APPENDIX 1
Glossary of Terms Related to Private Equity and Debt Financing
Accredited Investor: According to Regulation D of the Securities Act of 1933, specifically §§ 230.501-230.508, which provides rules for private equity offerings, “accredited investor” shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:
(1) Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any 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; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;
(2) Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;
(3) Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
(4) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;
(5) Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000;
(6) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;
(7) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in § 230.506(b)(2)(ii); and
(8) Any entity in which all of the equity owners are accredited investors.
(The bolding emphasizes those parts of the definition most applicable to angel investors, as individuals—subsections 5 or 6—or as part of an angel fund or group of angel investors—subsection 7.)
Accrued Interest: The interest due on preferred stock or a bond since the last interest payment was made.
ACRS: Accelerated Cost Recovery System. The IRS-approved method of calculating depreciation expense for tax purposes. Also known as Accelerated Depreciation.
ADR: American Depositary Receipt. A security issued by a U.S. bank in place of the foreign shares held in trust by that bank, thereby facilitating the trading of foreign shares in U.S. markets.
Advisory Board: A group of external advisers to a company that is less formal than the fiduciary board, that is, the Board of Directors. Advisory boards typically do not have authority to determine company direction but can be vital in providing subject-matter-specific guidance and expertise. Many technology companies have advisory boards made up of industry-related experts for guidance as well as validation of technology.
Allocation: The amount of securities assigned to an investor, broker, or underwriter in an offering. Allocation often occurs when a share offering or distribution is less than the total of all investors’, brokers’, or underwriters’ entitled percentage of total shares. For instance, if investors have rights of first refusal (defined later in this appendix), but the number of shares available for allocation is less than previously agreed, an allocation would be made among the entitled parties according to a preestablished or agreed-to formula.
Amortization: An accounting procedure that gradually reduces the book value of an intangible asset through periodic charges to income.
AMT: Alternative Minimum Tax. A tax designed to prevent wealthy investors from using tax shelters to avoid income tax. The calculation of the AMT takes into account tax preference items.
Angel Financing: Capital raised from independently wealthy investors who are not family or friends of the business’s founders. This capital is generally seed financing.
Angel Investor: An individual who typically meets the definition of an accredited investor (defined earlier in this appendix) and who actively participates in, or independently determines, decisions of investment of personal wealth. These wealthy individuals often provide the first professional funding available to a young company. People who are relatives or friends of the business’s founders are typically not considered angel investors. Angel investors typically follow the initial funding provided by the founders and their friends and family.
Anti-dilution: A provision in private equity financing that protects the earlyround investors from being washed out or their ownership from being diluted (that is, proportionally reduced) through later rounds of financing. There are many different forms of anti-dilution including: 1) broad-based weighted average, which is most favorable to the company; 2) narrow-based weighted average, which looks only at the outstanding stock (as opposed to all stock on a fully diluted basis); and 3) a “ratchet” provision, which is quite onerous from the company’s perspective as it provides that upon a down round, the conversion price of preferred stock is adjusted downward to the issuance price of the dilutive financing. Another provision, the so-called pay-to-play provision, is burdensome to the investors because it requires that investors must participate in dilutive rounds to retain anti-dilution protection for their shares.
Balance Sheet: A condensed financial statement showing the nature and amount of a company’s assets, liabilities, and equity on a given date.
Bankruptcy: An inability to pay debts. Chapter 13 of the bankruptcy code deals with individuals in reorganization of personal debt. Chapter 11 of the bankruptcy code deals with companies in reorganization, which allows the debtor to remain in business and negotiate for a restructuring of debt. Chapter 7 deals with liquidation proceedings for either an individual or a company.
Best Efforts: As opposed to an underwritten offering (see definition later in this appendix), “best efforts” indicates an offering in which the investment banker or broker-dealer agrees to distribute as much of an offering as possible, and return any unsold shares to the issuer, without further obligation.
Blue Sky Laws: A common term that refers to state securities laws as opposed to Federal securities laws. Each state has its own set of securities laws pertaining to public and private offerings made within that state. The term originated when a judge ruled that a stock had as much value as a patch of blue sky.
Bond: Specific type of debt instrument most commonly sold by government entities.
Book Value: Book value of a stock is determined from a company’s balance sheet by adding all current and fixed assets and then deducting all debts, other liabilities, and the liquidation price of any preferred issues. The sum arrived at is divided by the number of common shares outstanding, and the result is book value per common share. Book value is not commonly used for early-stage company valuation determinations because of the typical absence of actual fixed or other booked assets. Instead, early-stage companies often have their value determined on the basis of future earnings or projected value of intellectual property.
Bridge Financing: Short-term (usually one to six months) debt or equity funding (typically a convertible debenture—see definition later in this appendix) of a limited amount, provided to private companies immediately prior to a round of financing and meant to “bridge” a company to the next round of financing.
Burn Rate: The rate at which a company expends net cash over a certain period, usually a month.
Business Judgment Rule: The legal principle that assumes the board of directors is acting in the best interests of the shareholders. If the board is found to violate the business judgment rule, it would be in violation of its fiduciary duty to the shareholders.
Business Plan: A document that describes a business idea or existing business in detail and sets out the company’s plan for the future through the discussion of a number of different aspects of the business. Typical structure:
1. Executive Summary, 2. Company History, 3. Industry Discussion, 4. Customer Definition, 5. Product and Technology, 6. Competitive Analysis, 7. Marketing Plan, 8. Operations, 9. Management Team, 10. Financial Plan, and 11. Exit Strategy for the Coming Years. The brief executive summary that opens the typical business plan is probably the most important element of the document, because the time constraints of venture capital fund representatives and angel investors mean they start there and may not read anything else.
CAGR: Compound Annual Growth Rate. The year-over-year growth rate applied to an investment or other aspect of a firm using a base amount.
Capital Gains: The difference between an asset’s purchase price and selling price, when the selling price is greater. Long-term capital gains (on assets held for a year or longer) are taxed at a lower rate than ordinary income.
Capital (or Assets) Under Management: The amount of capital available to a fund management team for venture investments.
Capitalization Table: Also called a “Cap Table,” this is a table showing the total amount of the various securities issued by a firm. This typically includes the amount of investment obtained from each source and the securities distributed—for example, common and preferred shares, options, warrants, convertible debentures, and so on—and respective capitalization ratios. An investor will typically ask for a fully diluted Cap Table to understand any and all securities (anything that represents or could convert into ownership interests; see definition later in this appendix).
Carried Interest: Typically referred to as just “the carry,” it represents that portion of any gains realized by a venture capital fund to which the fund managers are entitled, generally without having to contribute capital to the fund. Carried interest payments are customary in the venture capital industry, in order to create a significant economic incentive for venture capital fund managers to achieve capital gains. A typical carried interest for venture capital general partners is 20 percent.
Cash Position: The amount of cash available to a company at a given point in time.
Chapter 7: The part of the Bankruptcy Code that provides for liquidation of a company’s or individual’s assets.
Chapter 11: The part of the Bankruptcy Code that provides for reorganization of a bankrupt company’s assets.
Clawback: A clawback obligation represents the general partner’s promise that, over the life of a venture capital fund, the managers will not receive a greater share of the fund’s distributions than they bargained for. Generally, this means that the general partner may not keep distributions representing more than a specified percentage (for example, 20 percent) of the venture capital fund’s cumulative profits, if any. When triggered, the clawback will require that the general partner return to the fund’s limited partners an amount equal to what is determined to be “excess” distributions.
Closing: An investment event occurring after the required legal documents are implemented between the investors and a company and after the capital is transferred in exchange for company ownership or debt obligation.
Co-investment: The syndication of a private equity financing round or an investment by an individual (usually a general partner) alongside a private equity fund in a financing round.
Collar Agreement: Agreed-upon adjustments in the number of shares offered in a stock-for-stock exchange to account for price fluctuations before the completion of the deal.
Committed Capital: The total dollar amount of capital an investor pledges to a private equity fund.
Common Stock: A unit of ownership of a corporation. In the case of a public company, the stock is traded between investors on various exchanges. Owners of common stock are typically entitled to vote on the selection of directors and other important events and in some cases receive dividends on their holdings. Investors who purchase common stock hope that the stock price will increase so the value of their investment will appreciate. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock, and as such the former will receive distribution of cash or other value before the holders of common stock.
Conversion Price: The price at which an interest in a convertible debenture or note (defined later in this appendix) is converted, or can be converted into, stock. For example, if an investor enters into a convertible debenture with a company at a conversion price of $0.10 per share, and exchanges $50,000 for a convertible debenture, the investor could convert (or possibly will be required to convert upon a predefined event) into 500,000 shares based on the investment amount of $50,000 and the conversion price of $0.10 per share.
Conversion Ratio: The number of shares of stock into which a convertible security may be converted. The conversion ratio equals the value of the convertible security divided by the conversion price. Preferred stock is typically convertible into common stock.
Convertible Note or Debenture: Debt instruments that automatically or voluntarily convert to some other security. By way of example, a company may issue a convertible note to investors and have the note automatically convert into preferred stock of the same nature and kind as issued in the first round of financing. Appendix 8 of this book is an example of this type of debt instrument.
Convertible Preferred Stock: Preferred stock that may be converted into common stock or another class of preferred stock, either voluntarily or automatically.
Convertible Security: A bond, warrant, debenture, or preferred stock that is exchangeable for another type of security (usually common stock) at a stated price. Convertibles are appropriate for investors who want higher income or greater liquidation preference protection than is available from common stock, together with greater appreciation potential than common stock offerings. (See Common Stock, Dilution, and Preferred Stock.)
Corporate Charter: The document prepared when a corporation is formed, also referred to as the Articles of Incorporation, depending on the state of incorporation. The charter sets forth basic information about the corporation, such as principal place of business, authorized shares, classes of stock, and rights related to the stock.
Corporate Resolution: A document signifying an action by a corporation’s board of directors.
Corporate Venturing: Investment capital distributed by in-house investment managers for large corporations to further the company’s strategic interests.
Corporation: A legal, taxable entity chartered by a state or the federal government. Ownership of a for-profit corporation is held by the shareholders. A for-profit corporation typically has a board of directors. Nonprofit corporations do not have shareholders, since no individual may receive a personal benefit through an ownership interest in a nonprofit company. A nonprofit or not-for-profit corporation typically has a board of trustees.
Co-Sale Rights: The right of an existing shareholder to demand pro rata or a prenegotiated percentage of the sale of securities when a founder or other key shareholder wishes to sell shares in the company. This right typically prevents one shareholder from selling stock in a private company that does not have a market for its stock without allowing other shareholders to participate in some manner in the sale of their shares.
Covenant: Typically a protective clause in an agreement, such as a “covenant not to compete,” which is intended to protect a company from an individual or entity financially or in other manner competing with the company. Generally, covenants not to compete are not favored and must be supported by adequate consideration for the restriction on someone’s actions.
Cram Down: Extraordinary dilution of a nonparticipating investor’s percentage of ownership in the company by reason of a subsequent round of financing, also known as a down round. Cram down or down rounds often affected angel investors when venture capitalists came in after the angels financed a company in an earlier round and financed the company at a significantly lower valuation than the valuation paid by the angel investors.
Cumulative Preferred Stock Dividends: A stock having a provision that if one or more dividend payments are omitted, the omitted dividends (arrearage) must be paid before dividends may be paid on the company’s common stock.
Cumulative Voting Rights: When shareholders have the right to pool their votes to concentrate them on an election of one or more directors rather than apply their votes to the election of all directors. For example, if the company has twelve openings on the board of directors, in statutory voting, a shareholder with ten shares casts ten votes for each opening (10 x 12 = 120 votes). Under the cumulative voting method, however, the shareholder may opt to cast all 120 votes for one nominee (or any other distribution the shareholder might choose). Compare with statutory voting defined later in this appendix.
Debenture: A debt instrument (basically the same as a promissory note) that obligates a company to repay the loaned amount, typically plus interest. Interest can be paid in cash or stock. See also convertible note or debenture, defined earlier in this appendix.
Debt: Any obligation by person or entity (singular or plural) to pay another (singular or plural). Maybe a primary (direct) obligation as in a note, or a secondary (contingent) obligation as in a guaranty.
Debt Instrument: Any instrument evidencing the obligation of the maker to pay the holder of the debt instrument. Includes bonds, debentures, and notes of all kinds.
Demand Registration: Resale registration that gives the investor the right to require the company to file a registration statement registering the resale of the securities issued to the investor in a private offering.
Demand Rights: The rights held by an investor related to a demand registration.
Depreciation: An expense recorded to reduce the value of a long-term tangible asset. Since it is a noncash expense, it increases free cash flow while decreasing the amount of a company’s reported earnings.
Dilution: A reduction in the ownership percentage of a given shareholder in a company caused by the issuance of new shares, regardless of the class.
Dilution Protection: Provision in private placements of stock that protects the shareholder’s ownership percentage in subsequent rounds of financing.
Director: Person with a fiduciary obligation to a company, who is elected by shareholders to serve on the board of directors. The directors appoint the chairman of the board, president, vice president, and all other operating officers, decide when dividends should be paid, determine and approve option issuance, and decide other matters.
Dividend: The payment designated by the Board of Directors to be distributed among the holders of outstanding shares. On preferred shares, it is generally a fixed amount. On common shares, the dividend varies with the fortune of the company and the amount of cash on hand and may be omitted if business is poor or if the directors decide to withhold earnings so as to invest in capital expenditures or research and development.
Down Round: See Cram Down.
Drag-Along Rights: A majority shareholder’s right, obligating shareholders whose shares are bound into the shareholders’ agreement to sell their shares into an offer the majority wishes to execute.
Due Diligence: A process undertaken by potential investors to analyze and assess the desirability, value, and potential of an investment opportunity. Chapter Eight discusses the due diligence process.
Early Stage: For purposes of comparison with published statistics, this book uses the definitions set out in the MoneyTree Survey, which provides statistics on venture financing through a collaboration of the National Venture Capital Association, PricewaterhouseCoopers, and Thomson Financials. Therefore, the definition of an early-stage company along with the definition of other stages of development are as follows:
Seed/Start-Up Stage • The initial stage. The company has a concept or product under development, but is probably not fully operational. Usually in existence less than eighteen months.
Early Stage • The company has a product or service in testing or pilot production. In some cases, the product may be commercially available. May or may not be generating revenues. Usually in business less than three years.
Expansion Stage • Product or service is in production and commercially available. The company demonstrates significant revenue growth, but may or may not be showing a profit. Usually in business more than three years.
Later Stage • Product or service is widely available. Company is generating ongoing revenue; probably positive cash flow. More likely to be, but not necessarily profitable. May include spin-outs of operating divisions of existing private companies and established private companies.
EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of cash flow calculated as revenue minus expenses (excluding interest, tax, depreciation, and amortization).
EBITDA looks at the cash flow of a company. Excluding interest, taxes, depreciation, and amortization makes it easier to understand the actual amount of cash a company brings in and to see if a company has adequate (or inadequate) cash flow for operations and growth.
Elevator Pitch: A concise statement—no more than a few minutes in length (the duration of an elevator ride)—that sets forth an entrepreneur’s idea, business model, company solution, marketing strategy, and competition for potential investors.
Employee Stock Option Plan (ESOP): A plan established by a company whereby a certain number of shares is reserved for issuance to employees to allow them to purchase the shares to gain ownership in the company. Such shares usually vest over a certain period of time to serve as an incentive for employees to build long-term value for the company.
Employee Stock Ownership Plan: A trust fund established by a company to purchase stock on behalf of employees.
Equity: Ownership in a company, in numerous forms, generally considered stock in a corporation and member interests or member units in a limited liability company.
Equity Kicker or Sweetener: The option to purchase additional shares (or stock) in a company, typically offered to private equity investors to encourage them to invest. Sometimes used in association with debt financing and differentiated from the debt financing as being in the form of equity.
ERISA: The U.S. Employee Retirement Income Security Act of 1974, as amended, including the regulations promulgated under the Act.
Exchange Act: Or more properly, the Exchange Act of 1934, as amended, which mandates the reporting requirements related to publicly traded securities, companies with more than five hundred shareholders, brokers and dealers in securities, and other activities and securities-related matters, with a primary objective of providing the public generally with full, fair, and complete information related to public companies and governing the actions and obligations of those dealing in the ownership of such companies, among other objectives.
Exercise Price: The price at which an option or warrant can be converted to stock.
Exit Strategy: A company’s strategy for providing investors with a liquidity event, which represents an event or time at which the investor can obtain a return on an investment through typically a distribution of cash, publicly tradable stock in the company, or stock in an acquiring company that is publicly traded.
Finder: A person who helps to arrange a transaction. Typically for young companies, this is an individual who finds private equity investors. In nearly all circumstances, if the finder charges a “success fee” or a fee related to the actual cash raised, typically as a percentage of the cash, the individual must be a licensed broker-dealer.
Flipping: The act of buying shares in an IPO and selling them immediately for a profit. Brokerage firms underwriting new stock issues tend to discourage flipping, and will often try to allocate shares to other investment houses in the syndication that intend to hold on to the shares for some time.
Form 10-K: This is the annual report that most reporting companies file with the Securities and Exchange Commission. It provides a comprehensive overview of the registrant’s business.
Form S-1: The form can be used to register securities for which no other form is authorized or prescribed, except securities of foreign governments or political subdivisions thereof.
Form S-2: This is a simplified optional registration form that may be used by companies that have been required to report under the 1934 Act for a minimum of three years and have timely filed all required reports during the twelve calendar months and any portion of the month immediately preceding the filing of the registration statement. Unlike Form S-1, it permits incorporation by reference from the company’s annual report to stockholders (or annual report on Form 10-K) and periodic reports. The company may be required to deliver these incorporated documents, as well as the prospectus, to investors.
Form S-4: Type of registration statement under which public company mergers and security exchange offers may be registered with the SEC.
Form SB-2: This form may be used by “small business issuers” to register securities to be sold for cash. This form requires less detailed information about the issuer’s business than Form S-1.
Formal Financing: Primarily refers to venture capital funds managed by professional venture capital firms. This contrasts with “informal financing,” which generally refers to funds that come from the founder’s savings, as well as money from friends and family. Many still consider angel investors as a source of informal financing. Angel investors are becoming sophisticated and organized, however, and thus taking on attributes of sources of formal financing such as venture capitalists.
Founders’ Shares: Shares issued to a company’s founders upon establishment of the company.
Fully Diluted Outstanding Shares: The number of shares representing total company ownership, including common shares and the current number of shares that would result from the conversion or exercise of any instrument that has the ability to convert into common shares—preferred shares, options, warrants, and other convertible securities.
Fund Focus: Most if not all venture capital funds have an industry focus or a stage of company development focus for the fund, or both. Such a focus is important for many reasons including providing the limited partners (VC investors) with an understanding of investment preference for the fund and the fund’s risk profile.
Fund Size: The total amount of capital committed by investors into a venture capital fund.
GAAP: Generally Accepted Accounting Principles. The common set of accounting principles, standards, and procedures. GAAP is a combination of authoritative standards set by standard-setting bodies as well as accepted ways of doing accounting.
General Partner (GP): The partner in a limited partnership responsible for all management decisions of the partnership. The GP has fiduciary responsibility to act for the benefit of the limited partners (LPs), and is fully liable for the partnership’s actions. Nearly all venture funds are set up as limited partnerships, with the GPs making the investment decisions and the LPs remaining passive as to these investment decisions (which is required to maintain limited partner status).
Golden Parachute: Employment contract for upper management that provides a large payout upon the occurrence of certain control transactions, such as a certain percentage share purchase by an outside entity or a tender offer for a certain percentage of a company’s shares.
Holding Company: A corporation that owns the securities of another, in most cases with voting control.
Holding Period: The amount of time an investor has held, or must hold, an investment. The period begins on the date of purchase and ends on the date of sale, and determines whether a gain or loss is considered short term or long term for capital gains tax purposes.
Hot Issue: A newly issued stock that is in great public demand. Technically, an issue is referred to as hot when the secondary market price on the effective date is above the new issue offering price. Hot issues usually experience a dramatic rise in price at their initial public offering because the market demand outweighs the supply.
Informal Financing: Generally refers to financing from the founders’ savings as well as those of their friends and family. Many would include angel investors in the definition of informal financing. This contrasts with “formal financing,” which refers to monies managed by professional venture capital firms.
Information Rights: In private financings, investors articulate the types and frequency of information so desired from the company. These rights can vary across a broad spectrum—from annual reports to quarterly reports to each revised business plan, monthly financials, board minutes, strategic and marketing plans, and board visitation rights.
Initial Public Offering (IPO): The sale or distribution of a stock of a portfolio company to the public for the first time. For the most part, IPOs are conducted by an underwriter (defined later in this appendix).
Institutional Investors: Organizations that professionally invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds. Institutional investors are usually mentioned in connection with venture capital funds.
Investor Questionnaire: A questionnaire required of private equity investors to determine their eligibility to invest in a private company. Unless a company has reason to believe that an investor’s questionnaire answers are lies or misrepresentations, it may rely on an investor’s statement of qualification as an accredited investor for purposes of maintaining the exemption under Regulation D.
IRR: Internal Rate of Return. A typical measure of how VC funds track performance. IRR is technically a discount rate: the rate at which the present value of a series of investments is equal to the present value of the returns on those investments.
Issued Shares: The number of shares in a company actually held by an individual or entity. Issued shares can also include shares, usually common stock, that are designated for distribution under a stock option plan, as well as common stock into which preferred stock or warrants may convert.
Issuer: The organization issuing or proposing to issue a security.
Key Employees: Professionals attracted by the founder to help run the company. Key employees are typically retained with stock options and/or ownership of the company.
Later Stage: The stage of a company’s development, defined earlier in this appendix as the stage when its products or services are widely available. The company is generating ongoing revenue; probably positive cash flow. More likely to be profitable, but not necessarily so. May include spin-outs of operating divisions of existing private companies and established private companies. The term can also refer to a venture capital fund investment strategy involving financing the expansion of a company that is producing, shipping, and increasing its sales volume.
Lead Investor: Member of an investment syndicate (or group) of private equity investors, usually investing the largest amount, in charge of negotiating the investment terms with the company and most likely the party engaged with the company after the investment.
Leveraged Buyout (LBO): A takeover of a company using a combination of equity and borrowed funds. Generally, the target company’s assets act as the collateral for the loans taken out by the acquiring group. The acquiring group then repays the loan from the cash flow of the acquired company.
Limited Partner (LP): An investor in a limited partnership who has no voice in the management of the partnership. LPs have limited liability and usually have priority over general partners upon liquidation of the partnership. Nearly all venture funds are set up as limited partnerships, with the general partners making the investment decisions and the LPs remaining passive as to these investment decisions (which is required to maintain limited partner status).
Limited Partnership: An organization that consists of a general partner, who manages the organization (usually a venture capital fund for purposes of these definitions), and limited partners, who invest money but have limited liability and are not involved with the day-to-day management of the fund, including its investments. In the typical venture capital fund, the general partner receives a management fee and a percentage of the profits (“carried interest,” often referred to as “the carry”). The limited partners receive income, capital gains, and tax benefits.
Liquidation: (1) The process of converting securities into cash. (2) The sale of the assets of a company in order to pay off debts. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock.
Liquidity Event: An event that allows an investor to realize a gain or loss on an investment. The event typically marks the end of a private equity provider’s involvement in a business venture with a view to realizing a return on the original investment. Most common liquidity events, or exits, involve (1) a merger of the invested company into another company (preferably a publicly traded company) in return for which the investors and shareholders receive stock in the other company or cash (or a combination); (2) an acquisition by another company, again, preferably a publicly traded company, in return for cash, stock, or a combination of cash and stock; (3) an initial public offering (which is not the typical exit strategy for private companies—see statistics in Chapter Nine), or (4) far less frequently, buybacks, mandatory puts, and other forms of a company purchasing its own shares from an investor-shareholder, whether at the company’s discretion or required under the given conditions.
Lockup Period: The period of time that certain stockholders have agreed to waive their right to sell their shares of a public company. Investment banks that underwrite initial public offerings generally insist upon lockups of 180 days or more from at least the large shareholders (1 percent ownership or more) in order to allow an orderly market to develop in the shares. The shareholders subject to lockup usually include the management and directors of the company, strategic partners, and other large investors. These shareholders have typically invested prior to the IPO at a significantly lower price than that offered to the public and therefore stand to gain considerable profits. If a shareholder attempts to sell shares subject to lockup during the lockup period, the transfer agent will not permit the sale to be completed.
Management Fee: Compensation for the management of a venture capital fund typically paid to the general partners or a separate entity the general partners set up to receive the management fee and act as the general partner for the venture capital fund. The fee usually runs between 2 and 3 percent of the total fund amount, on an annual basis.
Management Team: The people responsible for day-to-day operation and direction of a company.
Market Capitalization: The total dollar value of all outstanding tradable shares. Computed as number of shares multiplied by current price per share. Prior to an IPO, market capitalization is arrived at by estimating a company’s future growth and by comparing a company with similar public or private corporations. (See also Pre-Money Valuation.)
Merger: Combination of two or more companies for anticipated strategic, marketing, or operational reasons.
Mezzanine Financing: Refers to the stage of venture financing for a company immediately prior to an anticipated IPO. Investors entering in this round have lower risk of loss than those investors who have invested in earlier rounds because of the proximity of an intended IPO.
Mutual Fund: A mutual fund, or an open-end fund, sells as many shares as investor demand requires. As money flows in, the fund grows. If money flows out of the fund the number of the fund’s outstanding shares drops. Open-end funds are sometimes closed to new investors, but existing investors can still continue to invest money in the fund. An investor who wishes to sell shares usually sells them back to the fund. An investor who wishes to buy additional shares in a mutual fund must buy newly issued shares directly from the fund.
NASD: The National Association of Securities Dealers, an organization that oversees the registration and operation of brokers and dealers.
NASDAQ: An automated information network that provides brokers and dealers with price quotations on securities traded over the counter.
Net Income: The net earnings of a company after deducting all costs of selling, depreciation, interest expense, and taxes.
Net Present Value: An approach used in capital budgeting where the present value of cash inflow is subtracted from the present value of cash outflows. NPV compares the value of a dollar today to the value of that same dollar in the future after taking inflation and return into account.
Newco: The typical label for any new company prior to actual organization, often used as a term for a hypothetical company in planning stages.
No Shop, No Solicitation Clauses: A type of clause that requires the company to negotiate exclusively with the investor or buyer, and not solicit another investment or acquisition proposal from anyone else for a set period of time. The key provision is the length of time set for the exclusivity period.
Nonaccredited Investor: An investor not considered accredited for a Regulation D offering. (In contrast, see Accredited Investor.)
NYSE: The New York Stock Exchange. Founded in 1792, it is the largest organized securities market in the United States. The exchange itself does not buy, sell, own, or set prices of stocks traded there. The prices are determined by public supply and demand. Also known as the Big Board.
Offering Documents: Documents provided to a potential investor in a private placement transaction (referred to as a prospectus in public offerings). Documents can include a combination of agreements and other documents depending on the structure and terms of the investment, such as a private placement memorandum, stock purchase or subscription agreement, investor questionnaire, investor rights agreement, amended and restated articles of incorporation, notes or stock certificates, warrants, registration rights agreement, and other documents required by the particular investment.
Option: A security granting the holder the right to purchase a specified number of a company’s securities at a designated price at some point in the future. The term is generally used in connection with employee benefit plans as incentive stock options (ISOs or statutory options) and nonqualified stock options (NSOs or nonquals) for issuance to employees and nonemployees. Only employees may receive incentive stock options. “Stand-alone options” may be issued outside of any plan. Generally, options are not transferable, in distinction to warrants.
Option Pool: The number of shares set aside for future issuance to employees and nonemployees. A new company, which has not hired key employees other than the founders, may wish to set aside up 20 to 30 percent of its common shares for issuance to employees, board members (fiduciary and advisory), consultants, and other key individuals as part of their compensation and as an incentive to grow the company.
OTC or Over-the-Counter: A market for securities made up of dealers who may or may not be members of a formal securities exchange. The over-the-counter market is conducted over the telephone and is a negotiated market rather than an auction market like the NYSE.
Outside Financing: See Third-Party Financing.
Outstanding Stock: The shares of a company that are in the hands of investors. The total is equal to the number of issued shares less treasury stock (stock held by the company itself).
Oversubscription: Condition that occurs when demand for shares exceeds the supply or number of shares offered for sale. As a result, the underwriters or investment bankers must allocate the shares among investors. In private placements, this occurs when a deal is in great demand because of the company’s growth prospects.
Pari Passu: At an equal rate or pace, without preference.
Participating Preferred: A preferred stock in which the holder is entitled to the stated dividend, and also to additional dividends on a specified basis upon payment of dividends to the holders of common stock.
Participating Preferred Stock: Preferred stock that has the right to share on a pro rata basis with any distributions to the common stock upon liquidation, after already receiving the preferred liquidation preference.
Partnership: An entity in which each partner shares in the profits and losses of the partnership. The partners are each responsible for the taxes on their share of profits and losses. In a general partnership, all partners share the liabilities as well; in a limited partnership, the general partners share the liabilities and the limited partners have limited liabilities so long as they do not participate in the day-to-day operations and decisions of the partnership.
Penny Stocks: Low-priced issues, often highly speculative, selling at less than $5/share.
Piggyback Registration: A situation when a securities underwriter allows existing holdings of shares in a company to be sold in combination with an offering of public shares.
PIPE: Private Investment for Public Equity. Private offering by a public entity followed by a resale registration.
PIV: Pooled Investment Vehicle. A legal entity that pools various investors’ capital and deploys it according to a specific investment strategy. Although still the minority structure, one form an angel investment group may take is a fund, which can be made up of pooled or committed capital.
Placement Agent: An investment banker, broker, or other person who locates investors to purchase securities from a company in a private offering, in exchange for a commission.
Poison Pill: A right issued by a company as an anti-takeover measure. It allows the rightholders to purchase shares in either their company or in the combined target and bidder entity at a substantial discount, usually 50 percent. This discount may make the takeover prohibitively expensive.
Portfolio Companies: Companies in which a given fund or investor has invested.
Post-Money Valuation: The valuation of a company immediately after the most recent round of financing. This value is calculated by simply adding together the pre-money valuation plus the amount raised in the financing round.
Pre-Money Valuation: The valuation of a company prior to a round of investment. This amount is determined by using various calculation models, such as discounted P/E ratios multiplied by periodic earnings or a multiple times a future cash flow discounted to a present cash value and a comparative analysis to comparable public and private companies.
Preemptive Right: A shareholder’s right to acquire an amount of shares in a future offering at the then current price per share paid by new investors, so as to maintain the same ownership percentage as before the offering.
Preferred Dividend: A dividend ordinarily accruing on preferred shares payable where declared and superior in right of payment to common share dividends.
Preferred Stock: A class of capital stock with rights, preferences, and privileges superior to common stock, possibly including preferred rights on liquidation of assets, dividend payments, registration rights, anti-dilution rights, and rights of first refusal. Venture capitalists almost exclusively invest through the use of preferred stock. Preferred stock is almost always convertible into common stock at the investor’s discretion, and this right is typically exercised prior to an initial public offering. Historically, angels invested through a number of different vehicles, including common stock. Today, angel investors are becoming sophisticated and require preferred stock, as do venture capitalists. The rights provided to angel investors in early rounds of financing may (or should) differ from later rounds, such as with venture capitalists, to prevent a chilling effect on subsequent rounds by overreaching terms. Investment terms are discussed extensively in Chapter Three.
Private Equity: Equity securities of companies that have not “gone public” (are not listed on a public exchange). Private equities are generally illiquid and thought of as long-term investments. As they are not listed on an exchange, any investor wishing to sell securities in a private company 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 a sale or merger, a recapitalization, or an initial public offering.
Private Placement: The sale of unregistered, restricted securities by a company. Can also be a Regulation D exempt offering. The sale of a security (or in some cases, a bond) directly to a limited number of investors. Avoids the need for federal and state securities registration if the securities, issuer, and investors are compliant with the terms of a defined exemption and the shares are purchased for investment as opposed to being resold. See Chapter Three for an extensive discussion of private placement offerings.
Private Placement Memorandum (PPM): Also known as an offering memorandum. A document that outlines the terms of securities to be offered in a private placement. A PPM generally contains risk factors as well as the content similar to that contained in a comprehensive business plan. A PPM is not required for a private placement under Regulation D if all investors are accredited investors, because of the exemption from the information disclosure requirements of Regulation D.
Private Securities: Private securities are securities that are not registered and do not trade on an exchange.
Promissory Note: Debt instrument in which the maker promises to pay the holder according to its terms. Also referred to simply as a note or debenture.
Prospectus: A formal written offer to sell securities that provides an investor with the information necessary to make an informed decision and typically related to a public offering such as an IPO. A prospectus explains a proposed or existing business enterprise and must disclose any material risks and information according to the securities laws. A prospectus must be filed with the SEC and be given to all potential investors. Companies offering securities, mutual funds, and other investment companies (including business development companies) are required to issue prospectuses describing their history, investment philosophy or objectives, risk factors, and financial statements.
Public Company: A company that has securities that have been sold in a registered offering and that are traded on a stock exchange or NASDAQ; must be a reporting company under SEC rules.
Put option: The right to sell a security at a given price (or range) within a given time period.
QPAM: Qualified professional asset manager as defined by ERISA.
Recapitalization: The reorganization of a company’s capital structure. Recapitalization is rarely but can be an alternative exit strategy for private equity investors.
Red Herring: The common name for a preliminary prospectus, derived in part from the red SEC-required legend on the cover. It also retains overtones of the common use of the term: a false lure, like the dead fish sometimes dragged across a trail to confuse hunting hounds. (See Prospectus.)
Redeemable Preferred Stock: Preferred stock that is redeemable at the holder’s option after (typically) five years, which in turn gives the holders (potentially converting to creditors) leverage to induce the company to arrange a liquidity event. The threat of creditor status can motivate founders if a liquidity event is not occurring with sufficient rapidity.
Registered Offering: Also known as a “Public Offering.” A transaction in which a company sells specified securities to the public under a registration statement that has been declared effective by the SEC.
Registration: The SEC’s review process of all securities intended to be sold to the public. The SEC requires that a registration statement be filed in conjunction with any public securities offering. This document includes operational and financial information about the company, its management, and the purpose of the offering. The registration statement and the prospectus are often referred to interchangeably. Technically, the SEC does not “approve” the disclosures in a prospectus.
Registration Obligation: The obligation of a company to register the shares issued to an investor in a private offering for resale to the public through a registration statement that the SEC has declared effective.
Registration Rights: The right to require that a company register restricted shares. Demand registration rights enable the shareholder to request registration at any time, while piggyback registration rights enable the shareholders to request that the company register their shares when the company files a registration statement (for a public offering with the SEC).
Registration Rights Agreement: A separate agreement in which the investor’s registration rights are evidenced. Registration rights can also be contained in an investors’ rights agreement.
Registration Statement: The document filed by a company with the SEC under the Securities Act in order to obtain approval to sell the securities described in the registration statement to the public; it includes the prospectus. Examples of registration statements include S-1, S-2, S-3, S-4, SB-1, SB-2, and S-8.
Regulation A: An SEC provision for simplified registration for small issues of securities. A Regulation A issue may require a shorter prospectus and carry lesser liability for directors and officers for misleading statements. The conditional small issues securities exemption of the Securities Act of 1933 is allowed if the offering is a maximum of US$5,000,000.
Regulation C: The regulation that outlines registration requirements for the Securities Act of 1933.
Regulation D: A series of rules that allow for the issuance and sale of private securities to purchasers.
Regulation D Offering: (See Appendix 3, as well as Private Placement.)
Regulation S: The rules relating to offers and sales made outside the United States without SEC registration.
Regulation S-B: Regulation S-B of the Securities Act of 1933 governs the Integrated Disclosure System for Small Business Issuers.
Regulation S-K: The standard instructions for filing forms under the Securities Act of 1933, Securities Exchange Act of 1934, and Energy Policy and Conservation Act of 1975.
Regulation S-X: The regulation that governs the requirements for financial statements under the Securities Act of 1933 and the Securities Exchange Act of 1934.
Reporting Company: A company that is registered with the SEC under the Exchange Act or has more than five hundred shareholders, and must now comply with the information disclosure and other requirements applicable to publicly traded companies.
Resale Registration: Registration by a company of the investor’s sale of shares purchased by the investor in a private offering.
Restricted Securities: Securities that are not freely tradable due to SEC regulations. (See Securities and Exchange Commission.)
Restricted Shares: Shares acquired in a private placement are considered restricted shares and may not be sold in a public offering absent registration, or after an appropriate holding period has expired for companies currently making a public market for their securities.
Reverse Vesting: Often venture capital investors (and some angel investors) require the founders to essentially give up ownership rights to their stock, and then earn them back over time. The justification or reasoning for investors requiring founders to reestablish their ownership over time is to keep them committed and engaged with the company rather than leaving or coasting after funding is secured. The percentage of shares subject to reverse vesting varies, as does the time period for re-vesting. An example of reverse vesting: Say the founder, Alice Marshal, owns 5,000,000 shares. As a condition to financing, she must agree that 50 percent of her shares are subject to reverse vesting, with a three-year re-vesting period. In other words, if she leaves the company immediately after the financing, then she will own only 2,500,000 shares. However, if she stays for three years, she will re-vest all her shares at the rate of a third of 2,500,000 per year (or possibly a thirty-sixth each month). During re-vesting, founders often do not have voting rights for the shares in question.
Right of First Refusal: The right of first refusal gives a shareholder the right to purchase shares at a designated offering amount prior to new investors or before a subordinate class of shareholders has the right to purchase. The right of first refusal can also be a shareholder right with regard to the purchase of existing interests of other shareholders before the sale to new investors or a subordinate class of shareholders.
Rights Offering: Issuance of rights to current shareholders allowing them to purchase additional shares, usually at a discount from market price. Shareholders who do not exercise these rights are usually diluted by the offering. Rights are often transferable, allowing the holder to sell them on the open market to others who may wish to exercise them.
Risk: The chance of loss on an investment due to many factors—product market, management dependence, operational issues, inflation, interest rates, default, politics, foreign exchange, call provisions, and others. These risks are stated in the company’s estimation of priority in a prospectus or private placement memorandum.
Rule 144: Provides for the sale of restricted stock and control stock. Filing with the SEC is required prior to selling restricted and control stock, and the number of shares that may be sold is limited.
Rule 144A: A safe harbor exemption from the registration requirements of Section 5 of the Securities Act for resale of certain restricted securities to qualified institutional buyers, which are commonly referred to as “QIBs.” In particular, Rule 144A affords safe harbor treatment for re-offers or re-sales to QIBs—by persons other than issuers—of securities of domestic and foreign issuers that are not listed on a U.S. securities exchange or quoted on a U.S. automated interdealer quotation system. Rule 144A provides that re-offers and re-sales in compliance with the rule are not “distributions” and that the reseller is therefore not an “underwriter” within the meaning of Section 2(a)(11) of the 1933 Act. If the reseller is not the issuer or a dealer, it can rely on the exemption provided by Section 4(1) of the 1933 Act. If the reseller is a dealer, it can rely on the exemption provided by Section 4(3) of the 1933 Act.
Rule 147: Provides an exemption from the registration requirements of the Securities Act for intrastate offerings, if certain requirements are met. One requirement is that 100 percent of the purchasers must be from within one state.
Rule 501: Rule 501 of Regulation D defines accredited investor and other key terms.
Rule 505: Rule 505 of Regulation D is an exemption for limited offers and sales of securities not exceeding $5,000,000.
Rule 506: Rule 506 of Regulation D is considered a safe harbor for the private offering exemption of Section 4(2) of the Securities Act. Companies using a Rule 506 exemption can raise an unlimited amount of money if they meet certain exemption requirements.
SBIR: Small Business Innovation Research Program. See Small Business Innovation Development Act of 1982.
Secondary Sale: The sale of private or restricted holdings in a portfolio company to other investors.
Securities: According to Section 2(1) of the Securities Act:
The term “security” means “any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, pre-organization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing”.
Clearly, by this definition, the term security is very broadly interpreted and means all types of equity, debt instruments that are convertible into equity, and rights in and to them.
Securities Act of 1933: The federal law covering new issues of securities. It provides for full disclosure of pertinent information relating to the new issue and also contains antifraud provisions. Referred to in this set of definitions as the Securities Act.
Securities Exchange Act of 1934: The federal law that established the Securities and Exchange Commission and regulates the reporting requirements for publicly traded companies. The Act outlaws misrepresentation, manipulation, and other abusive practices in the issuance of securities and under the reporting requirements. Referred to in this set of definitions as the Securities Exchange Act.
Securities and Exchange Commission: The SEC is an independent, nonpartisan, quasi-judicial regulatory agency that is responsible for administering the federal securities laws. These laws protect investors in securities markets and ensure that investors have access to all material information concerning publicly traded securities. Additionally, the SEC regulates firms that trade securities, people who provide investment advice, and investment companies.
Seed Money: The first round of capital for a start-up business. Angel investors are the primary source of first professional seed capital, though there are also a few early-stage venture capital funds.
Senior Securities: Securities that have a preferential claim over other stock on a company’s earnings and dividends, and assets in the case of liquidation. Generally, preferred stock and bonds are considered senior securities.
Series A Preferred Stock: The first round of preferred stock offered during a seed or early-stage round of financing. This stock is typically 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.
Share: An equity ownership vehicle.
Shell Corporation: A corporation with no assets and no business. Typically, shell corporations are designed for the purpose of going public and later acquiring existing businesses. Also known as Specified Purpose Acquisition Companies (SPACs). Shell companies are often companies that remain after the substantial sale of assets of a publicly traded company. Unfortunately, many shell companies still have liabilities from the previous operations, making the acquisition of a shell company a potentially undesirable mechanism for going public.
Small Business Innovation Development Act of 1982: The Small Business Innovation Research Program (SBIR) is a set-aside program (2.5 percent of an agency’s extramural budget) for domestic small business concerns to engage in research or research and development (R/R&D) that has the potential for commercialization. The SBIR Program was established under the Small Business Innovation Development Act of 1982 (P.L. 97-219), reauthorized until September 30, 2000, by the Small Business Research and Development Enhancement Act (P.L. 102-564), and reauthorized again until September 30, 2008, by the Small Business Reauthorization Act of 2000 (P.L. 106-554).
Staggered Board: An arrangement whereby the election of directors is split into separate periods so that only a portion (for example, one-third) of the total number of directors come up for election in a given year. It is an anti-takeover measure—that is, a step designed to make taking control of the board of directors more difficult.
Statutory Voting: A method of voting for members of the board of directors. Under this method, a shareholder receives one vote for each share and may cast those votes for each of the directorships. For example: An individual owning a hundred shares of stock of a corporation that is electing six directors could cast a hundred votes for each of the six candidates. This method tends to favor the larger shareholders. Compare to cumulative voting, defined earlier in this appendix.
Stock: An equity ownership vehicle.
Stock Options: The right to purchase a stock at a specified price (at or below the market price at the time the option is granted) within a stated period. Options are typically for common stock and are a widely used form of employee incentive and employee and nonemployee compensation.
Stock Option Plan: The actual document approved by the shareholders of a company, representing the establishment of a stock plan and governing the parameters for the issuance of stock options.
Stock Purchase Agreement: The actual agreement witnessing the purchase of shares by an investor, including a founder. Provides the purchaser with notification of any restrictions on the stock and required status of the investor, such as being an accredited investor.
Strategic Investors: Corporate or individual investors that add value to investments they make through industry and personal ties that can assist companies in making connections with possible customers, in the marketing and sales process, as well as raising additional capital.
Subordinated Note or Debt: Debt that by its terms has no right to be paid until another debt holder is paid. Also referred to as junior debt.
Subscription Agreement: An agreement in which an investor formally commits to the purchase of shares in a company. It contains the terms for such purchase and can be combined with the investor questionnaire to qualify the investor as an accredited investor and to state the terms under which stock may be purchased. A company has the right to refuse an investor’s offer of a subscription agreement. Differentiated from a “stock purchase agreement,” which is the actual purchase rather than the offer to purchase securities.
Syndicate: Underwriters or broker-dealers who sell a security as a group. (See Allocation.)
Tag-Along Rights (see also Co-Sale Rights): A protection affording shareholders the right to include their shares in any sale of control at the offered price.
Term Sheet: A nonbinding but agreed-upon outline of the principal points for investment between the investor and company. The actual investment documents are then created consistent with the term sheet and cover the terms in detail.
Third-Party Financing: Investment in a company by an individual or entity not related to or personally known by the founders. Typically describes investment rounds other than founders’ initial investment or any investments by employees or friends and family. Also known as “outside financing.”
Time Value of Money: The basic principle that money can earn interest, therefore $1 today will be worth more in the future, if invested. This is also referred to as future value.
Treasury Stock: Stock issued by a company but later reacquired. It may be held in the company’s treasury indefinitely, reissued to the public, or retired. Treasury stock receives no dividends and does not carry voting power while held by the company.
Underwriter: The underwriters are the investment bankers who sell securities in an underwritten registered public offering. But beware, under the Securities Act, the class of persons who are considered “underwriters” is far more expansive and problematic.
Underwritten Offering: Registered offering that is sold through a consortium of investment banks assembled by one or more lead investment bank.
Unit Offering: Private or public offering of securities in groups of more than one security. Most often a share of stock and a warrant to purchase some number of shares of stock, but could be two shares of stock, a note and a share of stock, or other arrangement. Also used in some cases to refer to the sale of LP and LLC interests, since those interests are composed of more than one right.
Venture Capital Financing: An investment in a start-up business that is perceived to have excellent growth prospects but does not have access to capital markets. Statistics show that venture capital financing typically follows angel financing, although it can be the first round of professional financing.
Voting Agreements: Majority shareholders or a specific group agrees to vote their stock in a particular manner or consistent with choices made by a designated shareholder.
Voting Right: Shareholders’ right to vote their stock in the affairs of the company. The right to vote may be delegated by a stockholder to another person, often referred to as a proxy.
Warrant: A type of security that entitles the holder to buy a proportionate amount of common or preferred stock at a specified price for a period of years. Warrants are often issued together with a loan, a bond, or preferred stock—and act as sweeteners, to induce people to become investors.
Weighted Average Anti-dilution: The investor’s conversion price is reduced, and thus the number of common shares received on conversion increased, in the case of a down round; it takes into account both the reduced price and the number of shares (or rights) issued in the dilutive financing.
Workout: A negotiated agreement between debtors and creditors outside the bankruptcy process.
Write-off: The act of changing the value of an asset to an expense or a loss. A write-off is used to reduce or eliminate the value of an asset and reduce profits.
Write-up and Write-down: An upward or downward adjustment of the value of an asset for accounting and reporting purposes. These adjustments are estimates and tend to be subjective, although they are usually based on events affecting the company or its securities beneficially or detrimentally.