Terms Tagged with Investor
Accredited Investor :An individual or institution that meets certain wealth criteria (as defined regulators), and is therefore deemed to be sophisticated enough to participate in private, non-public investments. There are many ways to qualify, including if you are:- An individual that has had income in excess of $200,000 per year in each of the prior two years, and reasonably expects the same for the current year- A spousal couple that has had income in excess of $300,000 per year in each of the prior two years, and reasonably expects the same for the current year- An individual or spousal couple with over $1,000,000 in net worth (excluding the value of their primary residence)- A charitable organization, corporation, partnership or trust with assets in excess of $5,000,000.
Adverse Change Redemption :A right of a shareholder that requires the company to redeem a class of securities in the event the company experiences a material adverse change to its prospects, business or financial condition. This is a negotiated right that you expect to see in down economic cycles where investors tend to have more bargaining power than the companies seeking to raise capital. Startups should seek to avoid such a provision when negotiating a funding round for a variety of reasons, including the vagueness of the "material adverse change" trigger.
Alternative Asset Class :Asset classes that deviate from standard, publically traded debt and equity securities. Alternative asset classes include venture capital, hedge funds, real estate, and commodities. Typically, these assets are not highly correlated to typical equity and debt markets, and may provide diversification to investors.
Angel Investor :Wealthy individuals that invest in startups in their early stages of development or seed round of fundraising. Due to the inherent risk of loss of capital or significant dilution in subsequent fundraising, angel investors typically pursue investments with returns that they believe may have the potential to return multiples of the initial investment.
As-converted Basis :Considering a class of securities under the assumption that all of the that class has converted into another class of securities. In the venture context, this is usually with respect to preferred stock, which converts into common stock automatically in some instances and at the election of the preferred stock holder in others. Preferred stock often votes on matters on an "as-converted basis".
Bridge Loan :A loan given to a startup by investors that serves to fund the company until the next round of financing.
Carried Interest :The share of generated profits that an investment manager is entitled to keep as compensation. Typical venture capital fund incentive fees range from 20% to 30%, depending on the fund. This can also be referred to as an "Incentive Fee" or a "Performance Fee."
Common Stock :A type of equity security, contrasted with preferred shares. Common stock is most frequently issued to founders, management, and employees. In a liquidation event, preferred shares generally take priority over common shares.
Control Rights :Rights of an investor or shareholder relating to control over the company's affairs. Control rights typically relate to voting or designation of board seats, voting (e.g., does a class of securities give the holder 10 votes per share?), and certain actions (e.g., incurring indebtedness) which require the consent of a majority of a certain class or series of security.
Demand rights :A type of registration right that gives an investor the right to force a startup to register its shares with the SEC and prepare for an IPO.
Dilution :Generally speaking, as subsequent financing rounds occur, existing investors will own proportionally less of the company than they did previously since additional equity is generally issued as part of a new financing round. Dilution is not necessarily a bad thing _ since new stock can be issued at a higher price, you may own a smaller piece of a larger company, which means the value of your investment is actually higher than it was previously.
Due diligence :The process performed by prospective investors to assess the viability of an investment and confirm that the information provided by the company is accurate.
Elevator pitch :A concise presentation given from an entrepreneur to a potential investor about an investment opportunity. The presentation should be concise enough to be shared during an elevator ride.
Exit Event or Liquidity Event :When an issuer engages in a transaction that allows investors to sell their shares, which generally happens through a tender offer (sale) or an IPO.
Friends and Family Round :Capital provided by the friends and family of founders of an early stage startup. This is typically its first outside capital. The startup is generally too early (often still at ideation) to raise capital from professional angel or seed investors, but needs capital to get started.
Fully Diluted Shares Outstanding :The total number of shares that would be outstanding if all possible sources of conversion (convertible bonds and stock options) were exercised.
Fund of funds :A fund created to invest in private equity or venture capital funds. This entity is often referred to as a Limited Partner to the venture capital funds.
Growth Equity :Growth Equity refers to private investments in late-stage companies which aim to finance revenue growth through market expansion. Such investments typically target minority positions in proven market segment leaders
Initial Public Offering (IPO) :Process by which a formerly private company first issues stock to the public. New disclosures must be made, as the company must now adhere to SEC reporting requirements.
Inside Round :A round of financing entirely composed of existing investors.
Investment Syndicate :A group of investors that agree to participate in an investment round of funding for a company.
Issuer :The entity / company that shares represent ownership in. For example, if you were investing in shares of EquityZen Inc., EquityZen would be the issuer.
JOBS Act :Jumpstart Our Business Startups Act, passed in April 2012. Includes several provisions related to early stage companies, including new regulation regarding the maximum number of shareholders private companies are allowed and changes to the method in which companies can solicit private investors.
Lead investor :The venture capital firm that makes the largest investment in a financing round and manages the legal documents and closing of the round. The lead investor sets the price per share of the round which determines the valuation of the company.
Limited Partner (LP) :An investor in a limited partnership. General partners are liable for the actions of a partnership while limited partners are protected from legal actions and any losses beyond their original investment. In practice, many private funds are structured as limited partnerships, where the investors are Limited Partners and the fund manager or sponsor is the General Partner.
Liquidation :An event that could result in either investors or debt holders to receive cash from the company, either through acquisition or a sale of assets resulting from bankruptcy. In either case, preference clauses determine order of payout to claimants, typically valuing debt holders and preferred shareholders over common stock holders.
Liquidity :The ability of an asset to be freely transferred with minimal interference from the issuer. Public equity is deemed to be extremely liquid since there are many buyers and sellers, while stock in private companies is generally much less liquid since the buyers and sellers are more limited.
Lockup period :First, please remember that by investing through EquityZen, you do not directly purchase shares of a company, but purchase ownership interests in a fund that will own the shares. Shares that are the subject of investment through EquityZen are generally subject to a lock-up period of up to 180 days after the effectiveness of a company's IPO filing, during which time shareholders are restricted from selling their shares. These restrictions are typically put in place by the underwriters to assist in a successful IPO. Once the lock-up period expires, EquityZen will either (i) transfer the shares from the account of the fund to a brokerage account you designate (after which you can do whatever you like with the shares) or (ii) sell the shares in the open market and deliver to you your portion of the proceeds.
Management Fee :The fees that a fund will charge its limited partners each year. Venture capital fund management fees typically range from 1% to 3% annually and are generally charged based on committed capital during the investment period, and then invested capital after the investment period has finished.
Non-disclosure agreement (NDA) :An agreement issued by entrepreneurs to protect the privacy of their ideas when disclosing those ideas to third parties such as investors.
Ordinary Income Rate :The rate at which ordinary income (mainly composed of salaries, commissions, wages, and interest income) is taxed based on the individual's tax bracket.
Pari passu :Legal term that refers to equal treatment for two or more parties in an agreement.
Party Round :A trend beginning several years ago in early financing rounds where, instead of raising large amounts of money fro ma few large investors, companies are raising small amounts of money from many small investors.
Pay to play :A term in a financing agreement where an investor who does not participate in a future financing round will lose certain rights. The rights can often be anti-dilution rights.
Piggyback rights :Rights of an investor to have their shares included in a registration of a company's shares in preparation for an IPO.
Pledge :A contract that requires one party to transfer the cash proceeds from a liquidation of equity to another party in exchange for cash received prior to the liquidation event.
Portfolio Company :A company that has received an investment from a venture capital fund becomes a portfolio company of that fund.
Post-money Valuation :The valuation of a company that includes the capital provided by the current round of financing. For example, if an individual invests $3 million in a company with a $10 million pre-money valuation, the post-money valuation is $13 million.
Pre-money Valuation :Valuation of a company excluding the capital from the current round of financing.
Ratchet :A provision that provides an investor with down-round protection (i.e., where the company raises a subsequent round of financing, which can include IPO, at a lower price) by providing for the issuance of additional shares in the subsequent round. In the IPO context, a ratchet provision provides that if the IPO price does not meet a certain level, say at least the price paid by the investor in the private round or some baked in rate of return above that price, the IPO conversion of those shares to common shares is adjusted such that an additional number of shares are issued to investors which would meet the predetermined level.
Redemption Rights :The right of an investor to force the company to buy back shares issues as a result of an investment. The investor has a right to take back their investment and may negotiate a right to receive an additional sum in excess of the original investment.
Return on Investment (ROI) :The proceeds from an investment during a specific time period, which are calculated as a percentage of the original investment. Also net profit after taxes divided by average total assets.
Secondary Transaction :The acquisition of stock, or other securities, from sources other than the issuer. Under this definition, all transactions that are not part of a corporate transaction, such as an IPO, primary fundraising round, or spinoff, are considered secondary transactions.
Senior Liquidation Preference :An entitlement given to a certain class of shareholders that gives them a higher liquidation preference over other shareholders. Also known as Stacked Preference
Shareholder Agreement :A contract that sets out how the company will be operated and the shareholders' obligation and rights. It often provides protection to minority shareholders.
Shares Outstanding :Refers to a company's stock currently held by all of its shareholders, including shares held by institutional investors and restricted shares owned by a company's executives. This number is used to calculate key metrics such as a company's market capitalization, earnings per share, and cash flow per share.
Stacked Preference :When different classes of preferred stock have senior rights to payment over other classes of preferred stock. Also known as Senior Liquidation Preference
Stock Option :A right to purchase or sell a share of stock at a specific price within a specified period of time. Stock options are often used as long term incentive compensation for management and employees at high-growth companies.
Tag-Along Right :The right of a minority investor to receive the same benefits as a majority investor. This often applies to a sale of securities by investors and is also known as co-sale right.
Term Sheet :A document that includes the basic terms of a company's fundraising round (or any investment). Once signed, it indicates that the investor and the company intend to move forward to complete the transaction and stipulates the major economic or corporate governance terms related to the investment.
Transfer Restrictions :Contractually defined limitations on an individual's ability to sell or transfer their shares in the company.
Unicorn :A slang term used to describe a startup with a valuation of $1 billion or more.
Washout Round :A round of financing where previous investors, the founders, and management suffer significant dilution. The new investor in a washout round will typically gain majority ownership and control of the company.
Write-Off :A decrease in the reported value of an asset or company.
