A third party valuation of a company's common stock. Generally used by startup companies to help determine the exercise price for company stock options. For a deeper dive, see our blog post on 409A valuations (read both parts!).
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.
Contractual clause that protects an investor from having their investment as a percentage of ownership significantly reduced in subsequent rounds of fundraising. The method of total protection from dilution is called a Full Ratchet, and ensures that should a fundraising round cause a previous investor's ownership percentage to decrease as a result of newly issued shares, they will be given the opportunity to maintain their ownership level.
A loan that allows the lender to exchange the debt for common stock at a predetermined ratio instead of recollecting the principle as cash.
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.
A fundraising round in which the company is valued at a lower value per share than previous rounds.
Common demand of venture capitalists that stipulates that when a certain percentage of shares agree to sale provisions, the rest of the shareholders are forced to go along. Can result in those with lower liquidation preferences receiving little or no money.
An official document that shows the capital structure of a company, including the specific ownership level by investor. Generally used to view the percentage ownership that each investor or employee owns of a certain company. See a cap table example here.
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.
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.
The order in which investors, or debt holders, get paid in the event of company liquidation or bankruptcy. Commonly used by venture capitalists to ensure they see a return on their investment in different liquidation scenarios.
Legal term that refers to equal treatment for two or more parties in an agreement.
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.
Valuation of a company excluding the capital from the current round of financing.
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.
A sector of the private equity industry focused on investing in young companies with high growth potential.
A slang term used to describe a startup with a valuation of $1 billion or more.
The earliest round of fundraising, typically backed by a company's founders, their friends, family, or Angel investors. The company is generally not generating revenues and is in the process of developing their product.
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.
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.