Terms D-K

De-listing – an action, usually taken as part of a going private transaction,where a company removes itself from listing on a national securities exchange. A company may also be de-listed by the exchange for failing to comply with certain listing requirements. See also, Going Private

De-registration – a form of a going private transaction where an issuer is voluntarily able to “opt-out” of its reporting requirements as a public company because its shareholder base and/or total assets fall below certain SEC thresholds. In certain circumstances, the issuer may already qualify for de-registration, and no balance sheet, capitalization or ownership change is required to qualify for the de-registration process. In certain other cases, the issuer may have to engage in a significant corporate transaction, such as a management buy-out or leveraged buy-out, in order to qualify. 

Deal Flow – the number of potential investments that a collective investment vehicle, such as a private equity fund or venture capital fund, reviews or evaluates in any given period.

Debt – amounts owed by a business to a creditor. Unlike the purchase of an equity interest, debt is granted with the expectation of repayment at some certain point in the future and usually has an accompanying obligation to pay interest on the amounts owed. When a company makes a distribution, out of proceeds from an exit event or otherwise, debt is generally repaid prior to equity.

Debt Financing – a financing where a business receives cash financing in exchange for its issuance of a note, bond, indenture or some other debt instrument promising to repay the amounts received at some certain point in the future.

Demand Registration Rights – the right of a security holder to require an issuer to file a registration statement concerning restricted securities owned by the holder, thereby permitting the holder to sell the securities in the public market without restriction. See also, Registration Rights and Piggy-back Registration Rights.

Dilution – a reduction in the interest or percentage ownership of a security holder in a company relative to the company’s total outstanding capital that results from the issuance of additional securities by the company or the conversion of convertible securities. Dilution can also occur upon events that have the same effect on a company’s capital structure as the issuance of additional securities, such as an adjustment to a security’s conversion price pursuant to anti-dilution protection. 

Directors – the individuals elected by the shareholders and granted the power and authority to manage the business and affairs of a corporation. See also, Board of Directors.

Dividend – a payment made, usually on a per share basis, by a company to its shareholders out of the company’s earnings. Dividends are usually paid in cash, but they can also be in the form of stock or other equity securities. Dividends may vary based on the financial performance and prospects of the company, and the directors of a company often have discretion as to how much of a dividend to declare with respect to its common stock. The terms of a company’s preferred stock may include a dividend accruing at an agreed-upon rate, which can either be paid currently or accumulate. A dividend in a limited liability company is often called a distribution. See also, Accrued Dividend; Payment-in-Kind (PIK) Dividend. 

Down Round – a round of equity financing that is issued at a lower pre-money value than the prior round. See also, Flat Round and Up Round.

Drag-along Right – the right of one or more of a company’s security holders to force other security holders of the company to join in a sale of a company. Drag-along rights facilitate the sale of a company by giving the holders of the drag-along rights the ability to deliver all of a company’s outstanding equity securities to a buyer.

Due Diligence – the exercise conducted during the early stages of a securities offering, when the entities or individuals involved in the offering review and investigate all material information regarding a company provided in the private placement memorandum, prospectus, financial materials and corporate documents to provide a reasonable basis for believing that the information provided is true and complete. 

Dutch Auction – a form of offering structured so that the price per share is gradually lowered until enough responsive bids are obtained. The lowest price per share necessary to sell the entire offering becomes the price at which all securities are sold. 

Early Stage – a term used to describe the level of development of a company that has typically completed its seed financing stage, has a founding or core management team, has proven its concept or completed a beta test, has minimal (if any) revenue, and often no positive earnings or cash flow.

Earnout – a contractual arrangement where the seller of a business may be entitled to additional purchase price consideration, based on the seller or the business achieving certain performance milestones or benchmarks after the sale.  

EBITDA – earnings before interest, taxes, depreciation and amortization. A measure of cash flow calculated as revenue less expenses, excluding tax, interest, depreciation and amortization. EBITDA looks at the cash flow of a company, and by excluding 
interest, taxes, depreciation and amortization, creates a clearer measure of the amount of money a company generates. 

Elevator Pitch – a brief overview of an idea for a product, service or project, usually concise enough to be delivered in the time span of an elevator ride. An elevator pitch is sometimes referred to as a “30-second pitch.”

Enterprise Value – total market value placed on a company’s operations, equal to a company’s market capitalization plus debt and minus a company’s cash and cash equivalents. Enterprise value is often used to value a target company for purposes of an acquisition and is generally viewed as a more accurate estimate of acquisition cost than market capitalization because it includes a number of important additional factors, such as debt and cash reserves.

Equity – the ownership interest in a company, usually in the form of common stock, preferred stock or membership units, or in the form of options or similar instruments. When a company makes a distribution, out of proceeds from an exit event or otherwise, equity holders are not repaid until all other company obligations have been repaid.

Equity Financing / Equity Offering – a financing transaction in which a company raises capital by selling equity securities, as opposed to selling debt securities or obtaining loans.

Equity Kicker – contractual right of investors to purchase shares at a discount, usually in the form of warrants or the ability to convert convertible debt into equity securities at a discounted rate (i.e., a “conversion premium”). Equity kickers are typically associated with mezzanine financings or bridge loans where a small number of shares or warrants are added to what is primarily a debt financing. See also, Hamburger Helper.

Event of Default – a certain event or a company’s failure to comply with certain agreements that triggers remedies running in favor of a third party, such as the ability of third party lender to declare an entire debt immediately payable in full.

Evergreen – an agreement that renews automatically, usually on an annual or semi-annual basis, unless notice is given within a specified time period.

Exercise Price – the price at which the holder of an option can buy securities (“call” option) or sell securities (“put” right). The term is most often used in the context of an option or warrant.

Exit / Exit Event / Exit Strategy – a transaction or process by which the holders of securities in a private company achieve liquidity, generally consisting of initial public offerings, redemptions, sales of a company or sales of the securities held by one or more holders. Investors in a company often negotiate contractual provisions that are intended to facilitate future liquidity in an exit event, such as a right of redemption, drag-along rights, and registration rights.

Factoring – a procedure in which a company sells its accounts receivable to a factoring firm that pays a percentage of the invoices immediately and the remainder (minus a service fee) when the accounts receivable are actually paid by the company’s customers.

Fair Market Value – a price in cash or its equivalent that a willing buyer would pay to a willing seller for certain property if sold on the open market. With respect to a company, the fair market value of a company generally assumes the value of the company as an ongoing business. With respect to an individual security, the fair market value generally represents a proportionate interest in the fair market value of the company. 

Fairness Opinion – an investment banker’s professional opinion as to the fairness of the price offered by an acquiring company in connection with an acquisition or merger. Although a fairness opinion is often obtained by a target company’s board of directors to assist them in satisfying its fiduciary duties under state law, the fairness opinion is limited to whether the terms of the transaction are fair “from a financial perspective” and is not a dispositive opinion of the overall advisability of a particular transaction.

Finder – a person whose involvement in a securities transaction is strictly limited to bringing an issuer together with a potential investor, with no actual involvement in negotiating the terms of the investment. Persons qualifying as finders typically do not have to register as brokers / dealers under federal or state laws.

FINRA – the Financial Industry Regulatory Authority. This private corporation which acts as a self-regulatory organization is comprised of brokers / dealers and investment bankers and governs the conduct of its members. FINRA serves as the successor to the National Association of Securities Dealers.

Firm Commitment – an underwritten offering in which the underwriter acting as agent commits to purchase and resell a specific quantity of stock and assumes financial responsibility for any unsold shares. 

First Refusal Right – see Pre-emptive Right.

First Round Financing – see “A” Round.

Flat Round – a round of equity financing that is issued at the same post-money value as an earlier round. See also, Down Round and Up Round.

Float – number of shares of a public company that are outstanding and available for trading by the public, not including shares held by insiders or restricted stock

Follow-on Financing – an investment in a company in which an investor has previously invested.

Founder – an individual who starts a company, providing funds for its establishment. Often a founder will be a key member of management and the controlling shareholder for a private company

Full-ratchet Anti-dilution Protection / Full-ratchet Adjustment – a type of anti-dilution protection that adjusts the conversion price of a convertible security downward to the lowest price at which securities were issued since the date of the issuance of the convertible security that benefits from the full-ratchet anti-dilution protection. A full-ratchet adjustment is intended to prevent dilution since proportionate ownership of the company by the holder of the convertible security that benefits from the full-ratchet stays the same as when the investment was initially made. A full-ratchet adjustment does not take into account the number of shares issued at the subsequent lower price or the actual economic or dilutive effect of the issuance.

Fully-diluted – a measure of a company’s total outstanding capital stock, assuming the conversion of all convertible securities and the exercise of all options and warrants. Generally, only options and warrants whose exercise price is less than the then-current value of those options and warrants are assumed to be exercised and included for these purposes.

Fund of Funds – a collective investment vehicle set up to distribute its investments among numerous other collective investment vehicles, such as private equity funds and venture capital funds, which in turn invest the capital directly. Fund of funds are often able to provide investors with access to funds that would otherwise be closed to them and can also help spread the risk of investing in private equity because they invest in a variety of funds.

Funding Portal – websites that serve as a broker to entrepreneurs seeking crowdfunding.

GAAP – generally accepted accounting principals, constituting the overall conventions, rules, and procedures that define accepted accounting practice at a particular time in the United States.

General Partner – one of two types of partners in a limited partnership or the only type of partner in a general partnership. A general partner is an individual or entity that has the right to participate in the management of the partnership and has unlimited personal liability for its debts and obligations. In a venture capital fund, the general partner serves as the senior partner of the firm. See also, Limited Partner.

General Partner Commitment – the amount of money that the senior partner invests in the venture capital fund or private equity fund. The amount generally ranges from 1-5% of the fund’s total investments, but can vary.

Going Private – when a company with publicly-traded securities removes itself from the reporting requirements of a public company. Traditionally, the term going private referred to a major corporate transaction where a company is acquired by a private group, typically through a management buy-out or a leveraged buy-out. However, the term can also be applied to a public company that de-registers its shares without undergoing any sort of organic change. 

Golden Handcuffs – rewards and penalties intended to keep certain employees from leaving a company. 

Golden Parachute – a compensation arrangement typically given to a top-level executive providing that he or she will receive significant additional compensation if the company is acquired and the executive’s employment is terminated. This additional compensation can take the form of severance pay, a bonus, acceleration of options or some combination of these items. Golden Parachute payments over a certain amount can be characterized as “excess parachute payments” under the Internal Revenue Code, triggering adverse tax consequences to the executive and to the company.

Green Shoe – a typical feature of an underwritten public offering where the underwriter is given a right to purchase additional shares of an issuer’s stock and re-sell the shares to the public.

Greenmail – a practice where an investor who holds a large block of company’s equity securities engages in antagonistic conduct that often results in the company purchasing investor’s stock at a premium in order to avoid conflict.

Growth-Oriented Business – A business that, regardless of its stage of development or current size, may be of interest to private equity investors because of its potential for rapid growth, often within a five year period, and its intention to grow.

Haircut – see Underwriter’s Cutback.

Hamburger Helper – a provision included in a traditional bridge loan that includes the right of the lender to convert its convertible debt into equity at a discount from the per share price offered in the next financing round. See also, Equity Kicker.

Hedge Fund – a collective investment vehicle often characterized by unconventional investment strategies, including long/short equity strategies, arbitrage, trading options or derivatives, using leverage, investing in undervalued securities, trading commodities contracts and opportunistic investing.

Hockey Stick Projections – the general shape and form of a chart showing revenue, customers, cash or some other financial or operational measure that increases dramatically at some point in the future. Entrepreneurs often develop business plans with hockey stick projections to impress potential investors.

Holdback – a set amount of the purchase price that an acquiring company holds back following a transaction to ensure, among other things, that the representations and warranties made by the selling company are true and/or that funds are available for a post-closing adjustment.

Holding Period – the length of time that a security or other asset is held for purposes of SEC or tax rules. The applicable holding period for a security is relevant for, among other things, determining whether a restricted security is freely tradeable under Rule 144. The holding period of a security or other asset is also relevant for purposes of determining whether the sale of such asset is entitled to long-term capital gains treatment. See also, Capital Gain.

Hot Issue – an issuance of securities that sells at a premium over the public offering price on the first day of trading. Hot issues are governed by National Association of Securities Dealers Rule 2790, which puts certain restrictions on participation and trading activities in such offerings

Hurdle Rate – see Preferred Return.

Incentive Stock Option / ISO – a type of employee stock option meeting certain requirements under the Internal Revenue Code that permit it to be taxed at a more favorable capital gains rate if held for a certain period of time after exercise.

Incubator – an entity generally backed by a venture capital fund to assist emerging growth companies, generate early stage investment opportunities, and develop business concepts or new technologies of interest to venture capitalists.

Independent Director – a director who is not an officer or employee of a company or its subsidiaries, or who does not otherwise have a relationship with the company that would interfere with the exercise of such director’s judgment in carrying out his or her responsibilities. NASDAQ and NYSE rules require that a majority of a company’s board of directors consist of independent directors and specifically defines individuals who do not qualify. 

Indemnification – indemnification provisions are frequently contained in corporate or transactional agreements whereby one party promises to protect the economic interests of the other party if something in the transaction does not go according to plan, resulting in financial harm.

Initial Public Offering (IPO) – a company’s initial registration and sale of stock to the public. While IPOs are effective at raising capital for the issuer, they impose significant legal compliance and reporting requirements. IPOs generally involve one or more investment banks as underwriters, who purchase the shares offered by the issuer for sale to the public.

Institutional Investor – an organization in the business of making investments, including collective investment vehicles, such as private equity funds or venture capital funds, insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds. 

Internal Rate of Return (IRR) – the discount rate that results in a net present value of zero for a series of future cash flows. It is a discounted cash flow approach to valuation and investing and is widely used as a metric to evaluate an investment.

Intrastate Exemption – an exemption available under Section 3(a)(11) of the Securities Act of 1933 pursuant to which an offering of securities does not have to be registered under the Securities Act if: (1) the issuer is incorporated in the state where it is offering the securities; (2) the issuer carries out a significant amount of its business in that state; and (3) the issuer makes offers and sales only to residents of that state. The exemption is lost if an investor resells any of the securities to a person who resides outside the state within a short period of time after purchase (usually nine months). 

Investment Adviser – as defined by the Investment Advisers Act of 1940, any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities. 

Investment Advisers Act of 1940 – the United States federal law enacted to regulate the actions of investment advisers as defined by the Act.

Investment Bank – a financial intermediary whose services include acting as an underwriter and otherwise facilitating the sale of securities, facilitating mergers and acquisitions (including rendering fairness opinions), providing financial and strategic advice, and trading securities on its own account.

Investment Company – a company whose main business is holding securities of other companies purely for investment purposes. An investment company invests money on behalf of its investors who, in turn, share in the profits and losses.

Investment Company Act of 1940 – the United States federal law enacted to regulate investment companies

Investment Letter / Investment Representations – a letter signed by an investor purchasing unregistered securities under Regulation D in which the investor attests to the long-term nature of the investment. 

Investors’ Rights Agreement (IRA) – an agreement that governs the relationship between investors and the company in which they are investing. The agreement can cover many different subjects, including the investors’ right to receive information, registration rights, pre-emptive rights, and various company covenants.

Issuer – the corporation, governmental body, or other entity that has issued or is issuing its own securities for sale.

Issuer Exemption – an exemption available under SEC and state securities laws relieving issuers of securities and related individuals from registering as brokers / dealers if they are not engaged in the business of effecting transactions in securities. 

J-Curve Effect – the curve achieved by plotting the returns generated by a venture capital fund or private equity fund over time, generally from inception to termination. The first realizations of an investment cause the plotted curve to rise very steeply because management fees and organizational expenses are traditionally paid out of the first capital call. Since the payment of these expenses does not create an equivalent book value, as a fund realizes investments the effect on performance is disproportionate.
JOBS Act – the Jumpstart Our Business Startups Act that was signed into law on April 5, 2012 with the stated intention of encouraging investment in small businesses by easing various SEC regulations. See also, Crowdfunding, Funding Portal

Jump Ball – a term used to describe the sharing by the sponsors of a collective investment vehicle, such as a private equity fund, or venture capital fund of the carried interest, generally with individuals who assist the sponsors in some way (e.g., sourcing transactions). The jump ball portion of the carried interest can be allocated by the sponsors / principals on a discretionary basis or pursuant to certain agreed-to criteria.

Junior Debt / Mezzanine Debt – see Subordinated Debt.

Key Man Insurance – insurance designed to protect a company from the adverse financial effect of the death of a key employee or key director by making funds available to the company in his or her absence. The key man insurance benefit is payable to the company in order to minimize the adverse effect on the company’s profitability, stability and progress.