Terms L-Q

Large Accelerated Filer – a category of issuer under the federal securities laws consisting of companies with public floats of at least $700 million that have filed at least one annual report with the SEC.

Large-Cap – a company with a market capitalization usually in excess of $5 billion.

Lead Investor – a member of a syndicate or group of private equity investors who is charged with negotiating the terms and conditions of a private equity investment, who is often the most actively involved in a transaction and the ongoing project, and who may be responsible for assisting an issuer in raising additional funds.

Letter of Intent – a bid letter written by a potential buyer outlining the basic terms to which the potential buyer is willing to acquire another company.  When dually executed, the letter of intent evidences the mutual agreement between the parties of the basic terms of the transaction.

Leveraged Buy-Out (LBO) – a strategy involving the acquisition of a company using a significant amount of borrowed money to fund the cost of acquisition. Customarily, the assets of the company that is being acquired are used as collateral for the loans, in addition to the assets of the acquiring company.

Lifestyle Business – a business, generally smaller in size, whose main purpose is to provide a good standard of living and job satisfaction for its owners. As opposed to a growth-oriented business, outside investors generally do not consider lifestyle businesses to be suitable for private equity investment because they are unlikely to provide the requisite financial returns.

Limited Liability Company – an unincorporated business entity that limits each member’s liability for the company’s obligations to the amount of the member’s investment in the company. By specifying the terms in the operating agreement, the members may appoint a manager, who may or may not be a member, to direct the company’s day-to-day operations.

Limited Partner – one of two types of partners in a limited partnership. A limited partner is an individual or entity that has contributed capital to a limited partnership but has no management rights and no personal liability for the obligations of the entity. See also, General Partner.

Limited Partner Clawback – see Clawback.

Limited Partnership – an unincorporated business entity in which a general partner or general partners direct the company subject to the limited partnership statutes of a jurisdiction and have unlimited liability for the company’s obligations. The other partners are limited partners and enjoy limited liability for the company’s obligations Limited partnership interests, unlike general partnership interests, are generally deemed to be securities and are regulated by the securities laws.

Liquidation Preference – an amount per share (usually specified in dollars) that a holder of preferred stock is entitled to receive upon the occurrence of certain events, prior to any distributions to holders of junior preferred stock and common stock. A series of stock’s liquidation preference is usually designated as a multiple of its original issuance price. The events triggering the payment of a liquidation preference include a sale or liquidation of a company, or a merger in which the company’s shareholders immediately prior to the merger own less than half of the ownership of the new entity after the merger.

Liquidity Event – see Exit / Exit Event.

Lock-up Period – the time period following a public offering within which certain shareholders of a public company (typically upper management, company directors or large shareholders) have agreed not to sell their shares, thereby allowing an orderly market for the shares to develop.

Management Buy-Out (MBO) – a form of acquisition in which a company’s existing management group acquires all or some part of the ownership of a company. Management buy-outs are often sponsored by private equity funds.

Management Fee – a fee charged to the investors of a collective investment vehicle, such as a private equity fund or venture capital fund, compensating the sponsors of the collective investment vehicle for their management of its assets.

Managing Underwriter – the leading underwriter in an underwriting syndicate. The managing underwriter has typically originated the public offering and acts as the agent for the group. 

Mandatory Redemption – the right of a holder of stock to require the issuer of that stock to repurchase it on certain previously agreed-to terms, which can include timing and price. Often, the purchase price is the original issuance price, as increased by any accrued dividends.

Market Capitalization – a measure of corporate size based on the total dollar value of all outstanding shares of a company’s stock (i.e., number of outstanding shares multiplied by the current market price for the shares).

Market Standoff Agreement – an agreement that restricts the further issuance of company stock for a number of predetermined days after a previous stock offering by the company. See also, Lock-up Period.

Merchant Banking – an enterprise that may assist in financing a company’s products or services and in developing a comprehensive business strategy, which can include business development, public and private company corporate finance, capital markets research, human resources, due diligence and transaction negotiation and execution.

Mezzanine Debt / Mezzanine Financing / Mezzanine Securities – a term used to refer to a stage of venture capital financing immediately preceding an initial public offering. The term is also often used to refer to a hybrid of subordinated debt and equity financing occurring between venture rounds and used to either finance business expansion or serve as a “bridge” to the next round of financing. See also, Bridge Loan

Micro Venture Capitalist – an angel investor who raises a small venture capital fund made up of professional investors.

Mid-Cap – a company with a market capitalization of usually between $1 billion and $5 billion.

Migratory Merger – a form of merger used to allow the transfer of an existing entity into a different, often more business favorable, U.S. jurisdiction. The transfer is usually accomplished by setting up a new entity in the destination jurisdiction and merging the existing company into the new entity. 

Milestones – certain conditions that a venture capital-backed or private equity-backed company must meet in order to receive previously promised funding.

Min / Max Offering – an offering structure in which the offering does not close until a specified minimum number of securities are sold and where the size of the offering is capped at a specified maximum amount.

Most Favored Nation – status given to a party that requires such party receive at least the most advantageous contractual terms and conditions received by any other party to the agreement.

Narrow-Based – see Weighted Average Anti-dilution Protection / Weighted Average Adjustment.

NASDAQ – the National Association of Securities Dealers Automated Quotations. An automated national securities exchange that provides brokers / dealers with price quotations on securities listed thereon and traded over the counter. 

NYSE – the New York Stock Exchange. The largest securities exchange in the United States.

Non-accelerated Filer – a category of issuer under the federal securities laws consisting of companies with market capitalizations of less than $75 million that meet certain other criteria.

Non-competition / Non-solicitation – contractual provisions, often entered into in an employment context or in the context of the sale of a business, where a party agrees not to compete with a company’s business for a certain period of time. The provisions often include agreements not to solicit or hire company employees or to interfere with the company’s relationships with customers or vendors.

Non-disclosure Agreement – also called a confidential disclosure agreement, confidentiality agreement or secrecy agreement. The agreement specifies confidential materials or knowledge that the parties wish to share with one another for certain purposes but wish to restrict from generalized use. The non-disclosure agreement is often signed when two companies or individuals are considering doing business together and need to understand the processes used in one another’s businesses solely for the purpose of evaluating the potential business relationship.

Note – a contract concerning the repayment of a loan or some other form of debt. A borrower or other debtor issues a note to the lender or the person holding the debt to evidence the conditions of the loan and the terms of the repayment of the debt. The note may be for a specified term or due “on demand.” Also referred to as a “promissory note.

Offering – securities offered for sale by a company to the public or to private investors.

Offering Memorandum – the legal disclosure document used in connection with a Rule 144A Transaction or private placement. Also referred to as an “offering circular” and sometimes used interchangeably with Private Placement Memorandum.

Operating Agreement – agreement among the members of a limited liability company that sets forth the rights and obligations of the members and governs the entity. 

Option – the right, but not the obligation, to purchase a security within a specific time period. An option is generally exercised by payment of the exercise price to the issuer in exchange for issuance of the underlying security. 

Option Plan / Stock Option Plan – an incentive compensation plan that issues options to officers, directors, employees, consultants and other service providers. The options offer the company personnel the rights to purchase the company’s equity securities at a specified price, which may vest over a certain period. See also, Incentive Stock Options.

Option Pool / Option Reserve – the shares set aside by a company for issuance upon the exercise of options issued or issuable under an option plan.

Original Issue Discount (OID) – the premium that results when a debt instrument is issued at a price less than its principal amount, or when warrants or certain other equity instruments are issued in conjunction with a debt instrument. Under the original issue discount tax rules, investors who purchase securities subject to OID calculations and treatment will receive taxable income (and therefore need cash to pay taxes) despite not receiving a corresponding current cash payment. 

Oversubscription Right – a right granted to participating investors in an offering to also participate, usually on a proportional basis, in the portion of the offering that remains unsold and available for investment.

Paid-in Capital – capital received by the company in exchange for stock or membership interests in the company. Sometimes referred to as “contributed capital.” 

Pari Passu – “on an equal basis.” Often used in reference to how different series or classes of equity are treated relative to each other. 

Participating Preferred Stock – a type of preferred stock that provides its holder with the traditional features of preferred stock, including a liquidation preference, an accumulating dividend and protective provisions, and the right to receive funds upon an exit event in addition to its liquidation preference on an “as-converted” basis. Upon the occurrence of an exit event, holders of ordinary convertible preferred stock must choose between receiving their liquidation preference plus accumulated dividends or amounts that they would receive if they converted their convertible preferred stock into common stock. Holders of participating preferred stock are entitled to receive both automatically.

Pay to Play – a requirement that an existing investor participate in a subsequent financing (often a down round). The investor’s failure to participate on a pro rata basis will result in some type of penalty,often the conversion of the investor’s preferred stock into common stock or another junior security.

Payment-in-Kind (PIK) Dividend – a dividend paid in kind rather than with cash, often taking the form of a distribution of company stock.

Piggy-back Registration Rights – the right of shareholders to cause a company to include their shares of stock as part of a registered public offering. See also, Demand Registration Rights and Registration Rights

Pink Sheets – a decentralized market (as opposed to a national securities exchange) for the purchase and sale of unlisted securities, with purchase prices established by the market makers bidding on and engaged in the trading of the stock.

Placement Agent – an individual or entity, usually a broker / dealer, that assists an issuer in locating investors and selling its securities. 

Pledge Fund – a collective investment vehicle, such as a private equity fund or venture capital fund, in which investors are shown investment opportunities by the fund sponsors and are allowed to elect to participate or refrain from participating on a deal-by-deal basis. Particularly, investors are not forced to participate in each portfolio investment that the fund sponsors decide to participate in, and each investor in the collective investment vehicle is able to evaluate each portfolio investment on a case-by-case basis. Usually, investors are only permitted to refrain from investing in a limited number of investments.

Poison Pill – see Shareholder Rights Plan.

Portfolio Company – a company in which a collective investment vehicle, such as a private equity fund or venture capital fund, acquires an interest for investment purposes through the purchase of that company’s equity securities.

Post-money Value – the value assigned to a company’s equity after the completion of a financing transaction. A company’s post-money valuation includes the proceeds from the financing transaction.

Pre-emptive Right – the right of an investor to purchase its proportionate share of additional securities issued by a company.

Pre-money Value – the value assigned to a company’s equity,excluding external funding from a contemporaneous round of financing. 

Preferred Return – in the private equity context, the internal rate of return that a collective investment vehicle must achieve before its sponsors are permitted to participate in the proceeds of investments. 

Preferred Stock – a type of stock that has additional rights when compared to common stock. Generally, these rights include a liquidation preference, the right to receive accumulated dividends and the benefit of protective provisions. Often, preferred stock will also permit its holders to appoint one or more directors on a company’s board of directors, and entitle its holders to receive financial reporting information that is more intensive than the reports required by law. Types of preferred stock include convertible preferred stock, participating preferred stock and redeemable preferred stock. Many private equity and venture capital investments are structured using preferred stock.

Primary Offering – a direct sale by a company of its securities to an investor. See also, Secondary Offering.

Private Company – a company that does not have any class of equity securities registered with the SEC and is therefore not subject to the periodic reporting requirements of the Securities Exchange Act of 1934.

Private Equity – a broad term that refers to any type of equity investment in an asset in which the equity is not fully tradable on a public market. Private equity is generally illiquid and considered to be long term in nature. Investors in private equity generally attempt to receive a return on their investment upon an exit event

Private Equity Fund – a collective investment vehicle, usually structured as a limited partnership or limited liability company, organized by investment professionals as sponsors to invest in private equity.

Private Investment in Public Equity (PIPE) – a private placement of a public company’s securities that is exempt from registration under the Securities Act of 1933. Securities issued in a PIPE are often restricted securities, but issuers typically agree to register the securities within a specified period of time after the PIPE transaction is completed.

Private Placement – an offering of securities that is not open to the public. Under the Securities Act, a private placement is exempt from the registration requirements of a public offering.

Private Placement Memorandum (PPM) – the legal document generally stating the objectives, risks and terms of a private placement. This includes matters such as the issuer’s financial statements, management biographies and detailed description of the business. The memorandum serves to provide buyers with information concerning the issuer and the offering and to protect the sellers from potential liability associated with selling unregistered securities.

Promissory Note – see Note.

Prospectus – a formal written disclosure document to sell securities, usually including the proposed business plan and historical financial and operational information.

Protective Provisions – contractual provisions that run in favor of one or more of a company’s constituents, giving those constituents the right to approve certain enumerated company actions. Protective provisions may restrict the ability of a company to issue additional securities or securities of a certain type, to incur additional indebtedness, to alter or amend its articles of incorporation or other organizational documents, to enter into a sale or merger involving the company, and may restrict other governance or operational activities.

Public Company – a company that has a class of equity securities registered with the SEC and is therefore subject to the periodic reporting requirements of the Securities Exchange Act of 1934.

Public Float – see Float.

Public Offering – an offering of securities to the general public after compliance with SEC registration requirements. A public offering is usually coordinated by one or more underwriters.

“Put” Rights – the right of a holder of securities of a company to require that the company purchase from the holder some or all of the securities held by the holder. “Put” rights usually also specify the time period within which the “put” right must be exercised, and the price at which the securities subject to the “put” right must be purchased or a mechanism for determining the price. “Put” rights are sometimes referred to as redemption rights.

Qualified IPO / Qualifying IPO – an IPO that meets certain contractually agreed-upon prerequisites, including offering size and pricing. Often, terms of a venture capital or private equity investment may be structured so that certain conversion or other rights are triggered, or certain restrictions are eliminated, upon the consummation of a qualified IPO

Qualified Institutional Buyer (QIB) – A large, sophisticated institutional investor that is permitted to purchase securities in Rule 144A Transactions. Generally, QIBs must own and invest on a discretionary basis at least $100 million in securities issued by non-affiliates.

Qualified Purchaser – an investor in a private equity fund falling within any of the following categories:

  • a natural person owning $5 million or more in net investments;
  • any person, acting for his own account or for the account of other qualified purchasers, who owns or invests on a discretionary basis not less than $25 million in net investments in the aggregate; 
  • any family-owned organization or entity that owns $5 million or more in net investments; or 
  • any trust not formed for the specific purpose of acquiring the securities offered, where each trustee and person who contributed assets to the trust falls into one of the categories listed above.
  • A private equity fund where all of the investors are qualified purchasers (i.e., a “qualified investor pool”) qualifies as a “private investment company” and is exempt from certain registration and other requirements under the Investment Company Act of 1940

Qualified Small Business Stock – stock subject to a special tax provision allowing long-term non-corporate investors in qualifying corporations to exclude 50% of their gains on the sale of the stock and to allow the non-excluded portion of the gain to be taxed at a preferential tax rate.

Quiet Period – the period between the time that a company files a registration statement with the SEC for a public offering and the time that the SEC declares the registration statement effective. During the quiet period, also referred to as the “waiting period,” the company and related parties are prohibited by federal securities laws from releasing information to the public that could be construed as promoting sale of the securities covered by the as yet unapproved registration statement.