83 (b) Election. An 83(b) election, named after the relevant section of the Internal Revenue Code in the United States, refers to a choice that individuals can make when they receive restricted stock or other property subject to vesting.

When someone receives restricted stock from their employer or as part of an investment, it usually comes with a vesting schedule. This means that the individual gains ownership of the stock over time as they fulfill certain conditions, such as working for the company for a specific number of years.

By making an 83(b) election, the individual chooses to include the current value of the restricted stock in their taxable income for the year in which they receive the stock, even though it’s not yet fully vested. This can be advantageous if the stock’s value is expected to increase significantly over time. By paying taxes on the stock’s value at the time of grant, the individual can potentially reduce their overall tax liability compared to paying taxes on the increased value as the stock vests.

However, if the stock does not vest because the individual does not meet the required conditions (such as leaving the company before the vesting period is over), they do not get a tax refund for the taxes paid on the stock’s value.

409 A Valuation. A 409A valuation refers to the fair market value of a company’s common stock. This valuation is necessary for private companies in the United States to comply with Internal Revenue Code Section 409A, which regulates the taxation of nonqualified deferred compensation plans. Here is a short video on 409A valuations.

Accelerator. An accelerator refers to a program or an organization that helps early-stage startups grow by providing them with resources, funding, mentorship, and educational support. Accelerators are designed to accelerate the growth of startups and prepare them for the next stage of funding.

Key components of accelerator programs are typically funding, mentorship, education and training, provision of workspace, demo and presentation days to investors, connections and networking and post-program support.

Prominent examples of accelerators include Y Combinator, Techstars, and 500 Startups. These organizations have a track record of nurturing successful startups that have gone on to become major players in the tech industry.

Here is a list of accelerator programs around the world. 100 Startup Accelerators Around the World – Crunchbase

Accredited Investor. Refers to an investor with special status under financial regulation laws. While the definition of an accredit investor can vary under the laws of different jurisdictions, accredited investors generally include high-net worth individuals, banks, financial institutions and sophisticated institutional investors. Here is an article about accredited investors.

Acqui-hire. Talent acquisition strategy where one company buys another company to acquire its human resources. Here is a video about acqui-hires.

Advisory Board. An advisory board is a group of individuals who are appointed or invited to provide strategic advice, expertise, and support to an organization, company, or entrepreneur. Unlike a formal board of directors, an advisory board does not have legal responsibilities or decision-making authority. Instead, its primary function is to offer guidance and insights based on the members’ knowledge and experience.

The members of an advisory board are typically experts in specific fields relevant to the organization’s activities. They may include industry veterans, successful entrepreneurs, academics, professionals, or other individuals with valuable expertise.

The role of an advisory board can vary widely depending on the organization’s needs. Some common functions of advisory boards include:

Providing Expertise: Advisory board members can offer specialized knowledge, skills, and insights related to the organization’s industry or area of focus. They can provide advice on specific technical, scientific, or business issues.

Strategic Planning: Advisory boards assist in the development of strategic plans and long-term goals. They can offer recommendations on market trends, competitive analysis, and potential growth opportunities.

Networking: Members of an advisory board often have extensive professional networks. They can facilitate valuable connections, partnerships, and collaborations for the organization.

Mentorship: Advisory board members can mentor the organization’s leadership team, sharing their experiences and guiding them in decision-making processes.

Problem Solving: When challenges arise, an advisory board can serve as a brainstorming resource. Members can provide diverse perspectives and help identify creative solutions to problems.

Reputation and Credibility: Having respected individuals on an advisory board can enhance the organization’s credibility and reputation.

It is important for organizations to select advisory board members based on a consideration of their expertise, reputation, and ability to contribute meaningfully to the organization’s objectives. Advisory boards typically meet periodically to discuss relevant issues, provide advice, and assess progress toward goals.

Agile Project Management. Approach to project development that is based on iterations that incorporate feedback at each project stage. While agile project management approaches are commonly used in software development, they can also be used in other product development areas.

Allocation. In the capital raising context, allocation refers to how an investment amount will be divided between different investors.

Analogy. An analogy is a comparison between two things based on a characteristic that they share in common. Analogical reasoning is often used in business analysis to define market opportunities and risks.

Anchor Investor. An anchor investor is an investor that commits to a significant investment in a company or investment fund. Anchor investors play a crucial role in the success of a capital raise or launch because their commitment to investing often gives provides confidence to other potential investors. An article about anchor investors is here.

Angel Funder. An angel funder is an individual who provides capital to a business or businesses, including startups, usually in exchange for convertible debt or ownership equity.

Angel Investor. An angel investor is an individual who provides capital to a business or businesses, including startups, usually in exchange for convertible debt or ownership equity. An article about angel investors is here.

Annual Recurring Revenue. Refers to revenue, normalized on an annual basis, that a company expects to receive from customers.  

Annual Run Rate. Estimated annual revenues based on revenues earned in a particular period. Annual Run Rate = Revenues per period * number of periods in a year.

Anti-dilution clause. An anti-dilution clause is a clause that gives an investor in a company the right to maintain their shareholding interest if new shares are issued.

Antifragile. Term coined by Nassim Nicholas Taleb in his book “Antifragile: Things That Gain From Disorder.” Antifragile refers to the capacity of an organism, person or organization to become stronger when impacted by shocks and stresses. This is to be distinguished from resilience, which is the capacity to resist a shock or stress without getting stronger because of that shock or stress.

Arbitrage. In economics and finance, arbitrage refers to a strategy of taking advantage of differences in prices for similar items in two or more markets.

Average Order Value. E-commerce metric that measures that average amount spent by a customer on each order on a website or application. The formula is: Average Order Value = Revenue / Number of Orders. Average Order Value can be increased by price increases, upselling, cross-selling, discounts and free shipping. See Average Order Value (AOV) – Definition, Formula, How To Increase (corporatefinanceinstitute.com)

Average Revenue Per User. Average Revenue Per User measures the amount of money that a company generates from an individual customers. The formula is Average Revenue Per User = Total Revenue/Average Subscribers. The metric is useful to make comparisons between companies, for segmentation analysis and to analyze profitability and revenue generation capacity. See Average Revenue Per User (ARPU) – Definition, Formula, Example (corporatefinanceinstitute.com)

Balance Sheet. A balance sheet is a document that sets forth the assets and liabilities of a company at a particular point in time.

Berkus Valuation Method. Method of start-up valuation developed by David Berkus. This method is typically used by companies that are at the pre-revenue stage. In this valuation approach, companies are valued by assigning a maximum value of US $500,000 for each of five categories. The categories are sound idea, quality management team, prototype, strategic relationships, and product rollout.

Binding Term Sheet. Term sheet that is legally binding on the parties to a business transaction or investment. Compare with a non-binding term sheet.

Blue Ocean. An uncontested market. Here is a video on blue ocean vs. red oceans.

Board of Directors. A corporate body that supervises the activities of a company and exercises powers sets forth in a company’s organizational documents. Here are Warren Buffet’s and Charlie Munger’s views on Boards of Directors.

Bootstrapping. Bootstrapping in the context of entrepreneurship refers to the process of starting, managing, and building a business with little or no external capital. Here is an article on bootstrapping. Entrepreneurs who bootstrap rely on personal savings, revenue from early customers, and reinvestment of profits to fund business operations and expansion, instead of seeking external funding.

Bootstrapping involves making the most out of limited resources. Entrepreneurs who bootstrap their businesses typically focus on generating cash flow from the start, keeping costs low, and finding creative ways to build their business. They might work from home to save on office rent, use open-source software instead of purchasing expensive licenses, and handle various tasks themselves.

Bootstrapping offers several advantages:

Independence: Bootstrapping allows entrepreneurs to maintain full control of their business without the pressure from external investors or lenders.

Financial Discipline: Entrepreneurs learn to manage their finances wisely and develop a strong understanding of their business’s financial aspects.

Focus on Customers: Bootstrapped businesses often prioritize customer satisfaction and revenue generation from the beginning, leading to a customer-focused approach.

Resourcefulness: Entrepreneurs become resourceful and creative, finding innovative solutions to problems due to having limited resources.

Profitability: Bootstrapping encourages a focus on profitability from the outset, ensuring that the business is sustainable and can support its own growth.

Avoiding Debt: By not taking on loans, entrepreneurs avoid the burden of debt, reducing financial risks.

Bootstrapping also presents challenges.

Limited funding might restrict the speed of growth, and entrepreneurs might have to wear multiple hats, taking on various roles within the business. This may not be best use of the entrepreneur’s time and expertise. Additionally, there’s a higher risk involved as there might be limited safety nets if the business encounters financial difficulties.

The decision to bootstrap or seek external funding depends on the entrepreneur’s goals, the nature of the business, and the industry in which they operate. Some entrepreneurs prefer the freedom and control that bootstrapping offers, while others may opt for external funding to accelerate growth and expansion.

Break Fee. A break fee, also known as a termination fee or breakup fee, is a financial penalty or charge that one party pays to another in the event that a pre-agreed business deal or contract is terminated before it is completed. Break fees are common used in M&A deals.

In the context of M&A transactions, a break fee might be specified in the merger agreement. If either the buyer or the seller decides to back out of the deal after a certain point in the negotiation process, they would be required to pay the break fee to the other party. The purpose of a break fee is to compensate the non-defaulting party for the time, resources, and opportunity costs associated with the failed deal.

Break fees can serve several purposes, including deterring parties from walking away from a deal without a valid reason, compensating the injured party for the costs and efforts invested in the negotiation process, and providing a measure of security to the parties involved in the transaction.

The specific terms and conditions related to break fees are typically outlined in the contract or agreement between the parties, and the amount of the break fee is negotiated during the deal-making process.

Bridge Loan. A bridge loan is a short-term loan used to bridge the financial gap between two financing transactions. It is typically used by individuals or businesses to cover immediate expenses while waiting for long-term financing or the sale of an asset.

The following are some key elements of bridge loans:

Short-Term Solution: Bridge loans are designed to be short-term loans, usually with a duration of a few weeks to a few years, rather than long-term financial solutions.

Purpose: They are often used in real estate transactions. For example, if someone is buying a new home before selling their current one, a bridge loan can provide the necessary funds for the new purchase before the old home is sold.

Quick Access: Bridge loans can be obtained relatively quickly, making them an attractive option for borrowers who need funds urgently.

Higher Interest Rates: Because of their short-term nature and higher risk, bridge loans typically come with higher interest rates compared to traditional loans.

Collateral: Lenders often require collateral, such as the property being purchased, to secure the bridge loan.

Exit Strategy: Borrowers are expected to have a clear plan for repaying the bridge loan, usually through the sale of the old property or by securing long-term financing.

Risk: There is a risk involved for lenders, especially if the borrower’s plans don’t materialize as expected. If the borrower cannot repay the bridge loan as agreed, they may face financial difficulties and potential loss of the collateral.

It’s important for anyone considering a bridge loan to carefully evaluate their financial situation, the terms of the loan, and have a solid plan for repaying the loan to mitigate potential risks. Consulting with a financial advisor or loan officer is often advisable when considering a bridge loan.

Burn Rate. Rate at which a company is losing money, typically expressed in monthly terms. Here is an additional article on burn rate.

Business Angel. A business angel is an individual who provides capital to a business or businesses, including startups, usually in exchange for convertible debt or ownership equity.

Business Plan. Document that sets forth the goals of a business, the steps that will be taken to acheive those goals, and the time frame for achieving those goals.

Cap Table. Table providing an analysis of a company’s percentages of ownership, equity dilution, and value of equity in each round of investment by founders, investors, and other owners.

Capital Asset Pricing Model (CAPM). The Capital Asset Pricing Model (CAPM) is a widely used financial model that establishes a linear relationship between the expected return of an asset and its systematic risk, often represented by beta (β). It provides a framework for calculating the expected return on an investment based on its risk compared to the overall market.

According to CAPM, the expected return of an investment should compensate the investor for the time value of money (risk-free rate) and the risk associated with the investment in relation to the overall market risk (measured by beta). Investments with higher beta values are riskier but are also expected to provide higher returns to compensate for the additional risk, assuming the market is in equilibrium.

It’s important to note that CAPM has its limitations and assumptions, such as the efficient market hypothesis and constant beta over time, which may not always hold true in real-world situations. Despite its simplicity and assumptions, CAPM remains a fundamental tool in the field of finance for estimating the required rate of return for investments.

Capital Call. A capital call is a request by a manager of a fund that investors provide some or all of the investor’s committed capital.

Carried Interest. Carried interest is some portion of the profits of a fund that are paid to a fund manager as compensation.

Cash Flow. Cash flow refers to the movement of money into or out of a business, project, or financial product. It is one of the most important indicators of a company’s financial health. Positive cash flow means more money is coming into the business than going out, which is crucial for covering expenses, reinvesting in the business, and paying debts. On the other hand, negative cash flow indicates that a company is spending more money than it is receiving, which can lead to financial difficulties and potential bankruptcy if not addressed.

Cash flow can be categorized into three main types:

Operating Cash Flow (OCF): This refers to the cash generated or used by a company’s normal business operations. It includes revenue from sales, payment to suppliers, employee salaries, and operating expenses. Positive operating cash flow indicates that a company is able to generate enough cash from its core business activities.

Investing Cash Flow: This involves the purchase or sale of long-term assets such as property, equipment, or investments. Investing activities also include capital expenditures necessary to maintain or expand a company’s business. Investing cash flow can be positive (cash received from asset sales) or negative (cash spent on buying assets).

Financing Cash Flow: This relates to transactions with the company’s owners and creditors. It includes activities such as issuing stock, paying dividends, repurchasing stock, and borrowing money. Positive financing cash flow indicates that a company is raising capital, while negative financing cash flow indicates that a company is paying back loans or returning capital to shareholders.

Monitoring and managing cash flow is essential for businesses to ensure they have enough liquidity to meet their obligations, invest in growth opportunities, and weather financial downturns. Cash flow statements, which are a part of a company’s financial statements, provide a detailed overview of the cash inflows and outflows, allowing investors, analysts, and management to assess the company’s financial performance and stability.

Cash on Cash Return is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage.

Clawback. Clawback refers to money that must be repaid due to the failure to complete certain conditions or due to special circumstances or events.

Cliff. A cliff is the amount of time employees need to be employed by a firm before they can be eligible to receive a grant under an ESOP.

Common Stock. Stock that represents an interest in a company. See Preferred Stock.

Confirmation Bias. The tendency to look for things that we believe to be true.

Control Rights. Ability to control the actions of a company, typically through voting rights.

Convertible Arbitrage. Taking advantage of price differences between a convertible security and its underlying common stock.

Convertible Note. Type of bond that the holder can convert into a specified number of shares of common stock in the issuing company or cash of equal value.

Cottage Business. A cottage business, also known as a cottage industry, refers to a small-scale business or manufacturing activity that is operated from a person’s home, typically involving the production of handmade goods or providing specialized services. These businesses often require minimal investment in infrastructure and can be run by individuals or a small group of people.

Cottage businesses have been prevalent throughout history, especially before the industrial revolution when large-scale factories were not common. In a cottage business, products are often crafted by hand, and the business may involve family members or a small team of artisans working together.

Examples of cottage businesses include handmade crafts, artisanal food products, custom tailoring services, small-scale agriculture, and personalized services like tutoring or consulting. With the rise of the internet and online marketplaces, many cottage businesses have expanded their reach by selling their products or services online.

Cottage businesses provide individuals with the opportunity to turn their skills, hobbies, or talents into a source of income without the need for a formal workplace, making them popular among entrepreneurs and artisans.

Counterfactual Thinking. Approach that tries to generate what if scenarios but assuming something contrary to fact. For example, assume that there was no fire alarm today but we ask “What would we have done if there was a firm alarm today?” This helps people consider actions under alternative situations which can be helpful in preparing for the future.

Covenant. In finance, a covenant refers to a formal agreement or promise made by a borrower to adhere to specific terms and conditions set by a lender. These terms and conditions are designed to protect the interests of the lender and provide certain assurances regarding the borrower’s financial stability and ability to repay the loan. Covenants are commonly used in various financial transactions, such as loans, bonds, and debt issues.

There are two primary types of covenants in finance:

Positive Covenants. Positive covenants are actions that the borrower promises to take. These can include maintaining certain financial ratios, providing regular financial statements, or insuring assets. For example, a positive covenant might require a company to maintain a minimum level of working capital or limit capital expenditures.

Negative Covenants. Negative covenants are restrictions on the borrower. These limit the borrower’s ability to take certain actions that could affect their ability to repay the loan. Negative covenants might include restrictions on taking additional loans, paying dividends, or selling major assets without the lender’s approval.

Covenants are essential for lenders because they mitigate the risks associated with lending money. If a borrower violates a covenant, it is considered a breach of contract, allowing the lender to take various actions, such as increasing the interest rate, demanding immediate repayment, or taking legal action.

In the context of bonds, there are also debt covenants, which are conditions outlined in the bond indenture. These covenants can protect bondholders by limiting the actions of the issuer, ensuring that the issuer remains financially stable and capable of repaying the bondholders.

Covenants are crucial elements in financial agreements as they help maintain the balance between the interests of the borrower and the lender, ensuring that both parties fulfill their obligations and responsibilities.

Covered Interest Rate Arbitrage. Taking advantage of the interest rate differentials in the foreign exchange market while hedging against currency risk.

Co-Working Space. A co-working space is a physical location where individuals from different organizations or freelancers work together in a shared environment. These spaces are designed to provide a productive and collaborative atmosphere, allowing people to work independently on their projects while also fostering networking opportunities and collaboration among members.

Co-working spaces typically offer various amenities, including desks, chairs, meeting rooms, internet access, and office equipment such as printers and photocopiers. Some co-working spaces also provide additional services like coffee, snacks, and community events to create a sense of community among the members.

The concept of co-working spaces emerged as a response to the changing nature of work, particularly the rise of remote work and the gig economy. It provides individuals and small businesses with a flexible and cost-effective alternative to traditional office spaces. Co-working spaces are popular among freelancers, entrepreneurs, startups, and remote workers who seek a professional work environment without the long-term commitment and high costs associated with leasing a private office.

In addition to the practical benefits, co-working spaces often emphasize a sense of community and collaboration. Members can interact, exchange ideas, and potentially collaborate on projects, leading to a more dynamic and stimulating work environment compared to working in isolation.

Overall, co-working spaces cater to individuals and small teams who value flexibility, networking opportunities, and a supportive community while working on their projects or businesses.

Cross-Border Arbitrage. Exploiting price differences in assets traded in different countries.

Crowdfunding. Practice of funding a project or venture by raising money from a large number of people, typically via the internet.

Cumulative Dividend. A cumulative dividend refers to a type of dividend that must be paid to shareholders, even if the company does not generate enough profits in a given period to cover the dividend payments. In other words, if a company fails to pay a cumulative dividend in any year, it owes that payment to shareholders in the future, along with the dividends for the current year.

This contrasts with non-cumulative dividends, where if the company cannot afford to pay a dividend in a particular period, it is not obligated to make up for it in the future. Cumulative dividends are often specified in the terms of preferred stock, a class of stock that has a fixed dividend rate and is paid before common stock dividends.

The presence of cumulative dividends provides an assurance to preferred shareholders that they will eventually receive their dividend payments, even if the company faces financial difficulties in the short term. This can be an attractive feature for investors seeking a stable income from their investments.

Cutback Rights. Cutback rights, also known as reduction in force (RIF) or downsizing rights, refer to the rights and protections afforded to employees when an organization implements layoffs or reduces its workforce. These rights are typically outlined in employment contracts, collective bargaining agreements, or labor laws, and they vary from country to country and even within different states or regions.

Cutback rights generally include provisions related to:

Advance Notice: Employers may be required to provide employees with advance notice of the layoffs or downsizing. The notice period can vary and is often stipulated by labor laws or employment contracts.

Severance Pay: Employees affected by the cutbacks may be entitled to severance pay, which provides financial support to help them transition to new employment.

Retraining or Outplacement Services: Some employers offer retraining programs or outplacement services to help employees acquire new skills or find new employment opportunities.

Priority Rehiring: In some cases, employees who were laid off might have priority when new positions become available within the company. This means they have the right to be rehired before external candidates are considered.

Pension and Benefits: Cutback rights may include provisions ensuring that employees’ pension plans and other benefits are protected during and after the downsizing process.

Legal Protections: Laws and regulations protect employees against unfair treatment, discrimination, or wrongful termination during layoffs. These laws may vary, so it’s essential for both employers and employees to be aware of their rights and responsibilities.

It’s important to note that the specific cutback rights an employee has depend on various factors, including their employment contract, company policies, applicable laws, and the reason for the workforce reduction. Employees who believe their rights have been violated during a layoff or downsizing process should consult legal counsel to understand their options and potential courses of action.

Data Room. Place, which can be physical or virtual, where information is stored. When capital raising, data rooms are often created to store information about the company, including its business plan, financial model, and other important documents.

Definitive Documentation. Documentation that sets for the final, binding terms of a business transaction or investment. See Term Sheet.

Demand Registration Rights. Demand registration rights, also known as piggyback registration rights, are a provision in a contract between a company and its investors, typically found in venture capital or private equity investments. These rights allow minority shareholders (usually investors) to request the company to register their shares with the relevant securities regulatory authority, such as the U.S. Securities and Exchange Commission (SEC) in the United States.

When demand registration rights are in place, if a shareholder wishes to sell their shares to the public, they can demand that the company include their shares in a registration statement that the company files with the regulatory authority. This allows the shareholder to sell their shares on the public market, which provides them with liquidity and the ability to cash out their investment.

However, it’s important to note that demand registration rights do not obligate the company to go public or to register its shares. The decision to register shares and go public rests entirely with the company’s management and board of directors. Demand registration rights simply give the shareholders the ability to include their shares in the registration statement if the company decides to go public or conducts a public offering.

Diagonal Lateral Thinking. Diagonal thinking involves trying to integrate a thought perspective with what will happen once that thought perspective meets the reality of the world outside of that thought perspective.

Dilution. Dilution is the reduction of a shareholder’s interest in a company following the issuance of new stock. Here is an article in dilution.

Elevator Pitch. An elevator pitch is a concise and compelling introduction that can be delivered in the time it takes for an elevator ride, typically around 30 seconds to 2 minutes. The goal of an elevator pitch is to grab the listener’s attention and convey key information about a person, a product, a service, or an idea in a clear and engaging manner.

Elevator pitches are commonly used in networking events, job interviews, business meetings, or any situation where you need to quickly and effectively communicate your message. A well-crafted elevator pitch should provide a brief overview of who you are, what you do, and what makes you or your idea unique or valuable. It should be tailored to the audience you are addressing and focus on the most important points to leave a memorable impression.

Market Derivative Valuation Method. Valuation approach where the value of the company is calculated based on a market reference point, such as an EBITDA multiple.

Discounted Cash Flow Valuation. Valuation technique where the value of a company is calculated by discounting its future cash flows based on a discount factor.

Discount Factor. Factor that is used to mathematically reduce an expected payment or series of cash flows. In Discounted Cash Flow Valuation, the discount factor is based on the perceived risk related to the company’s future cash flows. The greater the perceived risk, the higher the discount factor.

Down Round. Down road is a financing round where the valuation of the company’s stock is lower than the valuation in a previous round.

Drag Along Rights. Drag-along rights, also known as drag rights or drag-along provisions, are a legal mechanism used in business agreements, especially in the context of mergers and acquisitions (M&A) and investment deals involving minority and majority stakeholders. These rights protect majority shareholders or investors by allowing them to force minority shareholders to join in the sale of a company.

Here’s how drag-along rights typically work:

Majority Shareholder’s Decision: When a majority shareholder (or a group of majority shareholders) decides to sell their stake or the entire company, drag-along rights enable them to “drag along” minority shareholders in the sale.

Forcing Minority Shareholders: If the majority shareholder(s) find a buyer and wish to sell their shares, the drag-along provision allows them to require the minority shareholders to join the sale under the same terms and conditions. This means that even if the minority shareholders do not want to sell, they are compelled to do so.

Ensuring Uniformity: Drag-along rights are included in agreements to ensure uniformity in the sale process. They prevent situations where a handful of minority shareholders can block a potentially beneficial sale for the majority.

Protection for Minority Shareholders: To protect the interests of minority shareholders, these agreements usually specify that the minority shareholders will receive the same price, terms, and conditions as the majority shareholders in the sale.

These rights are crucial for majority shareholders and investors because they provide a level of control and confidence when negotiating deals. However, they can be a point of contention for minority shareholders, as they might be forced into a sale they do not agree with. The specifics of drag-along rights can vary widely and are usually outlined in the company’s shareholder agreement or investment contract. It’s important for shareholders, especially minority shareholders, to carefully review and negotiate the terms related to drag-along rights before entering into any agreements.

Dragon. Privately held company valued at US $12 billion or more.

Due Diligence. Investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care. In financing, due diligence refers to the investigation that an investor carries out before investing in a company. This typically involves a analysis of the company’s team, business plan, financial situation, financial prospects, and relevant business circumstances.

Early Adopters. Refers to a person who starts using a product or a technology as soon as it becomes available.

EBITDA. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company’s operating performance and is often used to assess its profitability and ability to generate cash flow. EBITDA is calculated by taking a company’s net earnings and adding back interest, taxes, depreciation, and amortization expenses.

Here’s the breakdown of the acronym:

Earnings: This refers to a company’s net income or profit after all expenses and taxes have been deducted from its revenue.

Before: EBITDA looks at earnings before certain expenses are accounted for, namely interest, taxes, depreciation, and amortization.

Interest: This represents the cost of borrowing money. By adding back interest, EBITDA focuses on the company’s operational performance without the influence of its financial structure.

Taxes: EBITDA adds back taxes to evaluate a company’s profitability without the impact of its tax rate. This provides a clearer picture of the company’s core operating profitability.

Depreciation: Depreciation is the accounting method used to spread the cost of a capital asset over its useful life. EBITDA adds this back because it’s a non-cash expense; the company doesn’t actually spend this money annually, but it’s accounted for as an expense over time.

Amortization: Similar to depreciation, amortization is the process of spreading the cost of intangible assets (like patents or trademarks) over their useful life. EBITDA adds back this expense for the same reason as depreciation.

EBITDA is often used by analysts, investors, and lenders to assess a company’s cash-generating ability and its operational efficiency. However, it’s important to note that EBITDA does not reflect the entire financial picture of a company. It doesn’t take into account changes in working capital, capital expenditures, or other crucial factors that can affect a company’s overall financial health. Therefore, it is usually used in conjunction with other financial metrics to get a comprehensive understanding of a company’s performance.

EBIT. EBIT stands for Earnings Before Interest and Taxes. It is a measure of a company’s profitability that looks at its ability to generate operating income. EBIT is calculated by subtracting a company’s cost of goods sold (COGS) and operating expenses from its total revenue. EBIT excludes interest and taxes in order to focus solely on the company’s core operating performance, making it a useful metric for comparing the profitability of different companies, as it eliminates the effects of financing and tax decisions. EBIT is also known as operating income or operating profit and is a key indicator used by investors and analysts to assess a company’s financial health and performance.

EBITDA Margin. EBITDA margin is a financial metric that measures a company’s profitability as a percentage of its revenue, using EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) as the numerator. EBITDA margin provides a clearer view of a company’s operational efficiency and profitability by excluding certain non-operating expenses.

By expressing EBITDA as a percentage of total revenue, the EBITDA margin indicates how much profit a company generates for each dollar of revenue earned. A higher EBITDA margin suggests that a company has better control over its operating costs and is more efficient in generating profits from its core business activities. Conversely, a lower EBITDA margin might indicate higher operating expenses relative to revenue.

Elephant-on-the-Bus. Thought experiment to generate lateral thinking solutions. If someone where to ask “Can I take an elephant on the bus?” it would like lead to the answer “no.” However, if someone were to ask “How I get an elephant on the bus?” it would lead to set of possibilities.

Employee Stock Option Program (ESOP). An ESOP is a defined contribution plan, a form of retirement plan as defined by 4975(e)(7)of the IRS code, which became a qualified retirement plan in 1974. It is one of the methods of employee participation in corporate ownership.

Entrepreneur. An entrepreneur is a person who creates and/or invests in one or more businesses, bearing most of the risks and enjoying most of the rewards.

Entrepreneurship. Entrepreneurship is the process of a creating a business.

Exercise Price. In finance, the exercise price (or strike price) of a security is a fixed price at which the owner of the option can buy it.

Exit Event. An event that triggers the exit, typically an investor, from an investment.

Exit Strategy. An exit strategy is a planned approach to ending a situation or disengaging from a specific activity or business venture. In various contexts, an exit strategy outlines how an individual, company, or investor intends to sell, liquidate, or otherwise withdraw from an investment or business opportunity.

In the business world, an exit strategy can refer to how entrepreneurs plan to sell their business, transfer ownership, or cease operations. Common exit strategies include selling the business to another company or individual, merging with another business, handing over the business to a family member, conducting an initial public offering (IPO), or shutting down the business entirely.

For investors, an exit strategy outlines how they plan to capitalize on their investments. This could involve selling stocks or bonds, selling a real estate property, or divesting from a business venture.

Having a well-thought-out exit strategy is crucial because it helps individuals and businesses mitigate risks, maximize profits, and ensure a smooth transition when exiting a particular endeavor. It is often considered an essential part of business planning and investment management.

Fair Market Value. Fair market value (FMV) is the price at which a property, asset, or service would change hands between a willing buyer and a willing seller, both having reasonable knowledge of the relevant facts and neither being under any compulsion to buy or sell. In other words, it’s the price that a knowledgeable buyer would pay and a knowledgeable seller would accept in an open and unrestricted market.

Determining the fair market value is essential in various contexts, such as real estate transactions, taxation, insurance claims, and estate settlements. Various methods, including market analysis, appraisals, and comparative market research, are used to estimate the fair market value of different assets and properties. It’s important to note that the fair market value is different from the assessed value, which is used for property tax purposes and may not always reflect the actual market value accurately.

Fiduciary. A fiduciary is an individual or entity that holds a position of trust and confidence and is legally obligated to act in the best interest of another party. In the context of investment transactions, a fiduciary is a person or organization that manages or advises on financial matters on behalf of another party, often referred to as a beneficiary or client.

Fiduciaries are held to a high standard of care and are expected to prioritize their clients’ interests above their own. This means they must make investment decisions that are in the best interest of their clients and avoid conflicts of interest that could compromise their ability to act impartially.

Common examples of fiduciaries in the investment world include financial advisors, investment managers, trustees, and certain types of retirement plan administrators. These professionals are bound by fiduciary duty, which means they are legally obligated to act prudently, honestly, and in the best interest of their clients or beneficiaries. Breaching this duty can lead to legal consequences and financial liabilities for the fiduciary.

Financial Statements. Formal documents that set forth the financial position of a company at a particular point in time. Key documents in the financial statements are the balance sheet, the income statement, cash flow statement and statement of owner’s equity.

First Principles. First principles refers to fundamental truths (see First Principles Reasoning)

First Principles Reasoning. First principles reasoning is a thought process where a person tries to identify fundamental truths and then reason from those truths to question existing practices, adopt new perspectives, or develop out-of-the-box solutions. Here is an article on first principles reasoning.

First Refusal Rights. First refusal rights, also known as rights of first refusal (ROFR) or preemptive rights, are contractual agreements that give a party the option to enter into a transaction before the owner negotiates with external third parties.

These rights are commonly found in various contracts, such as shareholder agreements, real estate transactions, and joint venture agreements. They provide existing stakeholders or interested parties with a degree of control over the sale or transfer of assets and ensure that they have the opportunity to maintain their interest in the property or investment opportunity.

Flip-up. Transaction where a company establishes a new company and then the shareholders of the original company exchange their shares for shares in the newly formed company.

FLOSS (Free/Libre Open Source License. “FLOSS” stands for “Free/Libre and Open Source Software.” FLOSS licenses refer to licenses that allow users to freely use, modify, and distribute software. These licenses ensure that the source code of the software is openly available and can be freely modified and shared by anyone.

Forecast. A forecast is a prediction about the future. In business, items that are often forecasted include business conditions, revenues and costs.

Fox Concept. Idea that companies should have the ability to do many things. Distinguished from the Hedgehog Concept.

Freemium Business Model. A freemium business model is a pricing strategy where a company offers a basic version of its product or service for free, but also provides premium features or content at an additional cost. The basic version, which is free, often comes with limited features or capabilities. Users can then choose to upgrade to the premium version, which offers more advanced features or a better user experience, typically through a subscription or one-time payment.

This model is commonly used in software and digital services industries. The idea behind freemium is to attract a large user base with the free version, and then convert a small percentage of those users into paying customers who are willing to pay for the enhanced features or premium content.

Examples of freemium models include software applications like Dropbox, which offers a limited amount of free storage space with the option to upgrade for more storage, and mobile games that are free to download and play but offer in-app purchases for virtual items or premium gameplay features.

Friends and Family Round. Early investment in a company by friends and family of the founders. Here is an article on friends and family round funding.

Funds of Funds. A fund of funds (FoF) is an investment strategy where a fund invests in other mutual funds or hedge funds rather than directly investing in individual securities, such as stocks or bonds. In other words, it’s a fund that pools capital from investors and uses that money to invest in a diversified portfolio of other funds.

There are several reasons why investors might choose a fund of funds approach:

Diversification: By investing in a variety of underlying funds, a fund of funds can achieve a high level of diversification, spreading the investment across different asset classes, sectors, and geographic regions. Diversification helps reduce the risk because losses in one fund might be offset by gains in another.

Professional Management: Fund of funds are managed by experienced fund managers who make decisions about which underlying funds to invest in. Investors benefit from the expertise of these managers in selecting and monitoring the performance of other funds.

Simplicity: For investors who do not have the time, knowledge, or inclination to research and invest in individual funds, a fund of funds offers a simplified way to invest in a diversified portfolio.

Access to Expertise: Fund of funds managers often have access to specialized or institutional funds that might not be available to individual retail investors. This can provide investors with access to unique investment opportunities.

However, it’s important to note that investing in a fund of funds comes with its own set of fees. Not only do investors pay fees to the fund of funds manager, but they also indirectly bear the fees of the underlying funds in which the FoF invests. These fees can eat into the overall returns, so investors should carefully consider the cost implications.

Additionally, the performance of a fund of funds depends not only on the skill of its managers but also on the performance of the underlying funds, making it crucial for investors to research the track record and strategy of both the FoF and its underlying funds before investing.

Full Ratchet. In venture capital, a “full ratchet” is a term used to describe an anti-dilution provision that protects earlier investors (usually preferred stockholders) in a company from dilution resulting from later rounds of financing at a lower valuation.

Here’s how it works:

Let’s say an investor initially invests in a company at a certain price per share (let’s call it Price A). Later, the company raises another round of funding at a lower valuation (Price B). If the investor has a full ratchet anti-dilution protection, the conversion price of their preferred stock would be adjusted downwards to match the lower Price B.

This means that if the conversion price is lower due to the new financing round, the investor effectively receives more shares for their original investment amount. This adjustment occurs without any additional investment on the part of the earlier investor.

The purpose of a full ratchet provision is to ensure that earlier investors are not unfairly penalized if the company’s valuation drops significantly in subsequent rounds of funding. However, full ratchet anti-dilution provisions are relatively rare in venture capital deals because they can be quite harsh on founders and other shareholders, potentially discouraging future investors from participating in the company.

It’s important to note that the use and structure of anti-dilution provisions, including full ratchet, can vary and are negotiated between investors and companies during the investment process. Different types of anti-dilution provisions, such as weighted average ratchets, are often used to strike a balance between protecting earlier investors and not overly diluting the ownership stakes of founders and other shareholders.

Fully Diluted. “Fully diluted” refers to the total number of a company’s outstanding shares of stock that would exist if all potential sources of conversion, such as convertible bonds, stock options, restricted stock units (RSUs), and other securities, were exercised or converted into common stock. In other words, it represents the company’s market capitalization if all convertible securities were converted into common stock.

Calculating a company’s fully diluted shares is important for investors and analysts because it provides a more accurate picture of the company’s market value and ownership structure, especially when considering the potential impact of stock options and other securities that can be converted into common stock in the future. Fully diluted shares are often used in financial metrics such as earnings per share (EPS) calculations to provide a more comprehensive understanding of a company’s financial health and valuation.

General Equilibrium Theory. General equilibrium is a state of equilibrium between supply and demand in an entire economy. Given the fact that markets are constantly evolving general equilibrium is never reached. The concept, however, is useful to consider how a market might evolve given the progression of other market forces. Here is an article on General Equilibrium Theory.

General Partner. A General Partner is a person who joins with at least one other person to form a business. A general partner has responsibility for the actions of the business, can legally bind the business and is personally liable for all the partnership’s debts and obligations

General Solicitation. In finance, a general solicitation refers to the public advertising or broad marketing of a securities offering to potential investors. This could include advertisements in newspapers, magazines, television, radio, or on the internet, as well as seminars or meetings where attendees are invited through general advertising.

Before the Jumpstart Our Business Startups (JOBS) Act was enacted in the United States in 2012, general solicitation was prohibited in private securities offerings. However, the JOBS Act introduced Rule 506(c) under Regulation D of the Securities Act of 1933, which allows companies to engage in general solicitation and advertising when offering securities, provided that they meet certain requirements.

Under Rule 506(c), companies can raise capital from accredited investors through a general solicitation, but they must take reasonable steps to verify that the investors are indeed accredited. Accredited investors are individuals or entities that meet specific income or net worth requirements, as defined by the Securities and Exchange Commission (SEC) in the United States.

It’s important for companies engaging in general solicitation to comply with the regulations and rules set forth by the relevant regulatory authorities, such as the SEC in the United States. Failure to comply with these regulations can result in legal consequences.

Gordon Growth Model. The Gordon Growth Model is one of the ways to calculate the terminal value of a company after the fixed forecast period.

Grandfather Rights. “Grandfather rights” in the context of investments, also known as “grandfather clauses,” refer to provisions in laws or regulations that allow existing investments or activities to continue operating under the old rules even after new regulations or restrictions are put in place. These rights are typically granted to protect existing investments or businesses from being adversely affected by new laws or regulations.

For example, imagine a government introduces a new law that restricts the operation of certain types of businesses in a specific area. If a business was established before the new law was enacted, it might be allowed to continue its operations even though new businesses of that type are prohibited. The existing business is said to have “grandfather rights” because it is exempt from the new regulation due to its pre-existing status.

These rights are usually granted to provide fairness and avoid negative impacts on businesses or individuals who have invested time and resources in activities that were legal at the time they started. However, the specifics of grandfather rights can vary widely depending on the jurisdiction and the particular regulations in question. It’s important to consult legal experts or relevant authorities to understand the implications of grandfather rights in specific investment contexts.

Gross Burn Rate. Gross Burn Rate is the company’s operational expenses. See Net Burn Rate.

Gross Margin. Gross margin is= Revenues – Cost of Goods Sold/Revenues

Growth Equity. Growth equity refers to a form of private equity investment where investors provide capital to established companies that are poised for significant growth. Unlike traditional private equity, which often involves investing in distressed or undervalued companies with the aim of restructuring and selling them for a profit, growth equity investments are made in companies that have a proven track record and are looking to expand, enter new markets, or invest in new technologies.

Growth equity investors typically take minority stakes in these companies, meaning they do not seek to take control of the company but rather support its growth initiatives. In return for their investment, growth equity investors often receive a combination of equity ownership and sometimes preferred equity, which gives them certain rights and preferences over common shareholders.

The goal of growth equity investing is to help companies accelerate their growth and increase their value. Growth equity firms provide not only capital but also strategic guidance, industry expertise, and operational support to help the companies they invest in achieve their growth objectives. These investments are considered higher risk than traditional public market investments but can offer higher returns if the company succeeds in its growth plans.

Growth Hacking. Growth hacking is a term used in the field of marketing to describe strategies and techniques that focus on rapidly and efficiently growing a business, particularly in its early stages. The goal of growth hacking is to acquire as many users or customers as possible while spending minimal resources.

Growth hackers use creative and unconventional methods to achieve rapid growth, often relying on techniques such as social media marketing, viral marketing, search engine optimization (SEO), content marketing, email marketing, and data analytics. They constantly experiment with different approaches to identify what works best in terms of user acquisition, retention, and revenue generation.

Unlike traditional marketing, growth hacking emphasizes a data-driven and agile approach, where marketers analyze data and user feedback to make quick, informed decisions. It’s common for growth hackers to focus on specific metrics, such as customer acquisition cost (CAC), customer lifetime value (CLV), conversion rates, and retention rates, to measure the effectiveness of their strategies.

Growth hacking is especially popular among startups and small businesses with limited budgets, as it allows them to compete with larger companies without spending significant amounts on traditional marketing campaigns.

Hedgehog Concept. The idea that companies should focus on one key thing. Distinguished from the fox concept.

Hockey Stick Growth. “Hockey stick growth” is a term often used in business and economics to describe a rapid and significant increase in growth or revenue. The term is derived from the shape of a hockey stick, where there is a long handle followed by a sharp upward curve at the end. In the context of business or startups, it refers to a period of slow or moderate growth followed by a sudden and steep increase in growth, leading to a significant rise in profits or user base.

This term is commonly associated with technology startups, especially those in the internet and software industries, where a product or service may initially have a slow adoption rate but experiences explosive growth once it gains widespread acceptance or recognition.

The concept of hockey stick growth is often used to illustrate the potential of an investment or a business opportunity, indicating that while there might be a period of patience and gradual progress, the real success and substantial returns will come during the rapid growth phase.

Horizontal Lateral Thinking. Type of lateral thinking where a person make a jump to different perspective. Distinguished from vertical lateral thinking and diagonal lateral thinking.

Incubator. Hub or organization that exists to provide different types of support to early stage companies.

Inefficiency Creep. Inefficiency creep refers to inefficencies that continue to exist in organizational, operational, or technical processes.

Information Rights. In the context of investments, information rights refer to the rights that investors have to access certain information about the company in which they have invested. These rights are crucial for investors to make informed decisions about their investments and to ensure transparency and accountability within the company. Information rights typically include the following:

Financial Information: Investors have the right to access the financial statements of the company, including balance sheets, income statements, and cash flow statements. This information helps investors assess the company’s financial health and performance.

Operational Information: Investors may have access to operational data such as production figures, sales data, and other key performance indicators. This information is important for investors to understand how the company is operating and whether it is meeting its targets.

Strategic Plans: Investors often have the right to know about the company’s strategic plans and future direction. Understanding the company’s long-term goals and strategies is crucial for investors to assess the potential for growth and profitability.

Material Events: Companies are usually required to disclose material events that could affect the stock price, such as mergers, acquisitions, legal proceedings, or significant changes in management. Investors have the right to be informed promptly about such events.

Shareholder Meetings: Investors typically have the right to attend shareholder meetings, where they can vote on important company decisions and gain insights into the company’s management and performance.

Proxy Statements: Companies often provide proxy statements to shareholders before annual meetings, outlining matters to be voted on. Investors can use this information to make informed decisions during shareholder votes.

Regulatory Filings: Publicly traded companies are required to file various documents with regulatory authorities, such as the Securities and Exchange Commission (SEC) in the United States. Investors have the right to access these filings, which include important information about the company’s financial condition, operations, and management.

It’s important to note that the extent of information rights can vary depending on the type of investment (e.g., stocks, bonds, private equity) and the specific agreements between the investors and the company, as outlined in legal documents like shareholder agreements or bond indentures. Investors should carefully review these agreements to understand the full scope of their information rights in a particular investment.

Initial Public Offering. Refers to the time when a company first issues its shares to the public.

Innovation Trap. This refers to a situation where a company finds itself in a worse situation after implementing an innovation initiative and cannot return to the original position or solve it without significant use of resources.

Inside Round. In the context of investments, “inside round” refers to a type of funding round in which a company raises capital from existing investors, such as venture capitalists or angel investors, rather than seeking funding from external sources or new investors.

Inside rounds typically occur when a company needs additional funding to support its operations, product development, or expansion plans, but it may face challenges in attracting new investors or the current market conditions are not favorable for raising funds externally. In these situations, existing investors may choose to provide additional capital to help the company continue its growth trajectory.

Inside rounds can be advantageous for both the company and existing investors. For the company, it allows them to secure funding quickly from investors who are already familiar with the business and its potential. For existing investors, it can be an opportunity to protect their initial investment and maintain their ownership stake in the company without dilution from new investors.

However, inside rounds can also indicate that the company is having difficulty attracting new investors, which may raise concerns about its growth prospects or financial health. Investors and analysts often assess the reasons behind an inside round to gauge the company’s situation and make informed investment decisions.

Interest Rate Arbitrage. Exploiting differences in interest rates between different markets or instruments.

Investment Syndicate. An investment syndicate is a group of investors or investment firms that join together to pool their resources and expertise to invest in a particular business or startup. Syndicates are common in venture capital and private equity markets, where multiple investors collaborate to provide funding for a startup or a high-potential business opportunity.

Here’s how it typically works:

Lead Investor: One investor or investment firm takes the lead in conducting due diligence on the potential investment opportunity. This lead investor often negotiates the terms of the investment with the startup and coordinates the syndicate.

Pooling Resources: The lead investor convinces other investors to contribute a portion of the total investment amount. Each investor’s contribution can vary based on their financial capacity and interest in the opportunity.

Diversification: For individual investors, joining a syndicate allows them to diversify their investment portfolio by investing smaller amounts in multiple startups, thereby spreading the risk.

Expertise Sharing: Syndicate members often bring different skills, experiences, and networks to the table. Some investors might have industry-specific knowledge, while others could provide valuable managerial or technical expertise to the startup.

Risk Sharing: By spreading the investment across multiple participants, the risk associated with any single investment is mitigated. If the startup fails, the loss is shared among the members of the syndicate.

Due Diligence: Syndicate members collectively conduct thorough due diligence to assess the viability of the investment opportunity. This involves evaluating the business model, market potential, financial projections, and the management team.

Investment Decision: After due diligence, if the syndicate members are confident about the investment opportunity, they collectively decide to invest. The lead investor often represents the syndicate during negotiations and investment discussions.

Support: Syndicate members may provide ongoing support to the startup in the form of mentorship, strategic guidance, and introductions to potential partners or clients.

Investment syndicates provide a way for individual investors to participate in larger investment deals that they might not be able to access on their own. Additionally, they allow startups to benefit from the collective wisdom and financial resources of a group of investors, potentially increasing their chances of success.

Investors Rights Agreement. An Investor Rights Agreement (IRA) is a legal document that outlines the rights and obligations of investors in a company. This agreement is commonly used in startup and early-stage companies where multiple investors, including angel investors, venture capitalists, or other entities, contribute capital in exchange for equity or ownership stakes in the company.

The specifics of an Investor Rights Agreement can vary, but it typically covers several key areas:

Information Rights: Investors often have the right to receive certain financial and operational information about the company on a regular basis. This could include financial statements, business plans, and updates on significant company developments.

Approval Rights: In some cases, major decisions such as mergers, acquisitions, or changes to the company’s structure may require the approval of a certain percentage of investors. These rights protect the interests of investors in significant company events.

Pre-emptive Rights: Investors might have the opportunity to maintain their ownership percentage in future rounds of funding. If the company issues new shares, investors with pre-emptive rights can purchase additional shares to prevent dilution of their ownership stake.

Board Representation: Larger investors may negotiate the right to have a representative on the company’s board of directors. This gives them a direct say in the company’s decision-making processes.

Exit Rights: The agreement might outline the rights of investors when the company is sold or goes public. This can include the right to participate in the sale process or the distribution of proceeds from the sale.

Drag-Along Rights: These rights allow majority shareholders to force minority shareholders to join in the sale of the company. This is usually done to facilitate a smoother acquisition process.

Tag-Along Rights: Conversely, tag-along rights allow minority shareholders to join a sale initiated by majority shareholders. This ensures that minority shareholders are not left out of significant exit opportunities.

Investor Rights Agreements are crucial for both investors and entrepreneurs as they provide a clear framework for the relationship between the two parties. These agreements help in preventing misunderstandings and conflicts by establishing the rights and responsibilities of each party involved in the investment. It’s highly recommended for both parties to seek legal counsel when drafting and negotiating these agreements to ensure that their interests are adequately protected.

Issuer. In finance, an issuer refers to an entity, typically a company or a government, that issues financial securities like stocks, bonds, or other financial instruments to the public in order to raise capital.

Corporate Issuers: Companies issue stocks and bonds to raise funds for various purposes, such as expanding operations, funding research and development, or paying off existing debt. When a company issues stocks, investors buy shares in the company, becoming partial owners. When bonds are issued, investors essentially lend money to the company in exchange for regular interest payments and the return of the principal amount at maturity.

Government Issuers: Governments, both national and local, also issue bonds to raise funds for public projects, infrastructure development, or to cover budget deficits. Investors who buy government bonds are essentially lending money to the government in exchange for periodic interest payments and the return of the principal amount at maturity.

Municipal Issuers: Local governments and their agencies, such as cities or school districts, can also be issuers. They issue municipal bonds to fund public projects like schools, highways, or water treatment plants.

Special Purpose Vehicles (SPVs): Sometimes, companies create special purpose vehicles to issue securities for specific projects. These entities are designed to isolate financial risk and protect the parent company from potential losses related to the project.

Investors buy these securities from the issuer, and the issuer uses the funds raised from these transactions to finance its activities or projects. The relationship between the issuer and investors is governed by legal agreements that outline the terms of the securities, including interest rates, maturity dates, and other conditions.

K-1. Form K-1, also known as Schedule K-1, is a tax document used in the United States to report the income, deductions, and credits of a business partnership or a limited liability company (LLC) with multiple members. It is filed with the Internal Revenue Service (IRS) along with the partnership’s or LLC’s tax return, and a copy is provided to each partner or member.

The purpose of Form K-1 is to distribute the income, losses, deductions, and credits of the partnership or LLC among its partners or members, who then report this information on their individual tax returns. Each partner or member is responsible for paying taxes on their share of the partnership’s or LLC’s income.

Form K-1 includes various sections that detail the partner’s or member’s share of different items, such as ordinary business income, rental income, interest income, capital gains, and losses, among others. It also provides information about deductions, credits, and other tax items that are allocated to the partner or member.

It’s important for individuals receiving Form K-1 to accurately report the information from the form on their personal tax returns to ensure compliance with tax regulations. Keep in mind that tax laws and forms may change, so it’s always a good idea to consult with a tax professional or refer to the latest IRS guidelines for the most current information.

Key Man Insurance. Key man insurance, also known as key person insurance, is a type of life insurance policy that a company purchases on the life of a key employee or executive. The purpose of key man insurance is to financially protect the business in the event of the death or disability of the key person.

A key person is someone whose skills, knowledge, experience, or leadership are crucial to the company’s continued success. This could be a business owner, founder, key executive, or employee with specialized skills or expertise that are vital to the company’s operations and revenue generation.

If the key person covered by the insurance policy dies or becomes disabled, the insurance payout can be used by the company to cover various costs and losses, such as:

Recruitment and Training: Funds can be used to find and train a replacement for the key person.

Loss of Profits: If the company experiences a drop in revenue due to the key person’s absence, the insurance can cover these losses.

Loans and Debts: The payout can be used to pay off business loans, debts, or other financial obligations.

Employee Benefits: It can also be used to provide employee benefits to retain key employees who might be concerned about the company’s stability after the loss of the key person.

Reassuring Stakeholders: Having key man insurance can provide confidence to investors, creditors, and other stakeholders that the business is financially protected against the loss of a key person.

The specific terms, coverage, and beneficiaries of key man insurance policies can vary based on the insurance provider and the needs of the business. It’s important for businesses to carefully consider their key personnel and the potential impact of their absence when deciding whether to invest in key man insurance.

Key Man Provision. A key man provision is a requirement that a certain person continues to work for a firm for a particular period of time. Investors often include this provision in investment document to ensure that key people do not leave the firm during the period of their investment.

Key Man Risk. Key man insurance, also known as key person insurance, is a type of life insurance policy that a company purchases on the life of a key employee or executive. The purpose of key man insurance is to financially protect the business in the event of the death or disability of the key person.

A key person is someone whose skills, knowledge, experience, or leadership are crucial to the company’s continued success. This could be a business owner, founder, key executive, or employee with specialized skills or expertise that are vital to the company’s operations and revenue generation.

If the key person covered by the insurance policy dies or becomes disabled, the insurance payout can be used by the company to cover various costs and losses, such as:

Recruitment and Training: Funds can be used to find and train a replacement for the key person.

Loss of Profits: If the company experiences a drop in revenue due to the key person’s absence, the insurance can cover these losses.

Loans and Debts: The payout can be used to pay off business loans, debts, or other financial obligations.

Employee Benefits: It can also be used to provide employee benefits to retain key employees who might be concerned about the company’s stability after the loss of the key person.

Reassuring Stakeholders: Having key man insurance can provide confidence to investors, creditors, and other stakeholders that the business is financially protected against the loss of a key person.

The specific terms, coverage, and beneficiaries of key man insurance policies can vary based on the insurance provider and the needs of the business. It’s important for businesses to carefully consider their key personnel and the potential impact of their absence when deciding whether to invest in key man insurance.

Lateral Thinking. Lateral thinking involves looking at things from a perspective that is significantly different from one’ ordinary perspective.

Lead Investor. A lead investor, also known as a lead venture capitalist or lead angel investor, is an individual or firm that takes the primary role in a funding round for a startup company. When a startup seeks funding, especially in the context of venture capital or angel investing, there might be several investors interested in contributing capital. Among them, one investor often assumes the role of the lead investor.

Here are the key aspects of a lead investor’s role:

Primary Financial Contributor: The lead investor typically contributes a significant portion of the total funding sought by the startup. They might invest a substantial amount of money in the company.

Due Diligence: Lead investors usually conduct thorough due diligence on the startup, evaluating its business model, financials, team, market potential, and other relevant factors. This due diligence helps them assess the risk and potential return on investment.

Negotiating Terms: The lead investor often negotiates the terms of the investment on behalf of all investors participating in the funding round. This includes determining the valuation of the company, the equity stake the investors will receive, and any other conditions attached to the investment.

Setting the Valuation: The lead investor’s assessment of the startup’s value often sets the valuation for the entire funding round. Other investors may follow the lead investor’s valuation or negotiate adjustments based on their own assessments.

Providing Expertise: In addition to funding, lead investors often provide valuable strategic advice, industry expertise, and connections to help the startup grow and succeed. Their involvement can extend beyond the financial aspects.

Instilling Confidence: Having a reputable lead investor on board can instill confidence in other investors. It signals that an experienced investor has thoroughly vetted the opportunity and believes in the startup’s potential for success.

Board Representation: In many cases, the lead investor secures a seat on the startup’s board of directors. This involvement allows them to actively participate in major decisions and provide guidance directly.

Having a lead investor is often seen as a positive sign by other potential investors because it implies that a knowledgeable and experienced party has endorsed the startup’s prospects. This can make it easier for the startup to attract additional funding from other investors.

Lean Business Principles. Lean business concepts are principles and practices derived from lean manufacturing and applied to the world of business. The concept originated from the manufacturing industry, specifically from the Toyota Production System, and has been widely adopted in various sectors. The fundamental idea behind lean business is to maximize customer value while minimizing waste. Here are some key concepts associated with lean business:

Value

Lean businesses focus on delivering value to the customer. Value is defined by the customer and includes features of a product or service that they are willing to pay for.

Value Stream

The value stream represents all the steps and processes involved in delivering a product or service to the customer. Lean businesses analyze the value stream to identify areas of improvement and eliminate waste.

Waste Elimination

Lean business identifies and eliminates different types of waste, including overproduction, waiting time, unnecessary transportation, over-processing, excess inventory, unnecessary motion, and defects (often remembered by the acronym TIMWOOD).

Continuous Improvement (Kaizen)

Lean businesses emphasize the concept of continuous improvement, where employees at all levels are encouraged to constantly look for ways to improve processes and reduce waste.

Just-in-Time (JIT) Production

JIT production aims to produce goods or services at the exact time they are needed. This reduces excess inventory, carrying costs, and waste associated with storage.

Pull System

In a pull system, production is based on customer demand. Products or services are only produced when there is an actual order, preventing overproduction.

Respect for People

Lean businesses value their employees and involve them in the decision-making processes. Employees are seen as valuable resources who can contribute to process improvement.

Visual Management

Lean businesses often use visual tools like Kanban boards to represent workflow visually. This enhances communication and makes it easier to identify problems and bottlenecks.

Poka-Yoke (Error Proofing)

Lean techniques include designing processes and systems in a way that prevents errors or mistakes, reducing defects and rework.

Standardization

Lean businesses create standardized work processes to ensure consistency and quality. Standardization also makes it easier to identify deviations and areas for improvement.

By incorporating these concepts into their operations, businesses can become more efficient, reduce costs, improve quality, and respond more effectively to customer needs and market changes.

Letter of Intent. A letter of intent (LOI) is a document commonly used in business and academic settings to outline the preliminary understanding between two or more parties. It expresses the intention of the parties involved to enter into a formal agreement or contract in the future, but it does not create a legally binding commitment between the parties.

In a business context, a letter of intent is often used during the negotiation phase of a deal or transaction. It outlines the key terms and conditions that the parties have agreed upon, such as the price, timeline, and other important details. This document helps the parties involved clarify their understanding and ensure they are on the same page before moving forward with a more detailed and formal agreement.

In an academic context, a letter of intent is used by students applying for admission to universities or graduate programs. It is a document where the applicant expresses their intention to apply to a particular institution and outlines their qualifications, achievements, and reasons for wanting to attend the specific program.

It’s important to note that while a letter of intent is not a legally binding contract, it is still a formal document that should be crafted carefully and accurately to avoid misunderstandings between the parties involved.

Limited Partners. Limited partners are investors who invest in an investment. Distinguished from General Partners.

Lindy Effect. Lindy Effect suggests that the longer has something has existed, the greater the likelihood that it will continue to exist.

Liquidation Preference. Liquidation preference is a term commonly used in the context of venture capital and startup financing. It refers to the order in which investors are paid in the event of a company’s liquidation or sale. When a startup raises funding from investors, they often issue preferred stock to those investors. This preferred stock typically comes with certain rights and privileges, one of which is the liquidation preference.

In the event of a liquidation event, such as the sale or acquisition of the company, the proceeds from the liquidation are distributed to various stakeholders. The holders of preferred stock with liquidation preference rights are entitled to receive a specific amount of money from the proceeds before the common stockholders (usually the founders and employees) receive anything. This specific amount is the liquidation preference.

There are different types of liquidation preferences:

Non-participating liquidation preference: Investors are entitled to receive either their liquidation preference or their share of the remaining proceeds with common stockholders, whichever is higher. They can choose the higher amount but not both.

Participating liquidation preference: Investors receive their liquidation preference first and then also participate in the distribution of the remaining proceeds along with common stockholders.

Liquidation preferences are designed to protect investors, especially in the case of a downside scenario where the company is sold for a lower valuation than anticipated. It ensures that investors have a certain level of protection and can recoup their investment before the founders and other equity holders receive any proceeds from the sale.

Liquidity. Liquidity refers to the degree to which an asset or security can be quickly bought or sold in the market without significantly affecting its price. In simpler terms, it measures how easily an asset can be converted into cash or cash-equivalent securities without causing a significant change in its price.

Assets that can be quickly bought or sold with minimal price fluctuations are considered highly liquid. Cash is the most liquid asset, as it can be immediately used for transactions. Marketable securities, such as publicly traded stocks and government bonds, are also highly liquid because they can be bought or sold on financial markets with relative ease.

On the other hand, assets like real estate properties or collectibles are considered less liquid because they may take a long time to sell and their prices can be highly variable.

Liquidity is crucial for financial markets and the economy as a whole. It ensures that markets function smoothly and allows investors to enter or exit positions without significantly impacting prices. Central banks and financial institutions often monitor and manage liquidity in the economy to prevent financial crises and maintain stability.

Liquidity Event. A liquidity event refers to the process through which a company or an investor converts its assets into cash or cash-equivalent securities. In the context of startups and venture capital, a liquidity event usually occurs when a startup or a privately-held company is bought by another company or when it goes public through an initial public offering (IPO).

Liquidity events are significant for investors because they provide an opportunity to exit their investments and realize profits. For example, if an investor has equity in a startup, a liquidity event allows them to sell their shares and convert them into cash. Common types of liquidity events include:

Acquisition: When a larger company buys a smaller company, often for a combination of cash and stock or other assets.

Initial Public Offering (IPO): This is the first sale of stock by a company to the public. It allows a company to raise capital by issuing shares of stock to the public.

Secondary Market Transactions: Even if a company is not publicly traded, there are secondary markets where private company shares can be bought and sold. This is less common than public markets but still represents a form of liquidity for investors.

Merger: A merger occurs when two companies combine to form a new entity. Shareholders of the merging companies often receive shares in the new entity or a cash equivalent.

Management Buyout (MBO) or Employee Stock Ownership Plan (ESOP): In these scenarios, the company’s management team or its employees buy the company from its owners, providing liquidity to the previous owners.

The timing and manner of a liquidity event depend on various factors, including the company’s financial health, market conditions, and the preferences of its founders and investors. These events are critical points in the life cycle of a company, often determining the financial success of its founders and early investors.

Lock up Period. A lock-up period, also known as a lock-up agreement, is a predetermined amount of time following a company’s initial public offering (IPO) or a secondary offering during which company insiders, such as employees and early investors, are restricted from selling their shares in the public market.

During the lock-up period, these insiders are prohibited from selling their shares, which helps to stabilize the stock price shortly after the company goes public. Lock-up periods are established to prevent a sudden influx of shares into the market, which could lead to a significant drop in the stock price due to oversupply.

Lock-up periods typically last for 90 to 180 days after the IPO, although the duration can vary depending on the agreement between the company and the underwriters. Once the lock-up period expires, insiders are free to sell their shares in the public market if they choose to do so. This can sometimes result in increased volatility in the stock’s price as a large volume of additional shares becomes available for trading.

Limited Partner Agreement. A limited partner agreement is a legal document that outlines the rights, responsibilities, and obligations of limited partners in a limited partnership. A limited partnership is a type of business structure where there are two types of partners: general partners and limited partners.

General Partners: These individuals or entities are responsible for managing the day-to-day operations of the business. They also bear the financial risks and liabilities of the partnership. In essence, they have unlimited liability, meaning their personal assets can be used to satisfy business debts and obligations.

Limited Partners: Limited partners, on the other hand, contribute capital to the business but do not participate in its management. They are essentially investors. Limited partners’ liability is limited to the amount of their investment in the partnership. They are not personally liable for the partnership’s debts beyond their investment, and their involvement in the partnership’s activities is typically restricted.

The limited partner agreement specifies the following:

Capital Contributions: The agreement outlines how much capital each limited partner is contributing to the partnership.

Profit and Loss Sharing: It defines how profits and losses will be allocated among the partners. Limited partners usually receive a share of the profits in proportion to their investment.

Management Limitations: Details the extent to which limited partners can participate in the management of the business. Typically, limited partners cannot participate in day-to-day operations without losing their limited liability status.

Distribution of Assets: Explains how the partnership’s assets will be distributed if the partnership is dissolved.

Duration of the Partnership: States the duration of the partnership, whether it is for a specific period or indefinite.

Transfer of Partnership Interests: Outlines the conditions under which limited partners can sell or transfer their partnership interests.

Rights and Responsibilities: Specifies the rights and responsibilities of limited partners, including voting rights on major decisions affecting the partnership.

Dissolution and Winding Up: Describes the process to be followed if the partnership is dissolved, including how remaining assets will be distributed.

Limited partner agreements are important because they provide legal protection for limited partners and help prevent misunderstandings between partners regarding their roles and expectations within the partnership. These agreements are usually drafted with the assistance of legal counsel to ensure they comply with applicable laws and regulations.

Management Rights Letter. A Management Rights Letter is a document that is entered into by an investor and a company. This letter gives the investor certain management rights that allow it to substantially participate in, or substantially influence the conduct of, the management of the portfolio company.

Maximally Tolerable Pain Point. Stopgap approach to problems which involves removing parts of the problem until an acceptable situation is reached which is often not a complete resolution of the problem.

Memorandum of Understanding. A Memorandum of Understanding (MOU) is a document that outlines the broad agreement between two or more parties. It expresses a convergence of will between the parties, indicating an intended common line of action. An MOU is not legally binding in the same way a contract is, but it indicates a willingness to move forward with a contract. It’s often the first step towards a formal agreement, outlining the terms and details of the understanding between the parties involved.

Here are the key points about an MOU:

Non-Binding: An MOU is generally not legally binding, but it signifies a sincere intention to move forward with a certain plan or project.

Outline of Agreement: It outlines the specific understanding between the parties. This can include the goals, scope, roles and responsibilities, timelines, and any other important aspects of the agreement.

Flexibility: MOUs are often used in situations where the parties involved want to have a preliminary understanding but need flexibility before a formal agreement is made.

No Exchange of Value: MOUs typically do not involve the exchange of money or other valuables, as they are not contracts in a legal sense.

Intent of Cooperation: MOUs are frequently used in international relations, business, and research collaborations. They demonstrate a mutual intent to work together towards common goals.

Framework for Formal Agreement: In many cases, an MOU serves as a framework upon which a formal, legally binding contract or agreement can be built. It helps the parties involved to understand each other’s expectations before entering into a binding contract.

It’s important to note that while an MOU is not legally binding, it is still a serious document that reflects the parties’ intentions, and violating the terms of an MOU could damage a party’s reputation and future business relationships.

Merchandising Arbitrage. Taking advantage of price differences in goods across different markets.

Merger Arbitrage. Exploiting price discrepancies between a stock’s current market price and its expected future price due to an anticipated event, such as a merger or acquisition.

Milestone. In the context of venture capital, a milestone refers to a significant event or achievement in the development of a startup company. These milestones are predetermined goals set by the startup and its investors, usually agreed upon during the investment negotiation process. Achieving these milestones is often linked to the disbursement of funds from the venture capital firm to the startup.

Milestones can vary widely depending on the nature of the startup, its industry, and its specific business model. However, they typically represent crucial stages in the company’s growth and are used to measure progress. Common examples of milestones in venture capital include:

Product Development: Developing a prototype or minimum viable product (MVP) that demonstrates the viability of the company’s product or service.

Market Validation: Conducting market research or launching a pilot program to validate the demand for the product or service in the target market.

User Acquisition: Achieving a certain number of users, customers, or subscribers, demonstrating market traction and user interest.

Revenue Generation: Generating initial revenues, which could be through sales, partnerships, or other monetization strategies.

Partnerships and Alliances: Forming strategic partnerships with other companies or organizations that can help the startup expand its reach or enhance its offerings.

Regulatory Approvals: Obtaining necessary certifications or approvals, especially in industries like healthcare, biotech, or fintech, where regulatory compliance is crucial.

Scaling Operations: Scaling up production, increasing workforce, or expanding to new markets, indicating the startup’s ability to handle growth.

Technology Development: Reaching specific technological milestones, such as developing proprietary technology, algorithms, or intellectual property.

User Engagement: Demonstrating high user engagement metrics, such as active users, retention rates, or user satisfaction surveys.

Profitability: Achieving profitability or positive unit economics, where the revenue from each customer surpasses the cost of acquiring and servicing that customer.

When a startup achieves these milestones, it not only signifies progress and potential success but also often leads to additional rounds of funding, higher valuations, and increased credibility in the eyes of investors and the market.

Multiple on Invested Capital (MOIC). This is a metric used to calculate investment return. It compares the amount originally invested with the total amounts received over time. The formula for calculating MOIC is Total Cash Inflows / Total Cash Outflows.

Net Burn Rate. Net Burn Rate is a company’s revenues less its expenses. It is usually calculated on a monthly basis.

No-Shop Clause. A “no-shop clause,” also known as a “no-shop provision” or “exclusivity clause,” is a contractual agreement used in mergers and acquisitions (M&A) transactions. It is typically included in a letter of intent (LOI) or acquisition agreement between a buyer and a seller.

This clause prohibits the seller from soliciting or entertaining offers from other potential buyers for a specified period of time. During this period, the seller is legally bound to negotiate exclusively with the buyer who is named in the agreement. The purpose of a no-shop clause is to give the buyer a certain level of assurance that the seller will not back out of the deal or seek better offers from other parties while the buyer conducts due diligence and negotiates the final terms of the acquisition.

No-shop clauses are often negotiated to strike a balance between the buyer’s need for exclusivity during the deal-making process and the seller’s interest in ensuring that the proposed deal is fair and attractive. However, these clauses are also subject to negotiation, and sellers may seek exceptions or conditions that allow them to consider alternative offers under specific circumstances, such as if a more favorable offer is received. The specific terms of a no-shop clause can vary widely depending on the negotiations between the parties involved in the M&A transaction.

Non-Binding. Refers to something that is not legally binding on the party that signs it. Term sheets for investments are often non-binding and subject to approval of a transaction by the Board of Directors and the execution of definitive documentation.

Non-Binding Term Sheet. Term sheet that is not binding on the parties. See Binding Term Sheet and Definitive Documentation.

Non-Disclosure Agreement. Document signed by parties that prevent confidential information from being disclosed to third parties.

Novelty Bias. The tendency to favor something simply because it is new.

Open Source. Open source is source code that is made freely available for possible modification and redistribution. 

Operating Agreement. An operating agreement is a legal document that outlines the structure and operating procedures of a limited liability company (LLC). It is a crucial document for LLCs, as it establishes the rights, responsibilities, and relationships of the members and managers. Here are some key points about operating agreements in the context of investing:

Legal Requirement: While most jurisdictions do not legally require an LLC to have an operating agreement, it is highly recommended to have one in place. Operating agreements are essential, especially when multiple individuals or entities are involved in the business.

Ownership and Management: The operating agreement defines the ownership interests of the members in the LLC and outlines how the company will be managed. It specifies the roles and responsibilities of managers and members, and how profits and losses will be allocated.

Decision-Making: The document outlines how major business decisions will be made. This can include procedures for voting on important matters, the quorum needed for decision-making, and how disputes will be resolved.

Profit Distribution: One of the critical aspects of any business is how profits and losses are divided among the members. The operating agreement will specify the method of distribution, which might be based on ownership percentages or other criteria as agreed upon by the members.

Transfer of Membership: If a member wants to sell or transfer their ownership stake, the operating agreement can outline the procedures for this process. It might include rights of first refusal, valuation methods, and other relevant details.

Dissolution: In the unfortunate event that the LLC needs to be dissolved, the operating agreement can provide guidelines on how this process will be carried out, including the distribution of remaining assets among the members.

Investor Protections: For investors in an LLC, the operating agreement is crucial as it can include protective clauses. These might include restrictions on certain activities, approval rights for specific decisions, or preferences in terms of profit distributions.

Investors should carefully review the operating agreement before investing in an LLC. It is recommended to consult with legal and financial professionals who are experienced in business investments to ensure that the operating agreement protects the investor’s interests and clearly defines the terms of the investment.

Option Pool. An option pool, often referred to as an employee stock option pool (ESOP) or stock option pool, is a reserve of company shares set aside to grant as stock options to employees, advisors, consultants, and other key stakeholders. These stock options are typically used as a part of the overall compensation package to attract and retain talent, especially in startup companies.

When a company is founded, it might not have enough resources to offer competitive salaries to early employees or attract experienced professionals. In such cases, the company can create an option pool, which is a percentage of the company’s total shares, reserved for future stock option grants. These options give employees the right to purchase company shares at a predetermined price, often referred to as the strike price or exercise price.

Creating an option pool serves several purposes:

Employee Incentive: Stock options align the interests of employees with those of the company’s shareholders. When the company performs well and its stock value increases, employees with stock options benefit directly.

Attracting Talent: Startups and high-growth companies often use stock options to attract skilled professionals who are willing to trade a portion of their potential salary for the opportunity to benefit from the company’s growth.

Retaining Employees: Stock options can also be used as a retention tool. Employees are more likely to stay with a company if they have a stake in its success through stock options.

Motivation: Stock options can motivate employees to work towards the company’s success, as their financial rewards are tied to the company’s performance and valuation.

When a company decides to create or expand its option pool, existing shareholders’ ownership percentages can be diluted. To compensate for this, investors in funding rounds often require the option pool to be factored into the pre-money valuation of the company, effectively diluting the founders and earlier investors instead of the new investors.

Option pools are managed by the company’s board of directors and are typically administered according to a stock option plan, which outlines the terms and conditions of the options, including vesting schedules, exercise prices, and other relevant details.

Organizational Chart. An organizational chart is a document which sets for the positions in an organization and the relationship between them.

Out-of-the-Box Thinking. Thinking approach that represents a significant deviation from one’s typical thought frame of reference.

Overallotment Option. An overallotment option, also known as a greenshoe option, is a provision in an initial public offering (IPO) underwriting agreement. It gives the underwriters the option to purchase additional shares from the issuer at the offering price. This option allows the underwriters to stabilize the stock price after the IPO by covering short positions or preventing the price from dropping below the offering price.

Here’s how it works:

Issuer: A company decides to go public and issues a certain number of shares to the public through an IPO.

Underwriters: To ensure the success of the IPO, the issuer partners with underwriting investment banks. These banks agree to buy the shares from the issuer at a certain price and then sell them to the public.

Overallotment Option: The underwriters are often granted an overallotment option, which allows them to purchase additional shares (typically up to 15% of the original offering size) at the IPO price from the issuer. This option is exercised if there is high demand for the shares in the secondary market after the IPO.

Stabilizing the Stock Price: If the stock price rises significantly after the IPO, the underwriters can exercise the overallotment option to buy more shares at the offering price. By flooding the market with these additional shares, the underwriters can help stabilize the stock price. This benefits both the issuer and investors because it prevents extreme volatility in the stock price during the initial trading days.

Covering Short Positions: If the stock price falls below the offering price, the underwriters can buy shares at the market price and cover their short positions using the shares acquired through the overallotment option.

In summary, the overallotment option is a tool used by underwriters to manage the price and demand for newly issued shares in the stock market immediately after an IPO.

Partial Equilibrium Theory. Partial equilibrium is a state of equilibrium between supply and demand in a single market as opposed to the economy as a whole. Here is a short video about Partial Equilibrium Theory.

Pari Pasu. “Pari passu” is a Latin term that translates to “on equal footing” in English. In the context of investments, it refers to the equal ranking of different securities, debts, or obligations. When securities are said to rank pari passu, it means they have equal claims on a company’s assets and earnings.

Pari passu clauses are common in legal and financial agreements to ensure fairness and equal treatment among different parties, especially in the case of insolvency or bankruptcy where the assets of a company are distributed among its creditors.

Participating Preferred. Participating preferred stock is a type of preferred stock that gives its holders the right to receive dividends before common stockholders receive any dividends. Additionally, participating preferred stockholders have the potential to receive extra dividends beyond the fixed dividend rate if the company achieves a certain level of profitability.

When a company that issues participating preferred stock is sold or undergoes a liquidity event, participating preferred stockholders have the right to receive their initial investment back (the original purchase price of the shares) and then also participate in the distribution of remaining proceeds alongside common stockholders. This means that participating preferred stockholders receive both their fixed dividend and a share of the remaining profits, which gives them an advantage over common stockholders in terms of potential higher returns on their investment.

Participating preferred stock is a way for investors to balance the safety of a fixed dividend payment with the potential for additional returns if the company performs well. The exact terms of participating preferred stock, including the fixed dividend rate and the conditions for additional participation in profits, are specified in the company’s offering documents and shareholder agreements.

Pay to Play. Pay to play” in investing refers to a situation where individuals or organizations must make payments or contributions in order to participate in an investment opportunity or to receive special treatment from investment managers or firms. This practice can be controversial and may involve unethical or illegal activities. In some cases, it can lead to conflicts of interest and unfair advantages for those who can afford to pay, disadvantaging smaller investors or creating an uneven playing field.

In the context of investment funds, “pay to play” can occur when fund managers require investors to make additional payments, beyond the standard management fees, in order to access certain investment opportunities or receive favorable terms. This practice can erode returns for investors and create a system where those with more resources have preferential access to lucrative investments.

Regulators often have rules and regulations in place to prevent pay-to-play practices and ensure fair and equal access to investment opportunities for all investors. It’s essential for investors to be aware of these regulations and to carefully review any investment agreements to identify and avoid such arrangements.

PEG Ratio. The PEG ratio, or Price/Earnings to Growth ratio, is a financial metric used to assess a stock’s valuation while taking into account the company’s earnings growth. It is calculated by dividing the price-to-earnings (P/E) ratio by the annual earnings per share (EPS) growth rate.

Piggyback Registration Rights. Piggyback registration rights, also known as “demand registration rights,” are a type of registration right that allows minority shareholders or investors to register their shares for public sale along with a larger block of shares that a major shareholder or the issuing company intends to register.

Here’s how piggyback registration rights work:

Major Shareholder or Company Initiates Registration: The major shareholder (often an institutional investor or the company itself) decides to sell a significant number of its shares to the public or conduct an initial public offering (IPO).

Minority Shareholders’ Rights: If minority shareholders have piggyback registration rights, they have the option (but not the obligation) to include their shares in the registration. This means that their shares can be offered to the public alongside the major shareholder’s shares.

Benefits to Minority Shareholders: Piggyback registration rights benefit minority shareholders because they allow these shareholders to sell their shares publicly without having to initiate and bear the costs of a separate registration process. It provides them with an opportunity to exit their investment under favorable market conditions.

Registration Process: During the registration process, the securities regulatory authority reviews the registration statement, ensuring that it complies with all relevant regulations and disclosure requirements. Once approved, the shares can be sold to the public.

It’s important for investors to carefully review the terms and conditions associated with piggyback registration rights, as these rights can vary widely and may include limitations on the number of shares that can be registered, the timing of registrations, and the expenses associated with the registration process. These rights are typically outlined in the company’s shareholder agreement or investment agreement.

Pitch Deck. A pitch deck is a document prepared by companies to support the capital raising process.

Pivot. A pivot is a shift in a business’s strategy which can include a change in a product offering, business operations, or business model.

Pledge. A pledge of shares in investing refers to using shares of a company as collateral to secure a loan or another form of credit. When an investor pledges shares, they retain ownership and continue to receive benefits such as dividends and voting rights. However, if the investor fails to fulfill the obligations agreed upon in the lending agreement, the lender may have the right to sell the pledged shares to recover the loan amount.

Pledging shares is a common practice, especially among investors who need liquidity but do not want to sell their shares outright. By pledging the shares as collateral, they can obtain funds for various purposes, such as investing in other opportunities, funding business operations, or meeting personal financial needs.

It’s important for investors to carefully consider the terms and conditions of the lending agreement when pledging shares. If the value of the pledged shares falls significantly, investors may be required to provide additional collateral or repay a portion of the loan to maintain the loan-to-value ratio specified in the agreement. Failure to do so could result in the lender selling the shares to cover the outstanding loan amount, which could lead to financial losses for the investor.

Portfolio Company. One of the companies that a fund has invested in.

Post-Money Valuation. Post-value valuation is a valuation of company that includes money that investor have investors in a company during the funding round. For example if the value of a company is $1,000,000 and an investment invests $750,000, the post-money valuation of the company is $1,750,000.

Preemptive Rights. Preemptive rights, also known as pre-emption rights or subscription rights, are a privilege given to existing shareholders that allows them to maintain their ownership percentage in a company by purchasing additional shares before the company offers them to the public or to external investors.

When a company issues new shares, existing shareholders with preemptive rights have the opportunity to buy these shares before they are offered to the general public. This helps prevent dilution of their ownership stake in the company.

Preemptive rights are usually outlined in a company’s articles of incorporation or shareholder agreement. The specifics, such as the number of shares offered, the price, and the timeframe within which existing shareholders can exercise their preemptive rights, are typically detailed in these documents.

By exercising their preemptive rights, shareholders can maintain their proportional ownership in the company and ensure that their investment is not diluted by the issuance of new shares to external parties. If existing shareholders choose not to exercise their preemptive rights, the new shares are offered to external investors, potentially leading to a dilution of the ownership stake of existing shareholders.

Preferred Stock. Preferred stock, also known as preference shares or preferred shares, represents a type of ownership in a company. Unlike common stock, preferred stockholders have a higher claim on the company’s assets and earnings. Here are some key points about preferred stock:

Dividends

• Fixed Dividends: Preferred stockholders receive fixed dividends, unlike common stockholders whose dividends can vary.
• Priority in Dividends: Preferred dividends are paid out before dividends to common stockholders. If a company is unable to pay all dividends, preferred shareholders are entitled to receive their dividends before common shareholders receive anything.

No Voting Rights

• Preferred stockholders usually do not have voting rights in the company’s decisions as common stockholders do. This means they don’t have a say in the company’s management or policies.

Fixed Par Value

• Preferred stocks have a par value (face value), which is the price at which they are issued. However, market prices of preferred stocks can fluctuate based on interest rates and the issuing company’s financial health.

Less Volatile than Common Stock

• Preferred stocks are generally less volatile than common stocks. Their prices tend to fluctuate less because they offer fixed dividends.

Callable Preferred Stocks

• Some preferred stocks are callable, meaning the issuer has the option to buy back the shares at a specific price after a certain date. This feature can impact the potential returns for investors.

Cumulative vs. Non-Cumulative

• Cumulative Preferred Stock: If a company misses a dividend payment, it accumulates and must be paid to preferred shareholders before common shareholders receive dividends.
• Non-Cumulative Preferred Stock: Missed dividends do not accumulate. If the company cannot pay dividends, preferred shareholders may lose out on those payments permanently.

Preferred Stock as Hybrid Security

• Preferred stock shares some characteristics with both debt and equity. Like equity, it represents ownership, but like debt, it pays fixed dividends.

Suitable for Income Investors

• Due to the stable dividend payments, preferred stocks are often favored by income-oriented investors who seek regular income from their investments.

It’s important to note that the exact terms and conditions of preferred stocks can vary widely between different issuers. Investors should carefully review the prospectus and terms of the preferred stock offering before investing.

Over-Innovating. Refers to a situation where an innovation that solves a problem also negatively affects things that are working well.

Preferred Shares. Special type of shares in a company where dividends are paid before they are paid to common stock holders.

Pre-Money Valuation. Valuation of a company that does not include amounts to be invested by an investor in a funding round.

Price Anti-dilution Protection. Anti-dilution protection, also known as anti-dilution provision, is a term used in finance and investment to protect existing shareholders from dilution of their ownership stakes in a company. Dilution occurs when a company issues new shares, which can happen for various reasons, such as raising additional capital or issuing stock options to employees. When new shares are issued, the ownership percentage of existing shareholders decreases because the total number of outstanding shares increases.

Anti-dilution protection mechanisms, often found in investment agreements and stock option plans, aim to safeguard existing shareholders from the impact of dilution. There are two main types of anti-dilution protection:

Full Ratchet Anti-dilution: In a full ratchet anti-dilution provision, if the company issues new shares at a price lower than the price at which previous investors purchased their shares, the conversion or exercise price of existing securities (such as convertible preferred stock or stock options) is adjusted downward to match the new, lower price. This means existing investors are protected fully from any dilution, as their conversion or exercise price is adjusted to the lowest price at which new shares are issued.

Weighted Average Anti-dilution: Weighted average anti-dilution protection is a more complex mechanism. When new shares are issued at a lower price, the conversion or exercise price of existing securities is adjusted based on a weighted average of the old and new share prices. This method takes into account the number of new shares issued and the price at which they are issued, as well as the number of existing shares outstanding and their respective prices. Weighted average anti-dilution provisions are considered to be more fair than full ratchet anti-dilution, as they provide a more balanced adjustment to the conversion or exercise price.

Anti-dilution protection is an important clause for investors, especially in early-stage startups where there is a higher risk of future dilution due to the need for multiple rounds of fundraising. It helps to maintain the ownership percentage and voting power of existing investors in the company, ensuring that they are not unfairly penalized when the company issues new shares at a lower valuation.

Protective Provisions. Protective provisions in investments are contractual clauses or conditions designed to safeguard the interests of investors, particularly minority investors, in a company. These provisions provide investors with certain rights and controls over significant company decisions, even if they do not have a majority stake. Protective provisions are commonly found in shareholders’ agreements, especially in venture capital and private equity deals. Here are some common examples of protective provisions:

Veto Rights: Investors may have the right to veto specific corporate actions, such as mergers, acquisitions, or significant asset sales. This ensures that major decisions cannot be made without the agreement of the investors.

Board Representation: Investors, especially those holding a substantial stake in the company, may have the right to appoint members to the company’s board of directors. This representation gives them a say in the company’s strategic decisions.

Approval of Budgets and Business Plans: Investors may have the right to approve annual budgets, business plans, and major expenses. This control helps in ensuring that the company’s financial resources are used prudently.

Protective Voting Rights: Certain key decisions might require a higher majority vote, where the investor’s voting power is crucial. Protective provisions can stipulate that certain decisions require the approval of a supermajority of shareholders, providing minority investors with a protective shield.

Anti-Dilution Protection: Protective provisions can include anti-dilution mechanisms to prevent existing investors from being excessively diluted if the company issues more shares in the future at a lower valuation.

Information Rights: Investors may have the right to access certain financial and operational information about the company regularly. This transparency ensures that investors are aware of the company’s performance and can make informed decisions.

Drag-Along and Tag-Along Rights: In the event of a sale of the company, drag-along rights allow majority shareholders to force minority shareholders to join the sale. Tag-along rights, on the other hand, allow minority shareholders to join a sale initiated by the majority shareholders on the same terms and conditions.

No-Shop and Exclusivity Agreements: Protective provisions can include clauses preventing the company from seeking other investment offers for a specified period, giving the investor time to conduct due diligence and negotiate the terms of the investment.

These protective provisions are crucial for investors, especially in startup and early-stage companies, where the risk is high, and the investors often have limited control over the company’s operations. By including these provisions in investment agreements, investors can mitigate risks and protect their investments.

Private Equity. Investment strategy that involves making investments in private companies.

Private Equity Fund. Fund that is set up to make private equity investments.

Private Placement. Private placement refers to the process of raising capital by offering shares or securities to a select group of investors instead of the general public. In a private placement, companies sell these securities directly to institutional investors or accredited investors without conducting a public offering.

Accredited investors are typically individuals or entities that meet certain criteria set by regulatory authorities, such as having a high net worth or significant investment experience. By selling securities through a private placement, companies can raise funds without the extensive regulatory requirements and public disclosure obligations that come with a public offering.

Private placements are commonly used by startups and small to medium-sized enterprises (SMEs) to raise capital for various purposes, such as expanding their business, funding research and development, or paying off existing debt. Additionally, large companies may also use private placements to sell bonds or stocks to institutional investors.

It’s important to note that private placements are governed by securities regulations in different countries, and the rules and requirements can vary significantly. Companies engaging in private placements typically work closely with legal and financial advisors to ensure compliance with relevant laws and regulations.

Private Placement Memorandum. A Private Placement Memorandum (PPM) is a legal document provided to potential investors when a company is selling securities in a business. It is used in private placements, where securities are sold directly to a small number of investors, rather than through a public offering in a stock exchange.

The PPM contains detailed information about the company, its business model, management team, financial statements, and the securities being offered. It also includes the terms and conditions of the investment, such as the minimum investment amount, the price per share or unit, and any restrictions on resale. The document is designed to provide potential investors with enough information to make an informed decision about whether to invest in the company.

The PPM serves several important purposes, including:

Disclosure: It discloses relevant information about the company’s operations, risks, and financial health. This helps investors understand what they are investing in and the associated risks.

Legal Protection: By providing comprehensive and accurate information, the company and its executives reduce the risk of legal actions from investors who might claim they were not properly informed about the investment.

Regulatory Compliance: Private placements are subject to securities regulations to protect investors. The PPM ensures that the offering complies with these regulations, which vary depending on the jurisdiction and the type of securities being offered.

Basis for Discussion: The PPM serves as a basis for discussions between the company and potential investors. It outlines the terms of the investment, which can be negotiated between the parties before the investment is finalized.

It’s important for investors to carefully read and understand the information provided in the Private Placement Memorandum before making any investment decisions. Additionally, companies must ensure that the information disclosed in the PPM is accurate and complete to comply with legal requirements and maintain the trust of investors.

Pro-Rata Rights. Pro rata rights, also known as subscription rights or pre-emptive rights, are a type of privilege given to existing shareholders of a company. These rights allow existing shareholders to maintain their proportional ownership in the company by purchasing additional shares before those shares are offered to the public or to other investors. In other words, pro rata rights ensure that existing shareholders have the opportunity to buy more shares in proportion to their existing ownership stakes before new shares are issued.

When a company decides to issue new shares, existing shareholders are given the option to buy a certain number of these new shares at a specific price, typically at a discount to the market price. This helps prevent dilution of their ownership percentage in the company. Dilution occurs when the company issues new shares to external investors without giving existing shareholders the opportunity to buy more shares. Pro rata rights protect existing shareholders from dilution by allowing them to participate in new stock offerings in proportion to their existing ownership.

For example, if you own 10% of a company and the company offers pro rata rights to its existing shareholders, you have the right to purchase 10% of the new shares being issued before they are offered to others. This way, your ownership stake in the company remains unchanged relative to other shareholders.

Pro rata rights are a common feature in the corporate world and are designed to protect the interests of existing shareholders and maintain the fairness of ownership distribution within the company.

Pro-Rata Side Letter. Document that outlines the rights and responsibilities of the parties with respect to the pro-rata allocation of investments.

Qualified IPO. An Initial Public Offering (IPO) is a process through which a private company becomes publicly traded by offering its shares to the general public on a stock exchange. When a company decides to go public, it typically works with investment banks to underwrite the offering. These banks assess the company’s financial health, business model, market conditions, and other relevant factors to determine the initial price at which the shares will be offered to the public.

A “qualified IPO” usually refers to specific criteria set by stock exchanges or regulatory authorities that allow certain benefits to the company going public. For example, under the Jumpstart Our Business Startups (JOBS) Act in the United States, a company is considered a “qualified issuer” if it meets certain conditions, such as having less than $1.07 billion in total annual revenue in its most recently completed fiscal year. Qualified issuers are eligible for reduced disclosure requirements and certain exemptions from regulatory restrictions, making it easier and less costly for them to go public.

It’s important to note that the specific requirements for a qualified IPO can vary by country and stock exchange. Companies looking to go public should consult legal and financial experts to ensure they meet all the necessary criteria and comply with applicable regulations.

Ratchet. In the context of investments, a “ratchet” typically refers to a mechanism that allows for the adjustment or modification of certain terms of an investment agreement, usually in favor of the investor. Ratchets are commonly used in venture capital and private equity deals to protect investors in case the company’s valuation decreases in future financing rounds.

Here’s how it works:

Baseline Valuation: When an investor puts money into a startup, they do so at a certain valuation. For example, if an investor invests $1 million at a valuation of $10 million, they would receive 10% equity in the company ($1 million / $10 million).

Downward Adjustment: If the company’s valuation in the next funding round is lower than the previous valuation (a down round), a ratchet clause might be triggered. In a down round, the existing investors might be given additional shares or a lower price per share to compensate for the reduced valuation. This protects the investors from dilution, ensuring that they still own a significant portion of the company even though the overall value has decreased.

Ratchets are a way to provide a safety net for early investors, encouraging them to invest by mitigating the risks associated with fluctuating valuations. However, they can be complex and are subject to negotiation between the investors and the company seeking investment.

Recapitalization. Recapitalization refers to the process by which a company changes its capital structure, often in a significant way. This restructuring can involve various methods, such as issuing new debt or equity, repurchasing existing shares, or a combination of these strategies. The primary goal of recapitalization is to improve the financial stability and efficiency of a company.

Here are a few common scenarios where recapitalization might occur:

Debt Restructuring.

• Debt Repayment: A company might issue new stock to raise funds to pay off existing debt, reducing its overall debt burden.
• Debt-to-Equity Swap: Converting debt into equity can lower interest payments and improve the balance sheet.

Equity Restructuring

• Share Repurchase: The company buys back its own shares from the market, reducing the number of outstanding shares. This often increases the value per share for existing shareholders.
• Issuing New Shares: To raise capital, a company might issue new shares, diluting the ownership of existing shareholders but providing funds for investments or debt reduction.

Financial Reorganization

• Mergers and Acquisitions: In the process of acquiring another company, a firm might need to recapitalize to fund the acquisition or to integrate the new entity effectively.
• Divestitures: Selling off divisions or assets can lead to recapitalization, as the company adjusts its financial structure based on the reduced scale of operations.

Balance Sheet Optimization

• Optimizing Capital Mix: Recapitalization helps in finding the right balance between debt and equity to reduce the cost of capital and maximize shareholder value.
• Risk Management: Adjusting the capital structure can help manage financial risk, especially in changing economic conditions.

Distressed Companies:

• Financial Recovery: Companies in financial distress might undergo recapitalization to stave off bankruptcy, renegotiate debt terms, and regain investor confidence.

Recapitalization is a complex process that requires careful planning and analysis. It’s often undertaken with the guidance of financial advisors and legal experts to ensure that it aligns with the company’s strategic goals and maximizes shareholder value.

Redemption Rights. Redemption rights, also known as redemption provisions or redemption clauses, are terms in a contract or agreement that give a party the right to buy back or reclaim something that was previously sold, often under specific conditions. These rights are commonly found in various contexts, including business agreements, real estate transactions, and financial investments.

Registration Rights. Registration rights, also known as registration rights agreements, are contractual rights granted by a company to certain investors allowing them to register their securities with the U.S. Securities and Exchange Commission (SEC) or other regulatory authorities. These rights are common in the context of privately-held companies, especially startups, and are typically negotiated between the company and private investors such as venture capitalists.

Here are the key aspects of registration rights:

Registration of Securities: When a company offers securities to the public, it needs to comply with securities laws and register those securities with the appropriate regulatory authorities. Registration rights allow investors to include their shares in the company’s registration statement. This means that these shares can be sold to the public, providing the investors with liquidity.

Demand Registration: This type of registration right allows an investor or group of investors to require the company to register their shares with the SEC. Typically, there is a minimum threshold of shares that must be met for a demand registration to be initiated.

Piggyback Registration: Piggyback rights allow investors to include their shares in a registration statement filed by the company for its own securities. In other words, if the company decides to go public and registers its shares, investors with piggyback rights can register and sell their shares alongside the company’s shares.

S-3 Registration: S-3 is a short-form registration statement that can be used by companies that meet specific eligibility criteria. Investors with S-3 registration rights can require the company to use this streamlined process for registering their shares, making it faster and more cost-effective.

Registration rights are important for investors because they provide a way for them to exit their investments by selling their shares on the public market. For companies, offering registration rights can be a way to attract investors, especially in private financing rounds, by providing them with a potential exit strategy and liquidity for their investments. These rights are a significant aspect of the negotiation process between companies and investors during fundraising rounds.

Repurchase Option. A repurchase option, also known as a buyback option, is a financial arrangement where a company agrees to buy back its own shares from an investor at a predetermined price and date. This option can be included in financial instruments, such as preferred stock or bonds, as a way for the issuer to provide investors with some degree of flexibility and protection.

The following are some key elements of repurchase options:

Agreement: When an investor purchases a security with a repurchase option, the issuing company agrees to buy back the shares at a specified future date. The terms of the repurchase, including the price and the date, are clearly outlined in the agreement.

Predetermined Price: The repurchase price is typically set at a premium to the current market price. This provides an incentive for the investor to agree to the option because it guarantees a profit if the market price increases.

Flexibility for Investors: Repurchase options provide investors with flexibility. If the market price of the security increases significantly, the investor can choose to sell the shares back to the company at the predetermined higher price, realizing a profit. If the market price decreases, the investor can keep the shares and sell them on the open market.

Risk Management for Companies: From the company’s perspective, issuing securities with repurchase options can be a way to manage risk. For example, if a company expects to have excess cash in the future, it can issue securities with repurchase options as a way to potentially buy back shares when the stock price is low, providing shareholders with a floor price and the company with a potential source of undervalued shares.

Repurchase options are just one of the many tools available in the financial markets, and their use can vary widely depending on the specific needs and strategies of the parties involved. Investors considering such options should carefully evaluate the terms and conditions outlined in the agreement to make informed decisions.

Resilience. In business, refers to the ability of a business to withstand different types of positive and negative events and shocks. Distinguished from anti-fragility, which refers to the ability of a company not only withstand these events but also become stronger from them.

Return on Investment. Return on Investment (ROI) is a financial metric used to evaluate the profitability or performance of an investment. There are several methods to calculate ROI, and the specific formula you use depends on the context and the nature of the investment.

The most common way to calculate ROI is (Net Profit/Initial Investment) * 100

Red Ocean. Refers to currently existing marketing space. Here is a video on red ocean strategy. Compare with Blue Ocean.

Revenue. Revenue refers to the total income generated by a company from its primary operations, such as sales of goods or services, during a specific period of time. It is often referred to as the “top line” because it appears at the top of the income statement. Revenue is a key financial metric for businesses, as it indicates the effectiveness of a company’s sales and marketing efforts.

There are two main types of revenue:

Operating Revenue: This includes revenue generated from the core business operations of the company. For example, for a retail company, operating revenue would come from the sales of goods.

Non-Operating Revenue: This includes revenue that is not directly related to the core business operations. For instance, interest earned from investments or gains from the sale of assets.

Revenue is different from profit, which is the amount of money a company has left over after deducting all expenses, taxes, and other costs. To calculate profit, you subtract all the costs (including operating expenses, taxes, interest, and others) from the total revenue.

Revenue Multiple. A revenue multiple is a financial metric used to evaluate a company’s valuation by comparing its market value to its revenue. It is calculated by dividing the market capitalization (or enterprise value) of a company by its total revenue.

Revenue multiples are commonly used in the valuation of companies, especially in industries where revenue is a key performance indicator. Investors and analysts use revenue multiples to compare companies within the same industry or sector. A higher revenue multiple suggests that investors are willing to pay more for each dollar of the company’s revenue, indicating a potentially overvalued stock. Conversely, a lower revenue multiple suggests a potentially undervalued stock.

It’s important to note that the appropriate revenue multiple can vary significantly between different industries, as well as among companies within the same industry, based on factors such as growth prospects, profitability, risk, and market demand. Therefore, it’s essential to consider a wide range of factors when using revenue multiples for valuation purposes.

Reverse Solution Engineering. Problem solving approach where one starts with the problem and, rather than solving it completely, simply removes parts of the problem until an acceptable situation is reached.

Right of First Refusal. A “right of first refusal” (ROFR) is a contractual agreement between two parties that gives one party the option to enter into a business transaction or buy/sell property before the owner negotiates with other potential buyers or sellers. In essence, if the owner decides to sell the property or asset that is subject to the ROFR, they must first offer it to the party holding the ROFR on the same terms and conditions that they are willing to accept from other potential buyers.

For example, let’s say you own a piece of real estate and you’ve given your friend a right of first refusal. If you receive an offer from someone else to buy the property, you must first offer it to your friend under the same conditions before you can accept the outsider’s offer.

ROFRs are common in various business contexts, including real estate, joint ventures, and mergers/acquisitions. They provide the party holding the right with a certain level of security, ensuring that they have the opportunity to participate in a transaction before others if the owner decides to sell.

Risk Arbitrage. An investment strategy that takes advantage of a mispricing of risk. For example, if the discount factor for a set of cash flows assumes a risk of 10%, but the real risk only warrants a discount factor of 8%, purchasing the asset at a discount rate of 10% leads to a 2% arbitrage gain.

Risk Management. Practice of identifying risks that a person or organization faces and determining how to manage them. Typical risk management strategies include: (i) avoiding the risky activity; (ii) reducing the risk associated with the activity; (iii) transferring the risk; or (iv) accepting the risk.

Road Show. In the context of venture capital, a road show refers to a series of presentations and meetings conducted by a company’s management team and representatives with potential investors and analysts. The purpose of a road show is to generate interest and support for an upcoming initial public offering (IPO) or another significant financial event, such as a new funding round.

During a road show, executives from the company, often accompanied by investment bankers and analysts, travel to different cities to meet with institutional investors, such as mutual funds, pension funds, and hedge funds. These meetings typically involve detailed presentations about the company’s business, financial performance, growth prospects, and other relevant information that potential investors need to make informed decisions.

Road shows are a crucial part of the IPO process, as they allow the company to showcase its investment potential to a wide range of potential investors. The goal is to attract investors who are willing to buy shares of the company at the offering price, thereby raising capital for the company.

Road shows can also occur when a private company is raising funds in a private funding round, although they are more commonly associated with the IPO process. In both cases, the road show serves as a marketing effort to generate interest and support from investors.

Roll-up. In the context of investing, a “roll-up” typically refers to a strategy where multiple smaller companies in the same industry are acquired and merged into a larger company. This strategy is often employed by private equity firms or holding companies to consolidate a fragmented industry.

Here’s how it works:

Identification of Target Companies: Investors identify several small companies in the same industry that have growth potential or valuable assets.

Acquisition: The investor (or a parent company) acquires these smaller companies one by one. These acquisitions are often funded through a combination of debt and equity.

Integration: After acquiring these companies, they are integrated into a single, larger entity. This can involve streamlining operations, consolidating redundant functions, and creating economies of scale.

Synergies and Cost Reduction: The goal is to achieve synergies between the companies, such as combining sales forces, sharing technology or expertise, and reducing overall costs. By merging these companies, the new, larger entity can often operate more efficiently and profitably than the individual smaller companies could on their own.

Increased Value: The merged entity is expected to be worth more than the sum of its parts due to the synergies and efficiencies gained through the merger and integration process.

Roll-ups can be profitable if executed well, as they capitalize on the strengths of individual companies while eliminating duplicated efforts. However, they also come with risks, such as integration challenges, cultural differences between companies, and the overall health of the industry being consolidated.

It’s important for investors to thoroughly research and analyze both the target companies and the industry before engaging in a roll-up strategy to mitigate these risks and maximize the potential for success.

Rule 506-B. Rule 506(b) is a regulation enacted under the Securities Act of 1933 that provides a safe harbor for private placements of securities. In the United States, companies looking to raise capital through the sale of securities must either register their offerings with the Securities and Exchange Commission (SEC) or find an exemption from registration. Rule 506(b) is one such exemption that allows companies to sell securities to an unlimited number of accredited investors and up to 35 non-accredited investors who meet certain sophistication requirements.

Here are some key points about Rule 506(b):

Accredited Investors: Accredited investors are individuals or entities that meet specific income or net worth requirements, as defined by the SEC. These investors are deemed to be sophisticated enough to understand the risks associated with private investments.

Limited Information Requirements: Unlike registered offerings, companies conducting offerings under Rule 506(b) are not required to provide extensive disclosure documents to accredited investors. However, anti-fraud provisions still apply, meaning companies cannot make false or misleading statements.

No General Solicitation: Companies relying on Rule 506(b) are not allowed to engage in general solicitation or advertising to attract investors. They can only offer the securities to a select group of people with whom they have a pre-existing relationship.

Restrictions on Resale: Securities purchased in a Rule 506(b) offering are restricted securities, meaning they cannot be resold to the general public without registration under the Securities Act or an applicable exemption.

State Securities Laws: While Rule 506(b) is a federal regulation, companies must also comply with state securities laws (often referred to as “Blue Sky laws”). Each state has its own rules regarding private placements, and companies must ensure they comply with both federal and state regulations.

It’s important to note that there is another variation of this rule, known as Rule 506(c), which allows general solicitation and advertising to accredited investors, but companies must take reasonable steps to verify the accredited status of their investors.

Please keep in mind that securities regulations can be complex and may change over time, so it’s advisable for companies to consult legal experts or securities professionals when conducting private placements.

Run Rate. In business and finance, the term “run rate” refers to the financial performance of a company, typically its revenue or earnings, extrapolated over a specific period to provide an annualized figure. Run rate analysis is often used by businesses to estimate their future performance based on their current financial data.

For example, if a company’s revenue in a particular month is $1 million, its run rate for the year would be $12 million, assuming that the same level of revenue is maintained every month. It provides a simplified way to project annual figures based on a shorter timeframe, especially useful for startups and companies with rapidly changing revenue streams.

It’s important to note that run rate projections assume that current trends and conditions will continue unchanged, which may not always be the case in the real world. Therefore, run rate figures are often used cautiously and in conjunction with other financial analysis methods to make more accurate predictions about a company’s future financial performance.

S-3 Registration Rights.

S-3 registration rights refer to the registration of securities with the U.S. Securities and Exchange Commission (SEC) under the Securities Act of 1933, specifically using Form S-3. Form S-3 is a simplified and short-form registration statement that allows certain issuers to register securities for public offerings. S-3 registration is available to companies that meet specific eligibility criteria set by the SEC.

To qualify for S-3 registration, a company must meet one of the following criteria:

Primary Offerings: The company issuing the securities must have a class of common equity securities listed and registered on a national securities exchange, such as the New York Stock Exchange (NYSE) or NASDAQ.

Market Capitalization and Public Float: The company must have a public float (the aggregate market value of voting and non-voting common equity held by non-affiliates) of at least $75 million or, in the case of a company with no public float or a public float of less than $75 million, the company must have annual revenues of at least $50 million.

Non-Convertible Debt Securities: The company can also register non-convertible securities, other than common equity, under Form S-3, regardless of its market capitalization or public float.

S-3 registration provides several benefits to eligible issuers:

Simplified Registration Process: S-3 registration allows for a simplified and expedited registration process compared to the standard registration process under the Securities Act.

Shelf Registration: S-3 eligible issuers can use the registration to create a “shelf” registration, which means they can register securities in advance and then sell them to the public when desired, without having to file additional registration statements.

Lower Registration Fees: The registration fees for Form S-3 are generally lower than those for the standard registration process.

Increased Market Access: By having a shelf registration, issuers can respond quickly to market opportunities and investor demand, providing more flexibility in the timing and execution of offerings.

It’s important to note that the eligibility criteria and regulations related to S-3 registration are subject to change, and issuers should consult legal and financial experts or refer to the latest SEC guidelines for the most current information.

Scalability. Scalability refers to the ability of a system, network, or process to handle a growing amount of work, or its potential to be enlarged to accommodate that growth. It is a crucial characteristic for any system or software application, as it ensures that the system can handle an increasing amount of load without compromising its performance, responsiveness, or user experience.

There are two main types of scalability:

Vertical Scalability: In vertical scalability, you increase the capacity of a single machine, such as adding more CPU, RAM, or storage to a server. While this can improve performance, there are limits to how much a single machine can be scaled vertically. Eventually, you reach the maximum capabilities of the hardware, and further upgrades become impractical or too costly.

Horizontal Scalability: Horizontal scalability, also known as scale-out architecture, involves adding more machines or nodes to a system. This is typically done in distributed systems and web applications by adding more servers to a network. Horizontal scalability is more sustainable and cost-effective in the long run because it allows the system to grow by distributing the load across multiple machines.

Scalability is a critical consideration in various fields, including computer science, business, and economics. In the context of software and web applications, scalable systems can handle a growing number of users, transactions, or data volume without a significant drop in performance. This is especially important in today’s digital age where online services and applications need to accommodate millions or even billions of users simultaneously.

Scenario Analysis. Forecasting method which involves outlining different potential scenarios and then considering the likelihood that those scenarios will occur. An overview of Shell’s approach to scenario analysis is found here.

Scrum. Scrum is an agile project management system where teams break work into goals to be completed by time-defined iterations that are referred to as sprints.

Seed Investor. Seed investor is a type of angel investor who contributes capital at an early stage of a business venture. Seed investors are often the first external investors in a company.

Seed Round. Often the first capital raising round where seed investors invest.

Segmentation Analysis. Segmentation analysis is a technique used in market research and marketing to divide a target market into distinct groups or segments based on certain criteria. The goal of segmentation analysis is to identify and understand the different needs, preferences, and behaviors of various customer segments. By doing so, businesses can tailor their products, services, and marketing strategies to better meet the specific requirements of each segment.

Senior Liquidation Preference. Senior liquidation preference is a term commonly used in the context of venture capital and startup financing. When a startup raises funds from investors, it issues preferred stock to these investors. The terms associated with this preferred stock, including the liquidation preference, are crucial aspects of the investment agreement.

A liquidation preference defines the order in which investors get paid in the event of a company’s liquidation or acquisition. If a startup is sold or goes bankrupt, the assets are distributed to various stakeholders, including investors. The liquidation preference specifies how much money the investors receive before other shareholders, such as common stockholders, get paid anything.

A senior liquidation preference means that a particular class of preferred stock (senior preferred stock) has a higher priority than other classes of preferred stock or common stock in terms of receiving the proceeds from a liquidation event. In other words, senior preferred stockholders are the first to be paid, up to the value of their liquidation preference, before other investors receive any money.

For example, let’s say a company has two classes of preferred stock: senior preferred and junior preferred. If the senior preferred stock has a liquidation preference of $10 million and the company is acquired for $15 million, the senior preferred stockholders would receive their full $10 million before any of the proceeds are distributed to the junior preferred or common stockholders.

This arrangement provides a level of security to senior investors, ensuring that they have a better chance of recouping their investment, even if the company is acquired for a price lower than its valuation at the time of the investment. It’s a common feature in venture capital deals, designed to protect the interests of the early investors who often take higher risks by investing in startups.

Separation Agreement. In the context of investing, a separation agreement typically refers to a legal document that outlines the terms and conditions under which an employee departs from a company. This agreement can have implications for investors, especially if the departure involves key executives or individuals who play a significant role in the company’s performance and, consequently, its stock value.

When a high-ranking executive leaves a company, it can impact investor confidence and, in turn, stock prices. Investors often look at separation agreements to understand the reasons behind the departure, whether it was voluntary or forced, and what kind of compensation or benefits the departing executive receives.

Investors are interested in these details because executive departures can signal internal issues within the company, impacting its stability and future performance. This information helps investors make informed decisions about buying, holding, or selling a company’s stock.

It’s important to note that the specifics of separation agreements, as well as the legal and financial implications, can vary widely based on the individual circumstances and the laws of the relevant jurisdiction. Investors should carefully analyze such agreements and consider seeking advice from financial and legal professionals if needed.

Series A. Often the first significant round of fundraising for a company.

Series B. Second round of significant found for a company.

Shareholder Agreement. A shareholder agreement is a legal document that outlines the rights, responsibilities, and obligations of the shareholders of a company. This agreement is typically created among the founding members or major investors of a corporation, limited liability company (LLC), or other types of business entities.

Here are some key elements typically included in a shareholder agreement:

Ownership and Equity Distribution: The agreement specifies how much ownership each shareholder has in the company. It outlines the number and type of shares held by each shareholder.

Management and Decision-Making: Shareholder agreements often outline how the company will be managed and the decision-making processes. This can include details about the board of directors, how voting rights are distributed, and how major decisions are made.

Rights and Obligations: The agreement may specify the rights and obligations of shareholders, such as the right to participate in company decisions, the right to inspect company records, and the obligation to maintain confidentiality.

Transfer of Shares: The agreement usually includes provisions about how shares can be transferred or sold. This might include a right of first refusal, which gives existing shareholders the opportunity to buy shares before they are sold to an external party.

Dispute Resolution: Procedures for resolving disputes between shareholders, such as mediation or arbitration, may be outlined in the agreement.

Non-Compete and Confidentiality: Shareholder agreements often include clauses preventing shareholders from competing with the company or disclosing sensitive company information.

Exit Strategies: The agreement might outline what happens in the event of the sale of the company, an initial public offering (IPO), or if a shareholder wants to sell their shares.

Succession Planning: In the case of death or incapacitation of a shareholder, the agreement might specify what happens to their shares, ensuring a smooth transition of ownership.

The shareholder agreement is a crucial document as it helps in preventing future disputes and provides a clear framework for decision-making and conflict resolution among the shareholders. It is highly recommended for any company with multiple shareholders to have a well-drafted shareholder agreement in place. Legal counsel should be consulted during the creation of such agreements to ensure they comply with relevant laws and regulations.

Shareholder Limit. A shareholder limit, also known as a share ownership limit or ownership cap, refers to the maximum percentage or number of shares in a company that an individual or entity is allowed to own. Companies often impose shareholder limits to maintain control, prevent hostile takeovers, or ensure a diverse shareholder base.

Shareholder limits can vary widely and are typically outlined in a company’s bylaws or articles of incorporation. When an investor or group of investors acquires shares in a company and their ownership surpasses the predetermined limit, they may be required to sell the excess shares or obtain approval from the company’s board of directors to retain them.

These limits are meant to safeguard the interests of the company and its existing shareholders. By preventing any single entity from gaining too much control, shareholder limits can promote a more stable and balanced corporate environment. Companies usually have these limits in place to maintain their independence and strategic decision-making abilities.

It’s important for investors to be aware of these limits when considering investing in a particular company, as exceeding the shareholder limit could lead to regulatory issues or forced divestment of shares.

Shareholder of Record. A shareholder of record, also known as a registered shareholder or holder of record, is an individual or entity whose name appears on the company’s official list of shareholders. When you buy shares of a publicly traded company, your ownership information is recorded in the company’s books. The record of shareholders is maintained by the company’s transfer agent, which is responsible for tracking changes in share ownership, issuing stock certificates, and ensuring that dividends and other shareholder communications are sent to the correct individuals or entities.

Shareholders of record have certain rights, including the right to vote on company matters such as the election of the board of directors and other important decisions. They are also entitled to receive dividends, if the company distributes profits to shareholders. Shareholders of record are typically eligible to participate in shareholder meetings and have a say in company policies and major decisions.

Shareholder Value. Shareholder value has several meanings. The first is the enterprise value of a company, less its debt. The second is the theory that actions of a company should be taken to increase shareholder value.

Shares Outstanding. Shares outstanding refers to the total number of shares of a company’s stock that are currently held by all shareholders, including institutional investors, individual investors, and company insiders. These shares are held both by the public, in the form of publicly traded shares, and by company insiders, such as employees and executives, in the form of restricted stock.

The number of shares outstanding is an important metric for investors and analysts as it is used to calculate various financial ratios and metrics, such as earnings per share (EPS) and market capitalization.

Side Letter. A side letter is an agreement between a company and an individual investor.

Simple Agreement for Future Equity (SAFE). Investment document that provides that money investment will be converted into equity of a company upon a future investment event, such as a Series A round.

Solopreneur. A solopreneur is an individual who starts and runs a business on their own. Unlike entrepreneurs, who often build and lead companies with multiple employees, solopreneurs handle all aspects of their businesses by themselves. This includes tasks such as planning, marketing, product or service development, sales, customer service, and financial management. Solopreneurs may work from home or have a small office space, and they are responsible for making all the decisions related to their business.

SPAC. “SPAC” typically stands for Special Purpose Acquisition Company. A SPAC is a company that is created solely to raise capital through an initial public offering (IPO) to acquire an existing company. The purpose of a SPAC is to allow the acquired company to go public without going through the traditional IPO process.

Here’s how it works:

Formation: A group of investors, often with a specific industry focus or expertise, forms a SPAC with the sole purpose of raising funds through an IPO.

IPO: The SPAC goes public through an IPO and raises funds from public investors. These funds are placed into an escrow account.

Acquisition: After the IPO, the SPAC has a limited time frame, usually two years, to identify a private company to acquire. The acquired company usually becomes publicly traded as a result of the merger.

Merger: Once the target company is identified, the SPAC merges with the target, and the funds held in the escrow account are used to complete the acquisition. This process takes the private company public without it having to go through the traditional IPO process.

SPACs became popular in the financial world due to their flexibility and speed in taking a company public compared to traditional IPOs. However, investing in SPACs carries risks, and investors should carefully consider the specific terms and conditions of each SPAC before investing.

Stock Option. A stock option is a financial instrument that gives an investor the right, but not the obligation, to buy or sell a specific amount of a stock at a predetermined price within a specified time period. There are two main types of stock options: call options and put options.

Call Option: A call option gives the holder the right to buy a specific number of shares of a stock at a predetermined price, known as the strike price, before the option expires. Call options are typically used by investors who expect the price of the underlying stock to rise. By purchasing a call option, they can buy the stock at a lower price (the strike price) and then sell it at the higher market price, making a profit.

Put Option: A put option gives the holder the right to sell a specific number of shares of a stock at the strike price before the option expires. Put options are often used by investors who anticipate that the price of the underlying stock will fall. By purchasing a put option, they can sell the stock at a higher price (the strike price) even if the market price has decreased, thus minimizing potential losses.

Key Terms:

Strike Price: The price at which the stock can be bought (for call options) or sold (for put options) as specified in the option contract.

Expiration Date: The date on which the option contract expires. After this date, the option is no longer valid.

Premium: The price paid by the option buyer to the option seller for the right to buy or sell the stock. Option prices are influenced by factors such as the stock price, strike price, volatility, and time until expiration.

Stock options are commonly used in financial markets for hedging, speculation, and investment strategies. They provide investors with the opportunity to leverage their investment capital and potentially generate significant profits, but they also involve risks and complexities that investors need to understand before trading them.

Statistical Arbitrage. Utilizing statistical models and algorithms to identify and exploit pricing inefficiencies.

Stock Plan. A stock plan, also known as an employee stock plan or equity compensation plan, is a program established by a company to grant its employees, directors, or consultants the opportunity to own shares of the company’s stock. These plans are a way for companies to attract and retain talent by offering additional incentives beyond regular salary and benefits.

There are several types of stock plans, including:

Stock Options: Stock options give employees the right to buy a certain number of shares at a fixed price (the strike price) after a specific vesting period. If the company’s stock price rises above the strike price, employees can buy the stock at the lower price and then sell it at the higher market price, making a profit.

Restricted Stock Units (RSUs): RSUs are promises to give employees a certain number of shares after a vesting period. Unlike stock options, employees don’t have to purchase RSUs; they receive the shares for free after they vest.

Employee Stock Purchase Plans (ESPPs): ESPPs allow employees to purchase company stock at a discounted price, often through payroll deductions. These plans encourage employees to become shareholders and benefit from the company’s growth.

Stock Appreciation Rights (SARs): SARs are similar to stock options but do not require employees to purchase shares. Instead, employees receive cash or stock based on the increase in the company’s stock price from the grant date to the exercise date.

Stock plans often have vesting schedules, which means employees must work for the company for a certain period before they can exercise their options or receive the shares. Vesting schedules encourage employee retention and align employees’ interests with the company’s long-term performance.

Stock plans can be complex and vary widely from company to company. Employees participating in these plans should carefully review all documents provided by their employer and consider consulting a financial advisor to understand the implications and potential tax consequences of participating in a stock plan.

Spatial Arbitrage. Exploiting price differences of the same item in different locations.

Super Pro Rata. “Super pro rata” is a term commonly used in the context of venture capital and startup funding rounds. In venture capital financing, when a company raises additional capital through a new funding round, existing investors often have the right to participate and maintain their ownership percentage in the company.

The term “pro rata” means “in proportion.” So, when existing investors have the opportunity to invest additional money to maintain their ownership percentage, they are exercising their pro rata rights.

“Super pro rata” refers to a situation where existing investors are allowed to invest more than their pro rata share. In other words, they can invest more than what would be proportionate to their existing ownership stake in the company. This can happen if the company’s valuation has increased significantly since the previous funding round, and existing investors want to invest more capital to prevent dilution of their ownership.

Allowing super pro rata rights can be a way for startups to reward and retain loyal investors who have been supportive of the company’s growth. It can also help the company secure additional funding from investors who are already familiar with the business and believe in its potential.

Syndicate. In the context of investing, a syndicate refers to a group of individuals or entities that come together to pool their resources and invest in a specific venture or opportunity. This form of collaboration allows individual investors to participate in larger investment opportunities that might be beyond their individual capacity. Syndicates are commonly formed for investing in startups, real estate projects, or other high-potential ventures.

Here’s how it generally works:

Lead Investor: A syndicate is often led by an experienced investor who takes the lead in sourcing the investment opportunity, conducting due diligence, and negotiating terms with the target company or project.

Pooling Funds: The lead investor gathers a group of individual investors or institutions interested in investing in the opportunity. Each participant contributes a certain amount of money, and these funds are pooled together to make a larger investment.

Investment: The pooled funds are then collectively invested in the chosen venture. This larger investment capacity provides benefits such as negotiating better terms, diversifying risk, and increasing the likelihood of the investment being successful.

Profit Sharing: If the investment is profitable, the returns are distributed among the syndicate members based on their contribution. The distribution of profits is often proportional to the amount of money each member invested.

Professional Management: In some cases, syndicates are managed by professional fund managers or investment firms who charge a fee for their services. These professionals handle the due diligence, investment decisions, and ongoing management of the investment.

Syndicates are common in the world of venture capital, where a lead investor forms a syndicate to invest in a promising startup. It’s also prevalent in real estate, where multiple investors come together to invest in a large property development project.

It’s important for individuals participating in a syndicate to thoroughly research the lead investor and the investment opportunity, as well as to understand the terms of the syndicate agreement, risks involved, and potential returns before committing their funds.

Sweat Equity. Sweat equity refers to the contribution of effort, time, and hard work that individuals put into a project or business venture. Unlike financial equity, which involves investing money into a business, sweat equity represents the value added by people who contribute their labor and expertise. This concept is particularly common in startups and small businesses where the founders or employees may not receive immediate financial compensation for their work but instead receive ownership in the form of equity stakes in the company.

Tag Along Right. A “tag-along right” is a legal concept often found in shareholders’ agreements or corporate governance documents. It is designed to protect minority shareholders in a company in the event that a majority shareholder decides to sell their shares to a third party.

When a tag-along right is in place, if a majority shareholder (typically owning more than 50% of the company) decides to sell their shares, minority shareholders have the right to join the sale and sell their shares at the same price, terms, and conditions as the majority shareholder. Essentially, the minority shareholders have the option to “tag along” with the majority shareholder and participate in the sale.

This right helps minority shareholders ensure that if a significant change in ownership or control of the company occurs, they have the opportunity to cash out and not be left with potentially less valuable shares in a new ownership structure.

The specifics of tag-along rights can vary and are usually outlined in the company’s shareholders’ agreement or other relevant legal documents. It’s always important for shareholders to carefully review these agreements to understand their rights and protections.

Temporal Arbitrage. Exploiting differences in prices of the same item at different points of time.

Term Sheet. A document that sets forth the key terms and conditions of a business transaction or investment. See Binding Term Sheet, Non-Binding Term Sheet, and Definitive Documentation.

Term sheets are commonly used in various business transactions such as mergers and acquisitions, venture capital investments, and joint ventures.

Key elements typically found in a term sheet include the following:

Parties Involved: Names and details of the parties entering into the agreement.

Description of the Transaction: An overview of the proposed deal, including the type of transaction and the assets or shares involved.

Purchase Price or Investment Amount: The total amount to be paid or invested, and the breakdown of the payment (e.g., cash, stock, assets).

Conditions Precedent: The conditions that must be met before the deal can proceed. These could include regulatory approvals, due diligence, or other specific requirements.

Representations and Warranties: Statements made by the parties about the accuracy of their respective information. If these statements are later found to be untrue, there could be legal consequences.

Covenants: Agreements by the parties regarding their future conduct, often restricting certain activities during the negotiation period.

Closing Procedures: Details about the finalizing of the transaction, including the date, location, and specific documents or actions required.

Governing Law and Dispute Resolution: Specifies the jurisdiction whose laws will govern the agreement and outlines how disputes will be resolved (e.g., through arbitration or litigation).

Confidentiality: Agreements about the confidentiality of the negotiations and the terms discussed.

It’s important to note that while a term sheet outlines the basic terms of an agreement, it is not legally binding. The actual legal obligations come into effect when the parties sign a definitive agreement based on the terms outlined in the term sheet. However, certain provisions in the term sheet, such as confidentiality and exclusivity clauses, may be legally binding even though the entire document is not.

Thought Point Zero. This refers to one’s own frame of reference when making decisions or trying to find solutions to a problem.

Time Value of Money. This is fundamental concept in finance that states that a certain amount of money is worth more today than it is in the future.

Total Enterprise Value. Total Enterprise Value (TEV) is a financial metric that represents the entire economic value of a company. For public companies, it is calculated as the market capitalization of the company’s outstanding shares of common stock plus its total debt, minority interest, and preferred equity, minus its cash and cash equivalents.

Transfer Restrictions. Transfer restrictions, in the context of investing, refer to limitations or conditions placed on the transfer of certain assets or securities from one party to another. Transfer restrictions can apply to various types of investments, including stocks, bonds, real estate, and other financial instruments.

Lock-Up Periods: In the context of initial public offerings (IPOs), insiders, such as company executives and early investors, may be restricted from selling their shares for a specific period after the IPO. This lock-up period is designed to prevent a sudden influx of shares into the market, which could cause the stock price to drop significantly.

Securities Regulations: Regulatory bodies, such as the Securities and Exchange Commission (SEC) in the United States, impose restrictions on the transfer of securities to prevent fraudulent activities and insider trading. These regulations dictate how, when, and to whom securities can be transferred.

Shareholder Agreements: In private companies, shareholders may enter into agreements that restrict the transfer of shares without the consent of other shareholders. These agreements set forth the conditions under which shares can be sold or transferred.

Liquidity Events: Certain investments, especially in private equity and venture capital, might have restrictions tied to specific liquidity events, such as an acquisition or merger. Investors might be prohibited from transferring their stakes until these predefined events occur.

Foreign Exchange Controls: Some countries impose restrictions on the movement of capital across borders. Investors may face limitations on transferring funds in and out of the country, impacting their ability to move investments freely.

Mutual Funds and ETFs: Mutual funds and exchange-traded funds (ETFs) may have restrictions on the frequency and timing of redemptions. Some funds charge redemption fees if shares are sold within a certain period of purchase, discouraging short-term trading.

Restricted Stock: Employees often receive stock options or grants as part of their compensation packages. These stocks are often subject to restrictions on transfer until certain conditions, such as vesting periods or company performance goals, are met.

TTM. In the context of venture capital and investing, “TTM” commonly stands for “Trailing Twelve Months.” TTM refers to the financial data from the past twelve consecutive months. It is a way to measure a company’s financial performance over the most recent and relevant period, especially when assessing its valuation or making investment decisions.

If a venture capital firm is considering investing in a startup, it might consider TTM revenue, TTM profit margins, or other financial metrics to evaluate the company’s financial health and growth trajectory. TTM figures provide a snapshot of a company’s performance over the previous year, allowing investors to assess trends and make more informed investment decisions.

Turnover. Refers to the amount of money earned by a business over a particular period.

Unicorn. A privately held start-up company that is worth over US $1 billion.

Valuation. Formal process of trying to determine the economic value of an asset or business. Common value approaches include asset valuation methods, market-based valuation methods, and cash flow valuation methods.

Venture Capital. Refers to capital from investors that typically make speculative investments in companies that do not have an established track record or who are developing new products for untested markets.

Venture Capital Fund. Fund that established for the purpose of making venture capital investments.

Vesting Rights. In the context of ESOPs, vesting rights refer to the ability of an employee to exercise an option to purchase shares of the company. These rights are often conditioned on working for the company for a certain period of time and meeting minimum work performance-related milestones.

Vertical Lateral Thinking. Type of lateral thinking characterized by shifts in levels of granularity with respect to a problem or issue. This can involve jumping to look at a problem from a significantly broader or narrower perspective.

Warrant. A warrant is a financial instrument that gives the holder the right, but not the obligation, to buy the issuer’s stock at a specific price within a certain period. Warrants are often issued by companies as a way to raise capital.

Right to Purchase: Warrants give the holder the right to buy a specific number of shares of the issuer’s stock at a predetermined price, known as the exercise price or strike price. This right can typically be exercised at any time before the expiration of the warrant.

Expiration Date: Warrants expire after a certain period that is stated in the warrant agreement.

Leverage: Leverage can be used to allow investors to control a larger position in the underlying stock for a relatively small investment. This leverage amplifies gains if the stock price rises but also leads to significant losses if the stock price falls.

Issued by Companies: Companies issue warrants as a sweetener to entice investors to buy their bonds or preferred stock. These warrants give investors the opportunity to buy the company’s common stock at a favorable price in the future.

Traded on Exchanges: Warrants can be traded on stock exchanges just like stocks. Their prices are influenced by the underlying stock’s price, time until expiration, volatility, and the difference between the stock price and the warrant’s exercise price.

No Dividends or Voting Rights: Warrant holders do not receive dividends or have voting rights in the company, as they are not actual shareholders until they exercise the warrants.

Investors may buy warrants in the hope that the underlying stock’s price will increase before the warrants expire, allowing them to buy the stock at a lower price and potentially profit from the difference. However, warrants also come with risks, including the potential loss of the entire investment if the stock price does not rise above the exercise price before the warrants expire.

It’s important for investors to carefully consider their risk tolerance and investment goals before trading or investing in warrants, as they can be complex financial instruments.

Washout Round. A washout round is a funding round in which new investors provide capital to a struggling company, often at a significantly reduced valuation compared to previous rounds of funding. The term “washout” implies that existing shareholders, including founders and earlier investors, may see a substantial dilution of their ownership stakes due to the issuance of new shares at a lower valuation.

Washout rounds usually occur when a company is facing financial difficulties or has not met growth or financial performance expectations, and traditional investors are unwilling to invest at a valuation close to or higher than previous rounds. In such situations, the company may have limited options and may need to accept funding from new investors at a lower valuation to secure the necessary capital to continue operations.

This type of funding round presents significant issues for existing stakeholders, as their ownership percentage in the company decreases, potentially leading to a loss in control and reduced financial gains if company performance improves in the future.

From the perspective of new investors, a washout round can present an opportunity to invest in a distressed company at a lower valuation, potentially offering significant returns if the company is able to turn its fortunes around in the future.

Warrant Coverage. Warrant coverage is a financial arrangement in which a company issues warrants to investors alongside other securities, such as bonds or preferred stock. A warrant gives the holder the right, but not the obligation, to buy the company’s stock at a predetermined price within a specified time period. Warrant coverage provides an additional incentive for investors to participate in a securities offering.

Issuance of Warrants: When a company issues new securities, it might attach warrants to sweeten the deal for investors. For example, if you buy a bond from a company with a warrant coverage of 10%, it means that for every ten bonds you buy, you receive one warrant.

Exercise Price: Warrants have an exercise price, which is the price at which the warrant holder can buy the company’s stock. This price is usually higher than the current market price of the stock when the warrants are issued.

Expiration Date: Warrants also have an expiration date, which is the deadline for the warrant holder to exercise the warrant. If the warrant is not exercised before this date, it becomes worthless.

There are several benefits for companies who issues warrants.

Attracts Investors: Warrants make the securities offering more attractive to investors because they have the potential for future gains if the company’s stock price increases.

Additional Capital: If the warrants are exercised, the company receives funds from the sale of the underlying stock.

Flexibility: Warrant terms can be structured to provide flexibility for the company and investors. As an example, the exercise price and expiration date can be adjusted to accommodate changes in the company’s stock price or market conditions.

From an investor’s perspective, warrant coverage involves some risk. If the company’s stock price does not rise above the exercise price before the warrants expire, the warrants will not have value.

It’s important for investors to carefully evaluate the terms of warrant coverage and consider the company’s financial health, market conditions, and growth prospects before participating in a securities offering with warrant coverage.

Waterfall. Mechanism, typically found in fund investment documentation, that determines how distributable profits will be shared between an investment fund manager and investors. Can also be used in another types of arrangements.

Weighted Average Capital Cost. Financial metric that calculates the cost of capital of a company based on the relative weights of its cost of its equity and debt.

Write-off. A reduction in the recorded value of an asset or liability.