Venture Capital Glossary

Acquisition
The act of one company taking over controlling interest in another company. Investors often look for companies that are likely acquisition candidates, because the acquiring firms are often willing to pay a premium to the market price for the shares.
 
Angel Investors
Individuals that provide venture capital to seed or early stage companies.. Business angels can usually add value through their contacts and expertise.
 
Benchmarks
Benchmarks are performance goals against which a company's success is measured. Often, they are used by investors to help determine whether a company will receive additional funding or whether management will receive extra stock. Sometimes management will agree to issue more stock to its investors if the company does not meet its benchmarks, thus compensating the investor for the delay of his return.
 
Bridge Loans
Bridge Loans are short-term financing agreements that fund a company's operations until it can arrange a more comprehensive longer-term financing. The need for a bridge loan arises when a company runs out of cash before it can obtain more capital investment through long-term debt or equity.
 
Buyout
Funds provided to enable an enterprise to acquire another enterprise or product line or business.
 
Capital Gain
When an investor sells a stock, bond or mutual fund at a higher price than he or she paid for it.
 
Capital Under Management
The amount of capital available to a management team for venture investments.
 
Closing
The final event to complete the investment, at which time all the legal documents are signed and the funds are transferred.
 
Corporate Venturing
The practice of a large company taking a minority equity position in a smaller company in a related field.
 
Debt Financing
Money that business owners must pay back with interest. There are myriad types of debt financing, from simple commercial loans to bridge/swing loans in which a lender makes a short-term loan in anticipation of equity financing at a later stage in the development of a business.
 
Due Diligence
The investigation and evaluation of a management team's characteristics, investment philosophy, and terms and conditions prior to committing capital to the fund.
 
Equity Financing
Selling an interest in your business to an outside party to raise money.
 
Equity Offerings
Raising funds by offering ownership in a corporation through the issuing of shares of a corporation's common or preferred stock.
 
Executive Summary
Executive Summary refers to a synopsis of the key points of a business plan.
 
Exit
The sale or exchange of a significant amount of company ownership for cash, debt, or equity of another company.
 
Exit Route
The method by which an investor will realize an investment.
 
Follow-On
A subsequent investment made by an investor who has made a previous investment in the company -- generally a later stage investment in comparison to the initial investment.
 
Fund Of Funds
An investment vehicle designed to invest in a diversified group of investment funds.
 
Institutional Investors
It refers mainly to insurance companies, pension funds and investment companies collecting savings and supplying funds to markets, but also to other types of institutional wealth (e.g. endowment funds, foundations etc.).
 
IPO (Initial Public Offering)
Issue of shares of a company to the public by the company (directly) for the first time.
 
IRR
Compound Internal Rate of Return.
 
Lead Investor
The investor who leads a group of investors into an investment. Usually one venture capitalist will be the lead investor when a group of venture capitalists invest in a single business
 
Leveraged Buy-out (LBO)
An acquisition of a business using mostly debt and a small amount of equity. The debt is secured by the assets of the business.
 
Limited Partnerships
The legal structure used by most venture and private equity funds. Usually fixed life investment vehicles. The general partner or management firm manages the partnership using policy laid down in a Partnership Agreement. The Agreement also covers, terms, fees, structures and other items agreed between the limited partners and the general partner.
 
Liquidation
The sale of the assets of a portfolio company to one or more acquisition firms when venture capital investors receive some of the proceeds of the sale.
 
Lock-Up Period
The period an investor must wait before selling or trading company shares subsequent to an exit -- usually in an initial public offering the lock-up period is determined by the underwriters.
 
Management Buy-in (MBI)
Purchase of a business by an outside team of managers who have found financial backers and plan to manage the business actively themselves.
 
Management Buy-out (MBO)
Funds provided to enable operating management to acquire a product line or business, which may be at any stage of development, from either a public or private company.
 
Mezzanine Financing
Financing for a company expecting to go public usually within 6 –12 months; usually so structured to be repaid from proceeds of a public offerings, or to establish floor price for public offer.
 
Minority Enterprise Small Business Investment Companies (MESBICS)
MESBICs (Minority Enterprise Small Business Investment Companies) are government-chartered venture firms that can invest only in companies that are at least 51 percent owned by members of a minority group or persons recognized by the rules that govern MESBICs to be "economically disadvantaged."
 
PIPE
Private Investment in Public Equity.
 
Portfolio Company
The company or entity into which a fund invests directly.
 
Private Equity
Private equities are equity securities of companies that have not “gone public” (in other words, companies that have not listed their stock on a public exchange). Private equities are generally illiquid and thought of as a long-term investment. As they are not listed on an exchange, any investor wishing to sell securities in private companies must find a buyer in the absence of a marketplace. In addition, there are many transfer restrictions on private securities. Investors in private securities generally receive their return through one of three ways: an initial public offering, a sale or merger, or a recapitalization.
 
Raising Capital
It refers to obtaining capital from investors or venture capital sources.
 
Recapitalization
The reorganization of a company’s capital structure. A company may seek to save on taxes by replacing preferred stock with bonds in order to gain interest deductibility.
 
Return On Investment (ROI)
The internal rate of return on an investment.
 
Secondary Public Offering
This refers to a public offering subsequent to an initial public offering. A secondary public offering can be either an issuer offering or an offering by a group that has purchased the issuer's securities in the public markets.
 
Secondary Purchase
Purchase of stock in a company from a shareholder, rather than purchasing stock directly from the company.
 
Seed Capital
Money used to purchase equity-based interest in a new or existing company. A venture capitalist's return usually comes from preferred stock, a share of profits, royalties or capital appreciation of common stock. Most venture capitalists look for companies with high growth potential.
 
Series A Preferred Stock
The first round of stock offered during the seed or early stage round by a portfolio company to the venture investor or fund. This stock is convertible into common stock in certain cases such as an IPO or the sale of the company. Later rounds of preferred stock in a private company are called Series B, Series C and so on.
 
Small Business Investment Companies (SBIC)
SBICs (Small Business Investment Companies) are lending and investment firms that are licensed by the federal government. The licensing enables them to borrow from the federal government to supplement the private funds of their investors. Some of these funds engage only in making loans to small businesses or invest only in specific industries. The majority, however, are organized to make venture capital investments in a wide variety of businesses.
 
Syndication
The process whereby a group of venture capitalists will each put in a portion of the amount of money needed to finance a small business.
 
Term Sheet
A non-binding agreement setting forth the basic terms and conditions under which an investment will be made. The Term Sheet is a template that is used to develop more detailed legal documents.
 
Turnaround
This word is used to describe businesses that are in trouble and whose management will cause the business to become profitable so they are no longer in trouble.
 
Venture Capital
Money used to purchase equity-based interest in a new or existing company. A venture capitalist's return usually comes from preferred stock, a share of profits, royalties or capital appreciation of common stock. Most venture capitalists look for companies with high growth potential.