Ratchet Protection – see Anti-dilution Protection.
Recapitalization – the reorganization of a company’s capital structure. Recapitalization can be an alternative exit event for investors in private companies by allowing them to liquidate a portion of their investment in the company.
Red Herring – a preliminary prospectus for a public offering providing certain required information but not including a purchase price.
Redeemable Preferred Stock – a class or series of preferred stock that, pursuant to its terms, gives the holder the right to require the company to repurchase the stock at an agreed-to time and at an agreed-to price (or an agreed-to mechanism for determining the price). The ability of a holder of redeemable preferred stock to require the company to repurchase the stock gives the holder leverage to induce the company to explore other liquidity events.
Redemption – the purchase by a company of its own securities, which may be by contract or pursuant to the terms of the securities.
Registration Rights – the rights of shareholders to cause a company to register their stock with the SEC. See also, Demand Registration Rights, Registration Rights Agreement and Piggy-back Registration Rights.
Registration Rights Agreement – an agreement between a company and its shareholders granting shareholders the right to participate in or require a public offering. A registration rights agreement can also refer to an agreement that creates an obligation for the company to register its stock with the SEC. See also, Registration Rights.
Registration Statement – a set of documents containing prescribed information and a prospectus, required to be filed with the SEC prior to any public offering.
Regulation D – the SEC regulation promulgated under the Securities Act of 1933 providing a non-exclusive safe harbor for private offering exemptions.
Representations and Warranties – the provisions contained in a purchase or financing agreement whereby the company makes certain assurances about itself and its business. Representations present all assurances from past to current status, while warranties make promises as to future status.
Restricted Securities – generally, securities acquired in an unregistered private sale from the issuer or its affiliate. Restricted securities cannot be freely resold except in strict compliance with securities laws.
Return On Investment (ROI) – a comparison of the money earned or lost on an investment to the amount of money invested.
Reverse Stock Split – a proportionate decrease in the number of a company’s outstanding shares, resulting from the combination of existing shares into a lesser number of shares (e.g., in a 10:1 reverse stock split, each 10 shares of company stock would combine into one share). In some cases, fractional shares following the reverse stock split are redeemed for cash, thereby reducing the company’s shareholders of record in order to facilitate a going private transaction.
Reviewed Statement – a financial statement prepared by a CPA that involves a lower level of testing than an audited statement but more testing than a compilation statement. The CPA must be of the opinion that no material modifications would be made to the financial statement in order to conform to GAAP.
Right of First Refusal – see Pre-emptive Right.
Rights Offering – a general reference to any offering of a company’s securities that is made substantially on a pro rata basis among the company’s shareholders based on share ownership. The term is more specifically used to refer to an issuance of additional shares to shareholders at a discount in market price.
Risk Factors – disclosures often included in offering documents of certain or potential risks that may adversely affect the value of the company or the return on investment.
Road Show – a series of presentations made by a company in advance of a public offering intended to promote interest in the company’s securities.
Round – a grouping of investments in a company separated temporally, and often by company valuation used in each investment, and the rights, privileges and preferences of each group of investors.
Rule 144 – the SEC rule permitting the public resale of restricted securities if a number of conditions are met, including holding the securities for an applicable holding period, the availability of adequate current information on the issuer, compliance with certain limitations on the volume of securities that can be sold, and filing a notice with the SEC.
Rule 144A Transaction – A securities offering in which one or more investment banks, referred to as “initial purchasers,” acquire securities from an issuer in a private placement and immediately resell them to Qualified Institutional Buyers in a transaction exempt from registration under the Securities Act of 1933 pursuant to Rule 144A. Securities sold in Rule 144A Transactions are restricted, but issuers commonly agree to exchange them for registered (and therefore freely tradable) securities within a specified period of time after the transaction.
Rule 504 – a “safe harbor” provision available under Regulation D providing an exemption from the registration requirements of the Securities Act of 1933 for certain private placements where the size of the offering, when combined with the aggregate sales of the issuer’s securities during the immediately preceding 12-month period, does not exceed $1 million.
Rule 505 – a “safe harbor” provision available under Regulation D providing an exemption from the registration requirements of the Securities Act of 1933 for certain private placements where the size of the offering, when combined with the aggregate sales of the issuer’s securities during the immediately preceding 12-month period, does not exceed $5 million and where the offering only includes accredited investors and up to 35 non-accredited investors.
Rule 506(b) – a “safe harbor” provision available under Regulation D providing an exemption from the registration requirements of the Securities Act of 1933 for certain private placements where securities are only sold to accredited investors and up to 35 non-accredited investors. Unlike the exemptions available under Rule 504 and Rule 505, an offering is not limited to a specific dollar amount in order to meet the Rule 506(b) exemption.
Rule 506(c) – a “safe harbor” provision available under Regulation D providing an exemption from the registration requirements of the Securities Act of 1933 for private placements in which an unlimited amount of securities are sold only to accredited investors. Unlike the other Regulation D safe harbors, Rule 506(c) permits issuers to advertise the transaction and to solicit the public to participate in it. Also unlike the other Regulation D safe harbors, Rule 506(c) permits only accredited investors to purchase securities in the transaction, and it requires issuers to take “reasonable steps” to verify the accredited investor status of all purchasers
S Corporation – a corporation that has elected to be taxed under subchapter S of the Internal Revenue Code, thereby allowing profits and losses to “flow through” to the business’ owners (as compared to a C Corporation). Businesses must meet certain requirements to qualify as an S Corporation, including meeting certain limitations on capital structure and number of shareholders.
S-1 Registration Statement – the most stringent of registration statements required to be filed with the SEC to conduct a public offering, typically used where the issuer is conducting an IPO or does not otherwise satisfy the requirements for using an alternative registration statement.
S-3 Registration Statement – a less stringent registration statement required to be filed with the SEC to conduct a public offering where the issuer meets certain requirements, including market capitalization, length of time being a reporting company and being current on its periodic reporting requirements with the SEC.
S-8 Registration Statement – the required filing with the SEC that an issuer uses to register securities issued under an option plan and other employee benefit plans.
Sarbanes-Oxley Act (SOX) – passed in 2002, SOX heightened the governance and financial reporting requirements primarily of public companies and was initially intended to restore investor confidence in the marketplace following Enron and other high-profile corporate scandals.
Secondary Market – the market on which securities are traded after they are initially issued.
Secondary Offering – generally used to refer to the sale of stock already issued in a primary offering. May also be used to refer to a public offering of previously-issued securities by large institutional investors. See also, Primary Offering.
Secured Debt – debt backed by collateral to reduce the risk associated with lending. In the event of the borrower’s default, the lender may seize the collateral property in satisfaction of the borrower’s obligation.
Securities and Exchange Commission (SEC) – the primary federal agency charged with promulgating and administering the federal securities laws.
Securities Act of 1933 – the federal law, also known as the “Securities Act” or the “33 Act,” that created the SEC and outlawed the use of fraud and deception in the securities industry by regulating registration and disclosure requirements in connection with the offering of securities.
Securities Exchange Act of 1934 – the federal law, also known as the “Exchange Act” or the “34 Act,” that outlawed manipulative and abusive practices in securities trading by requiring registration of stock exchanges, brokers / dealers and listed securities.
Seed Capital / Seed Money – funds used for the initial financing of a project or startup company, generally focused on market research, initial product development or proof-of-concept.
Senior Debt – debt that has priority in terms of economic and other rights over other debts of a company, including priority in terms of order of payment and rights to collateral.
Series – separate divisions of a class of securities as determined by rights of the holders of the series.
Series A Preferred Stock – the initial series of preferred stock issued by a company to investors, generally during the seed or early stage round of financing.
Shareholder Rights Plan – a defensive tactic used by a corporation’s board of directors to prevent hostile takeovers. A typical shareholder rights plan will allow shareholders the right to buy more shares at a heavy discount if one shareholder (the bidder) reaches a certain percentage threshold of share ownership in the company. Shareholder rights plans require bidders to negotiate with the board of directors, rather than directly with shareholders. Also known as a poison pill.
Shelf Registration – a procedure that allows an issuer to file one registration statement for subsequent offerings of the same securities. Under SEC rules, a registration statement can remain “on the shelf” and effective for up to two years prior to a public offering if the company periodically files updated information with the SEC.
Shell Company – an entity with no assets and no operations.
Sidecar Investment – a direct investment into an issuer by the investors of a collective investment vehicle, such as a private equity fund or a venture capital fund, generally made alongside an investment by the collective investment vehicle.
Small Business Innovation Research Program (SBIR) – a federal program that awards research and development funds to small businesses to encourage them to innovate new technologies that will be made commercially available to the public.
Small Business Investment Company (SBIC) – a company, usually a collective investment vehicle, such as a private equity fund or venture capital fund, licensed by the United States Small Business Administration to receive government leverage for raising capital to use in investing.
Small Business Issuer – a narrow class of public companies defined by SEC rules that generally includes issuers with annual revenues and a public float of less than $25 million. Small business issuers are subject to more limited periodic reporting requirements under the Securities Exchange Act of 1934 and are able to file shorter form registration statements in connection with public offerings.
Small-Cap – a company with a market capitalization of typically less than $1 billion.
Special Purpose Acquisition Company (SPAC) – an investment vehicle, often a shell company or blank check company, that has no operations but goes public in contemplation of acquiring an operating company with the proceeds of the SPAC’s initial public offering (IPO).
Special Purposes Vehicle (SPV) / Special Purpose Entity (SPE) – a business entity formed for a specific business purpose, such as an individual real estate investment, whose corporate powers and authorities are limited to those necessary to attain that purpose.
Staggered Board – a board of directors of which a portion is elected in alternating years, generally through the division of directors into classes that serve terms of multiple years. Board terms are often staggered to discourage takeover attempts by making it more difficult to use normal voting procedures to obtain board control.
Startup – refers to the initial state of development of a company, usually early stage, and often pre-revenue.
Stock Option Plan – see Option Plan.
Stock Split – a proportionate increase in the number of a company’s outstanding shares, resulting from the division of existing shares into a greater number of shares (e.g., in a 10:1 stock split, each share of company stock would split into 10 shares). The price is adjusted so the ownership ratio remains the same and dilution does not occur.
Strategic Investor – a minority financial investor in a company that by virtue of its experience or background is expected to contribute strategic and operational value to the company in
addition to capital.
Subordinated Debt – debt that is junior in terms of economic and other rights compared to other debts of a company, including in terms of order of payment and rights to collateral. Also referred to as “junior debt.”
Subscription Agreement – an agreement for the purchase and sale of a company’s securities, usually entered into as part of a private placement. A subscription agreement typically includes investment representations on the part of the potential investor designed to allow the issuer to confirm that the private placement meets an exemption from registration under federal and applicable state law.
Sweat Equity – the contribution made to a project or a new
company by people who contribute their time and effort, as contrasted with financial equity, which is the money contributed to the project.
Syndication – a group of banks that jointly loans money (i.e., a syndicated credit facility) or that jointly underwrites the issuance of bonds or other debt instruments. Also used to refer to a group of investors acting jointly to make a co-investment in a company.
Tag-along Right – see Co-sale Right.
Term Sheet – a document outlining the basic terms of a private equity investment, acquisition or other transaction. A term sheet is generally non-binding on the parties except for certain limited provisions, such as exclusivity, confidentiality and the payment of expenses, but assists in reflecting an agreement in principal to guide the parties toward definitive documentation.
Treasury Stock – stock that has been issued by a company, repurchased and held by the company and that may be reissued by the company. The repurchased or redeemed stock is not retired upon redemption to allow it to be resold by the company at a later time.
Underwriter – a company, usually an investment bank, that assists in bringing securities to market in a public offering by purchasing the securities directly from the issuer and reselling them on the secondary market.
Underwriter’s Cutback – the right of an underwriter to reduce the number of securities being sold in an offering, generally the number of those securities being sold by selling shareholders.This right is designed to facilitate the company’s public offering. The cutback is usually pro rata to all selling shareholders in proportion to the shares they intend to sell. An underwriter’s cutback usually occurs where the underwriter feels the reduction in shares will facilitate the marketing of the offering. Sometimes referred to as a “haircut.”
Underwriting Fee – the portion of the income generated by an underwriter in an underwritten public offering (i.e., the difference paid in the primary offering / sale of the securities to the underwriter and sale price on the secondary market) that compensates the underwriters.
Underwriting Syndicate – a group of underwriters who work together to promote and facilitate a public offering.
Up Round – a round of equity financing that is issued at a higher pre-money value than the prior round. See also, Down Round, Flat Round.
Venture Capital – money used for investment in enterprises that involve high risk but offer the possibility of large profits, including investments in startups, expansion-stage companies and emerging growth companies.
Venture Capital Fund – a private equity fund that focuses on venture capital investments.
Venture Ecosystem – collectively, the venture ecosystem is made up of the different constituents who function in the areas of venture capital and private equity, including angel investors, portfolio companies, small business investment companies, startups, emerging growth companies, venture capital funds and private equity funds. The development of a venture ecosystem can stimulate business growth and economic development by aiding in the establishment of innovative companies and helping companies gain access to important resources, such as seed capital.
Vest – a term usually used in connection with option plans that defines when the stock options or other equity grants become applicable or exercisable. To incentivize an employee to perform over a period of time, stock options or other grants often vest over a certain time period.
Voting Agreement – an agreement between shareholders of a company and also sometimes the company that designates how shares of the company’s stock will be voted, usually on matters such as the composition of the board of directors or the sale of the company.
Warrant – a security that permits the holder to purchase another security within a specific time period. A warrant is generally exercised by payment of the exercise price to the company in exchange for issuance of the underlying security.
Warrant Coverage – an agreement between an issuer and its investors, typically purchasers of convertible debt or preferred stock, whereby the issuer will issue warrants to the investors based on a certain percentage of the dollar amount of the investor’s investment.
Waterfall – the contractual provisions governing the order and priority of distributions among a company’s various classes of equity holders.
Weighted Average Anti-dilution Protection / Weighted Average Adjustment – a type of anti-dilution protection that has the effect of adjusting downward the price per share of issued and outstanding preferred stock, of a company (on an “as-converted” basis) due to a subsequent issuance of shares by the company at a lower price than the price per share of the stock in favor of which the anti-dilution protection runs. A series or class of stock that benefits from a weighted average adjustment receives an adjustment usually affecting the rate at which it converts into common stock, through application of a formula that takes into account the number of shares issued at the new, lower price and the actual adverse impact on the previously outstanding shares. A “narrow-based” weighted average adjustment takes into account only the shares of common stock and common stock equivalents actually outstanding in this formula, while a “broad-based” weighted average adjustment takes into account all common stock outstanding on a fully-diluted basis, including all options, warrants and convertible securities.
Well-known Seasoned Issuer – a class of public companies defined by SEC rules that are entitled to certain relaxed communication and other requirements leading up to a public offering. To be a well-known seasoned issuer or “WKSI,” an issuer must, among other things, currently be a public company, have been current in its periodic filings under the Securities Exchange Act, and have a public float of at least $700 million or have issued $3 billion in registered debt within the last three years.
White Knight – a potential acquirer who is sought out by a target company’s management to take over the company to avoid a hostile takeover.
Working Capital – a measure of a company’s short-term liquidity and funds required to operate the business in the ordinary course, calculated by subtracting a company’s current liabilities from its current assets.