company that was previously financed by founders, “friends and family” and/or angel investors.
Accelerated Filer – a category of issuer under the federal securities laws consisting of U.S. companies with market capitalizations of between $75 million and $700 million that have filed at least one annual report with the SEC. See also, Large Accelerated Filer and Non-accelerated Filer. Which category of issuer determines, among other things, when its pending reports under the Securities Exchange Act of 1934 are due.
Accelerator – an entity offering a “business acceleration program” designed to mentor and rapidly grow mid-stage startups (many of whom are transitioning out of an incubator) over the course of 3-6 months. During the program the accelerator aims to provide startups with institutional strength as well as long-term vision and strategy.
Accredited Investor – includes most typical institutional investors as well as individuals meeting minimum wealth or income standards. Specifically, Rule 501 of Regulation D of the Securities Act of 1933 defines an accredited investor as one of the following:
- a bank, savings and loan association or similar institution whether acting in its individual or fiduciary capacity;
- a broker / dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934;
- an insurance company as defined in Section 2(a)(13) of the Securities Act of 1933;
- an investment company registered under the Investment Company Act of 1940, or a business development company as defined in Section 2(a)(48) of the Investment Company Act of 1940;
- a Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958;
- an employee benefit plan that has total assets in excess of $5 million which was established and is maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions;
- an employee benefit plan within the meaning of Title I of ERISA if the investment decision is made by a plan fiduciary, which is either a bank, savings and loan association, insurance company or registered investment adviser, or if the employee benefit plan has total assets in excess of $5 million, or, if a self-directed plan, with investment decisions made solely by persons who are accredited investors;
- a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940;
- an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities being issued, with total assets in excess of $5 million;
- a director, executive officer or general partner of the issuer, or a director, executive officer or general partner of a general partner of the issuer;
- an individual with income in excess of $200,000 in each of the two most recent years, or joint income with his or her spouse in excess of $300,000 in each of those years, with a reasonable expectation of reaching the same income level in the current year;
- an individual with net worth, or net worth with spouse, in excess of $1 million at the time of the purchase of securities. Net worth does not include the individual’s primary residence and indebtedness secured by the individual’s primary residence, up to the estimated fair market value of the residence;
- a trust, with total assets of $5 million and not formed for the specific purpose of acquiring the securities, whose purchase is directed by a person who has such knowledge and experience in financial and business matters that such person is capable of evaluating the merits and risks of the prospective investment; or
- a corporation, limited partnership, partnership, limited liability company or other entity in which all of the equity owners are qualified as accredited investors individually.
Accrual – an accounting method that shows expenses incurred and income earned for a given period, although such expenses and income may not have actually been paid or received. The right to receive payments and not the actual receipt determines inclusion of an amount in gross income.
Accrued Dividend / Accumulated Dividend – a dividend declared and due to a shareholder or investor but not yet paid as a dividend and reflected accordingly on a company’s balance sheet.
Advisory Board / Advisory Committee – a group of individuals acting as external advisors to a company or collective investment vehicle, such as a private equity fund or venture capital fund, generally consisting of either experts in a particular field or representatives selected by key investors. An advisory board / advisory committee often works in conjunction with a traditional board of directors or board of managers and generally has no authoritative powers.
All or None Offering – a term used in an underwritten offering stating that if the underwriter is not able to sell all of the shares being offered, then the offering will be canceled and none of the securities will be offered for sale. See also, Best Efforts Offering; Firm Commitment.
Angel / Angel Investor – an individual investor, generally with high net worth, providing venture capital to an early stage business. Angel investors often invest in industries or businesses with which they are familiar. Angel investors may not be as sophisticated as institutional investors and often may not involve themselves as deeply in the oversight and management of company operations as traditional institutional investors.
Anti-dilution Protection – contractual rights that protect against certain dilutive events, such as a subsequent sale by the company of additional equity securities. The two main types of anti-dilution protection are: (1) price-based, which protects against subsequent issuances by a company of securities at a company valuation that is lower than some specified benchmark; and (2) standard proportional, which protects against events that affect the number of shares outstanding or proportionate ownership of the company, such as stock splits, stock dividends and recapitalizations. The two primary forms of price-based anti-dilution protection are full-ratchet and weighted average. Sometimes referred to as Ratchet Protection.
Articles of Incorporation – a corporation’s fundamental legal organizational document, filed with the secretary of state in the state of incorporation and commencing a company’s corporate existence. The required contents of the document are set forth in each state’s general corporation statutes and commonly include the name, location and purpose of the corporation; the number, classification, rights and preferences of the corporation’s capital stock; and conditions of operation, including any lawful provision defining or limiting the exercise of authority of the corporation, the directors, the officers or the shareholders. Sometimes referred to as the Certificate of Incorporation.
“As-converted” Basis – a form of viewing or analyzing a company’s capital structure on the basis that all shares that are convertible into common stock have been converted into common stock, taking into account whatever anti-dilution or other adjustments may be necessary.
Audit Committee – a committee of a board of directors or board of managers comprised of individuals who are generally well-versed in accounting and financial reporting matters. The functions of an audit committee generally include overseeing: (1) the company’s financial reporting process and its financial statements; (2) the appointment, compensation, independence and performance of the company’s independent auditors; (3) the company’s compliance with legal and regulatory requirements; and (4) the company’s internal audit, internal controls related to financial reporting and disclosure, and internal accounting controls. Public companies listed on national exchanges are generally required to have an audit committee composed exclusively of independent directors. In addition, institutional investors, customers and creditors may, in certain cases, require a private company form an audit committee.
Audit Committee Financial Expert – pursuant to SEC rules implemented pursuant to the Sarbanes-Oxley Act, public companies are required to disclose whether or not they have at least one “financial expert” serving on their audit committee. An Audit Committee Financial Expert is a person with all of the following attributes:
- an understanding of GAAP and financial statements;
- an ability to assess GAAP in connection with accounting for estimates, accruals and reserves;
- company-appropriate experience preparing, and/or evaluating audited financial statements;
- an understanding of internal controls and procedures for financial reporting; and
- an understanding of audit committee functions.
Audited Financial Statement – a financial statement that has been prepared and certified by an independent certified public accountant and certifies that the financial statement meets the requirements of GAAP.
Benchmarks – performance goals or operating criteria against which a company’s success can be measured. Benchmarks can include operating criteria, such as levels of revenue or numbers of customers, and other objective criteria, such as the obtainment of governmental approvals or other third-party validation. Achieving benchmarks can result in additional equity financing, additional debt financing, the issuance of additional stock options or equity incentive compensation, the payment of monetary bonuses, or other agreed-to events.
Best Efforts Offering – an underwritten offering in which the underwriter acting as agent agrees to use its best efforts to sell the securities for sale but does not buy the securities outright and does not guarantee that the offering will generate any amount of proceeds. See also, All Or None Offering.
Blank Check Company – a development stage company without a specific business plan or business purpose, or whose stated business plan is to engage mergers or acquisitions with to-be-identified companies.
Blank Check Preferred Stock – shares of preferred stock that are authorized in a company’s certificate of incorporation or articles of incorporation, which remain authorized and unissued, and permit a company’s board of directors to, at a subsequent date, create a new series of preferred stock by setting its rights, privileges and preferences in a certificate of designation that is filed with the appropriate governmental agency (generally a secretary of state). This permits a company to engage in financing transactions and agree to terms with financing sources without having to first obtain the consent of the company’s shareholders, which in the absence of blank check preferred stock would be required. Blank check preferred stock can also be used to implement a shareholder rights plan or to prevent unsolicited takeovers by placement of the stock with friendly holders.
Blind Pool – a form of collective investment vehicle, generally a limited partnership or limited liability company, that does not specify which investment opportunities that the sponsor (usually a general partner) plans to pursue.
Blue Sky Laws – regulations governing the sale of securities designed to protect investors against securities fraud by requiring issuers to register an offering at the state level.
Board of Directors – the individuals elected by shareholders and granted the power and authority to manage the business and affairs of a corporation. In a limited liability company members elect or designate a manager or board of managers to manage the business and affairs of the company. See also, Directors.
Board Observation Rights – the rights of an individual or entity (often an investor) to attend meetings of a company’s board of directors (or equivalent governance body), as well as certain committees thereof, and receive other information and reports generally received by directors. These observation rights allow investors to monitor their investments in a company and participate in meetings of the board of directors, without a right to vote on matters before the board.
Bridge Loan – a type of short-term loan typically taken out for a period of two weeks to three years and used as interim financing pending the obtainment of larger or longer-term financing.
Bring-down – to confirm certain factual matters, generally in the form of representations and warranties, as of a more recent date than originally stated. A bring-down is often effectuated in the form of a bring-down certificate.
Broad-based – see Weighted Average Anti-dilution Protection / Weighted Average Adjustment.
Broker / Dealer – a securities “broker” is generally defined under federal and state securities laws to mean any person engaged in the business of effecting transactions in securities for the account of others, and a “dealer” is any person engaged in the business of buying and selling securities for his or her own account. A person acting as a broker / dealer must register with both the SEC and in any jurisdiction where he or she is operating, and must comply with various other requirements. As opposed to a finder, a broker / dealer is generally actively involved in important parts of a securities transaction, including negotiation of terms, and the compensation of the broker / dealer is typically structured as a commission based on the amount or outcome of the securities transaction.
Burn Rate – the rate at which a company spends cash in excess of cash inflows to sustain its operations over a given period of time; a measure of negative cash flow.
Bylaws – a company’s internal document that provides the basic rules for the corporate activities, internal procedures and certain rights of the shareholders and board of directors. Sometimes referred to as the Code of Regulations.
C Corporation – a corporation taxed under subchapter C of the Internal Revenue Code. Unlike partnerships, subchapter S Corporations, limited liability companies or other entities where profits and losses “flow through” to the entity’s owners, a C Corporation is treated for tax purposes as legally distinct from its owners.
“Call” Option / “Call” Right – the right to purchase or acquire a security within a specific time period. “Call” options / “call” rights often specify the time period within which the right can be exercised, the price at which the security can be purchased (or mechanism for determining the price), and other conditions to its exercisability.
Capital Call – the notification by a collective investment vehicle, such as a private equity fund or venture capital fund, to its investors calling or drawing funds from the investors in order to deploy capital in one or more portfolio investments.
Capital Gain – the profit generated when a financial asset such as stock is sold for a purchase price greater than its tax basis (often tied to the price originally paid for the asset). Profits characterized as long-term capital gain (i.e., generally based on the sale of an asset held for a year or longer) are taxed at a lower rate than profits treated as ordinary income.
Capital Under Management – the amount of capital committed to a collective investment vehicle, such as a private equity fund or venture capital fund, that is available for deployment in portfolio investments.
Capitalization Table – a table showing the total amount of capital investment from each source and the respective ownership ratios. Also referred to as a “cap table.”
Carried Interest – the percentage of proceeds to which the sponsors of a collective investment vehicle, such as a private equity fund or venture capital fund, are entitled. The term is derived from the fact that the sponsors of the collective investment vehicle did not contribute capital in exchange for this economic interest. The carried interest serves to incentivize the sponsors to achieve economic returns on their investors’ capital.
Carve-out – a feature of many purchase agreements that provides indemnification of certain representations and warranties outside of the escrow.
Catch-up – a feature of many collective investment vehicles, such as private equity funds or venture capital funds, that provides a preferred return to investors, pursuant to which the sponsors of the collective investment vehicle receive a distribution such that the amount they receive in the distribution, as a percentage of the sum of the preferred return distributed to investors and the catch-up distribution, equals the percentage that the sponsors are to receive pursuant to the carried interest. In other words, if the sponsors of a collective investment vehicle have a carried interest of 20%, then a catch-up distribution will permit the sponsors to receive a distribution such that when the amount distributed to the sponsors is added to the preferred return, the sponsors have received 20% of that total amount. Sometimes referred to as a general partner clawback.
Certificate of Designation – the document filed by a company with the appropriate governmental agency (usually a secretary of state), pursuant to which a company creates a series of preferred stock by allocating shares of blank check preferred stock to a series and designating its rights, privileges and preferences.
Certificate of Incorporation – see Articles of Incorporation.
Change in Control – generally defined as a change in management or ownership of a company and may include or be caused by an acquisition of stock by third party, a change in the composition of the board of directors or board of managers, a merger or consolidation of a company with another entity, or the sale or disposition by the company of all or substantially all of its assets.
Class – a certain group of a company’s capital stock having specified rights designated in the company’s articles of incorporation or bylaws.
Clawback – a feature of a collective investment vehicle, such as a private equity fund or a venture capital fund, requiring that over the life of the collective investment vehicle, the sponsors will not receive a greater portion of distributions than originally agreed to. A clawback will require that the sponsors return to the investment vehicle’s investors all amounts that are determined to be “excess” distributions. Generally, a clawback is required because collective investment vehicles make distributions to their investors throughout their life span upon each exit event from portfolio investments, and the economic allocations of proceeds that were agreed to upon the formation of an investment vehicle are viewed in the aggregate, taking into account the returns on all of an investment vehicle’s portfolio investments.
Co-investment – the syndication of an investment or financing. Collective investment vehicles, such as private equity funds or venture capital funds, may co-invest into portfolio investments with other institutional investors, their own investors or angel investors. See also, Syndication.
Co-sale Right – the right to include shares in a sale when another shareholder sells shares, usually on a pro rata basis. Co-sale rights, also referred to as tag-along rights, often run in favor of investors and are triggered upon a sale of shares by a company’s founders, or run in favor of minority shareholders and are triggered upon a sale of shares by a majority. Co-sale rights are frequently used in conjunction with pre-emptive rights.
Code of Regulations – see Bylaws.
Collateral – assets pledged to a lender by a borrower to secure a loan, subject to seizure by the lender if the borrower defaults.
Comfort Letter / Cold Comfort Letter – a statement from an independent auditor provided to the underwriters, initial purchasers or placement agents in connection with a public offering or private placement of securities, providing “comfort” to the accuracy of financial information present in the prospectus or other offering documents. The purpose of the comfort letter is to assist the underwriters (or initial purchasers or placement agents) in establishing a “due diligence standard” if there is securities litigation related to the transaction.
Commitment Period – the length of time that a collective investment vehicle, such as a venture capital fund or private equity fund, has for identifying and investing in new companies. The commitment period is generally around five (5) years but can widely vary. Once the commitment period has ended, the collective investment vehicle can no longer draw down investor capital to invest in new companies and must only invest additional money in existing portfolio companies.
Committed Capital Fund – a collective investment vehicle, such as a private equity fund or venture capital fund, that requires investors to initially agree to a specific capital commitment. Investors do not have the ability to select the collective investment vehicle’s portfolio investments in which they will participate. See also, Pledge Fund.
Common Stock / Common Units – securities representing equity ownership in a company, generally providing owners with economic rights that are subordinate to all other classes or series of preferred stock. Accordingly, the holders of common stock will generally not get paid on a distribution (from the proceeds of an exit event or otherwise) until a company’s obligations to its creditors, holders of preferred stock, and all other stakeholders are paid in full. A shareholder’s percentage ownership of a company’s common stock, including common stock issuable on an “as-converted” basis with respect to that company’s convertible preferred stock, generally constitutes the shareholder’s percentage interest in the company for voting and other purposes.
Compensation Committee – a committee of a corporation’s board of directors whose function is to determine, or recommend for board approval, executive officer compensation. National securities exchanges generally require that compensation committees consist entirely of independent directors. Although the SEC has imposed certain disclosure and other requirements relating to compensation committees for public companies; institutional investors, customers and creditors may in certain cases also require that a private company form a compensation committee.
Compilation Statement – a financial statement that verifies only the mathematical accuracy of the financial information presented to the accountant by the company’s management. A compilation financial statement is not verified or audited and lacks footnotes and certain other disclosures found in an audited financial statement or a reviewed statement.
Conversion Price / Conversion Ratio – the price per share at which a convertible security, such as preferred stock or convertible debt, converts into shares of the security into which it is convertible. A convertible security’s conversion price is often subject to adjustment pursuant to anti-dilution protection provisions that may run in favor of the convertible security. In the case of options and warrants, the conversion price is commonly referred to as the exercise price or strike price.
Convertible Debt – a note or other instrument of indebtedness that, pursuant to its terms, is convertible into another security. Convertible debt may convert into another security upon the occurrence of certain events, such as the passage of time or the consummation of another financing by the issuer that satisfies certain agreed-to criteria. Generally, convertible debt has a higher priority in terms of repayment than an issuer’s equity securities, since convertible debt appears as indebtedness on an issuer’s balance sheet and indebtedness is generally repaid before distributions to holders of equity securities. Often a company issues convertible debt when, for one reason or another, circumstances are not amenable to setting a valuation of the company (and a concomitant price per share) in a financing transaction.
Convertible Preferred Stock – a class or series of preferred stock that, pursuant to its terms, is convertible into another security, usually common stock, upon the occurrence of certain specified events or at the election of the holder of the convertible preferred stock. Convertible preferred stock converts into another security at its conversion price.
Convertible Security – a security that, pursuant to its terms, is convertible into another security upon the occurrence of certain specified events or at the election of the holder of the convertible security. Examples of convertible securities include convertible preferred stock, options, warrants and convertible debt. A convertible security is convertible into another security at the convertible security’s conversion price.
Corporate Venture Capital – a larger company making a direct minority investment in a smaller company for financial or strategic reasons.
Covenants – certain agreements made by a company in favor of certain other parties, typically a lender or a particular group of investors. A company can either make “affirmative” covenants to take certain actions, such as providing financial information to investors on a periodic basis, or a company can make “negative” covenants to refrain from certain actions without consent, such as issuing a new class of equity securities or selling the company.
CPA – a certified public accountant.
Crowdfunding – generally refers to companies raising money through small equity investments from large numbers of investors, typically over the internet. The JOBS Act of 2012 provides a mechanism that will permit companies to raise up to $1 million per year from crowdfunding transactions that are open to non-accredited investors through internet funding portals. See also, Funding Portal.
Cumulative Dividend – see Accrued Dividend.
Cumulative Preferred Stock – preferred stock on which dividends accrue or accumulate in the event that dividends are not paid currently or on specified periodic intervals.
Cumulative Voting – a type of voting in which a shareholder has the right to cast one vote for each share he or she owns, multiplied by the number of directors to be elected to the board of directors. Cumulative voting is intended to enable minority shareholders to elect directors when they otherwise would be out-voted by the majority.
Current Ratio – a financial metric obtained by dividing a company’s current assets by current liabilities. A company’s current ratio is indicative of its liquidity and its ability to meet short-term obligations. A higher ratio indicates higher liquidity.