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The AngelNews Dictionary

our Glossary of Terms used in the Venture Capital and Business Angel Industry internationally.

Here at AngelNews we know that there are many words and phrases in use in the Venture Capital and Business Angel Industry which can be unfamiliar to investors and entrepreneurs.

We have compiled a list of all the words and phrases into a glossary, or dictionary, if you like, of definitions for the Venture Capital and Business Angel world.

This A-Z list of definitions also includes explanations of words used in the industry outside the UK. If you have a word or phrase which you think should be on the list, please send it to Debbie Dufour by email at Debbie@angelnews.co.uk and, should we agree with you and put it up on our site, we will send you £5 as a reward.

Please click on any of the words or phrases to open the definition or just scroll down the page to find the full list in alphabetical order.

"A" Round*
A financing event whereby venture capitalists invest in a company that was previously financed by founders and/or angels. The "A" is from Series "A" Preferred stock. See "B" round.

Accredited Investor
A term used in both the US and the UK to refer to investors who have been accredited as wealthy enough to invest in high risk investments - the definition of which is defined in law in each jurisdiction.

Accrued Interest
This is the interest that accrues on a preference share or bond from the day after the last interest payment was made.

Administration
A procedure defined in the UK by the Insolvency Act 1986, providing a possible alternative to the liquidation or receivership of a company. Once an administration order is granted by a court, the claims of all creditors are frozen, giving the company protection against its creditors. The administrator then runs the company. See Administrative Receivership (qv).

Administrative Receivership
The new term for receivership in the UK. If a company is no longer financially viable an administrative receiver may be appointed to run the company, probably with a view to selling it as a going concern. The company is then said to be in an administrative receivership or, more commonly, in receivership.

Alternative Assets
Higher risk non-traditional asset class including private equity, venture capital, hedge funds and real estate. In return for the high risk that they represent these asset should, in theory, generate higher returns for investors.

AIM/Alternative Investment Market
AIM is the London Stock Exchange's global market for smaller, growing companies. Since AIM opened in 1995, more than 1200 companies have been admitted. Collectively, these companies have raised more than 14 billion US dollars whilst on AIM. There are no specific suitability criteria for companies to qualify for AIM. However, under the AIM rules, all companies must produce an admission document making certain disclosures about such matters as their directors' backgrounds, their promoters, business activities and financial positions. Importantly, all AIM companies are required to have a nominated adviser (popularly known as a "nomad") from the register of such advisers published by the Exchange. This nominated adviser is responsible, amongst other duties, for warranting to the Exchange that a particular company is appropriate for AIM. Once admitted to AIM, a company has certain ongoing disclosure requirements and needs to retain a nominated adviser at all times. Ordinarily, once a company has been on AIM for 2 years it will have the opportunity to seek admittance to the main market by using a special expedited procedure. AIM is operated, regulated and promoted by the London Stock Exchange. Email: aim@londonstockexchange.com Tel: AIM Helpline:+44 (0) 20 7797 4404. Website: www.londonstockexchange.com

Amortization
An Accounting procedure that gradually reduces the book value of an intangible asset through periodic charges to income. See Depreciation (qv).

APR
Annual Percentage Rate. The rate of interest calculated by a set formula, to give a "true" rate of interest on a loan. All companies offering loans to the public are obliged to quote the APR on the loans or credit they are offering.

AER
Interest calculated under the assumption that interest is paid and compounded per year.

Asset Backed
An investment which is covered by assets, perhaps land or buildings or intellectual property, is said to be asset backed. If the business fails, the losses to the investor will be less, since the assets will be sold and the proceeds distributed to creditors, lenders and investors, so reducing or eliminating any losses.

Asset Value
The value of the assets owned by a company. Net asset value is the value of the assets minus the value of any liabilities.

"B" Round
A financing event in an unquoted company whereby investors such as venture capitalists are sufficiently interested in a company to provide additional funds after the "A" round of financing. Typically new investors are invited to join existing shareholders in such a round of financing. Any later rounds are called "C", "D", and so on.

Basis Point/BPS
This is a measure of the yield of an instrument, equal to 1/100th of 1% of yield. For example a yield increase from 1.0% to 1.5% has grown by 50 basis points.

BBAA
The British Business Angel Association (BBAA) is the trade association dedicated to promoting angel investing and supporting early stage investment in the UK. The BBAA works to create an eco-system to promote and support the early stage investment market, providing a forum for these groups to integrate and share good practice on new developments and trends in early stage investing, development o f new services and tools to support the investment process. BBAA also acts as a voice to Government, stakeholders, business and the media to promote the interests and needs of the angel and early stage investment industry. Website: www.bbaa.org.uk

Bear Hug
An offer made directly to the Board of Directors of a target company, often as a threatening gesture prior to a hostile offer to the shareholders.

Benchmark
A standard measure of performance against which a company or a piece of equipment can be judged. A datum.

Blind Trust
This is a trust where the trustees have full discretion over the assets and the beneficiaries of the trust have no knowledge of its holdings and no ability to control what happens to those assets.

Break-even
The level of sales necessary for a company to cover all its fixed and variable costs. Above break-even sales, a company will be profitable.

Bridge Financing
Capital received by a company to cover a short term requirement eg to build a new factory before the existing factory is sold.

Bring-along Rights
See Tag-along rights (qv).

Broad-Based Weighted Average Ratchet
A type of anti-dilution mechanism. A weighted average ratchet adjusts downward the price per share of the preferred stock of investor A due to the issuance of new preferred shares to new investor B at a price lower than the price investor A originally received. Investor A's preferred stock is repriced to a weighed average of investor A's price and investor B's price. A broadbased ratchet uses all common stock outstanding on a fully diluted basis (including all convertible securities, warrants and options) in the denominator of the formula for determining the new weighed average price. Compare Narrow-Based Weighted Average ratchet (qv).

Bubble
When a market in any good becomes unrealistically and unsustainably overvalued. For an excellent history of bubbles in history refer to Great Bubbles, Reactions to the South Sea Bubble, the Mississippi Scheme and the Tulip Mania Affair, published by Pickering & Chatto (Publishers) Ltd, www.pickeringchatto.com

Burn Rate
The rate at which a company is consuming cash each month. A high technology start-up will often have a high burn rate while people are employed to develop the technology and before any sales are achieved.

Burn Out/Cram Down/Wash Out
This is when an existing investor's shareholding suffers extraordinary dilution, from a later round of financing by a company.

Business Angel
An individual who invests capital in a small business, and who will often be actively involved in helping the business to grow.

Business Angel Networks
Private or public sector owned and operated networks where business angels can see private equity investment opportunities and decide whether to opt in to an investment. Such networks also enable angels to syndicate investments. Many networks in the UK operate small side-car venture capital funds that can invest alongside angels in the network. Typically networks do not act in a corporate finance or other advisory role.

Business Expansion Scheme/BES
A UK scheme started in the early 1980s and originally intended to encourage high tax payers to invest and take and interest in small businesses. In practice, the scheme became a tax avoidance measure, and was used more to turn a bad return on a safe investment into a good return on a safe investment. In the last years of the scheme, which ended in 1993, over 90% of funds went into property investment, which was originally specifically excluded. In 1994 BES was replaced by Enterprise Investment Scheme (qv).

Business Plan
A plan written by the management of the company (often with the assistance of their advisers), usually for the purpose of raising capital, describing how the capital will be used to develop the business.

Buy-back
The owner of a company who sells shares in his company may retain the right to buy-back some or all of the shares he sells, usually at a price which will show a good return to the investor. When used in reference to quoted companies this term frequently refers to the right of the company to buy-back shares in itself from its shareholders, sometimes at a fixed price and sometimes by way of a tender offer.

BVCA
British Venture Capital Association, association of suppliers of venture capital and investment capital. Website: www.bvca.co.uk

Compound Annual Growth Rate/CAGR
The year over year growth rate applied to an investment or other aspect of a firm using a base amount.

Call Option
The right to buy a security at a given price (or range) within a specific time period.

Capital Gains
The difference between the price paid for shares (or other capital assets) and the price at which they are sold.

Capital Call/Draw Down
The act of a venture capital firm's investors physically transferring the money that they have already pledged so it reaches the investee company. This takes place once the venture capitalist has made the decision to invest and approached its investors accordingly.

Capitalization Table/Cap Table
A table showing the total amount of the various securities issued by a firm, with the amount of investment obtained from each source and the securities distributed - different types of shares, options and warrants etc and respective capitalization ratios.

Captive Funds
Venture capital funds which are owned by larger financial institutions.

Carried Interest
The portion of any gains realized by the fund to which the fund managers are entitled, generally without having to contribute capital to the fund. Carried interest payments are customary in the venture capital industry, in order to create a significant economic incentive for venture capital fund managers to achieve capital gains.

Carry/Cost of carry/Net Financing Cost
Investors are concerned about carry which is the difference between how much it is costing them to finance an asset/investment (ie the loss of not putting the equivalent cash sum on deposit at the bank) and how much that asset/investment is yielding them since purchase. Positive carry is when the yield received is greater than the financing cost; negative carry is the opposite.

Conversion Ratio
The number of shares of stock into which a convertible security may be converted.

Conversion Ration
The par value of the convertible security divided by the conversion price.

Cash Flow
The flow of cash in and out of a company. A company may be profitable, but still have a negative cash flow and therefore fail. A company may be loss-making and, for a time, still have a positive cash flow. First-time entrepreneurs should take care to understand the distinction between profit and loss and cash flow.

Clawback
This is the requirement that a fund's managers will not receive more of a financial reward over the life of the fund than was originally understood when the fund was set-up. It ensures that the other investors reap as much of the rewards as possible. Usually the clawback is fixed to ensure that the managers will not receive more than a fixed percentage of cumulative profits - often 20%.

Closing
The event occurring after the signing of all legal documentation between the investor and the investee and following the transfer of capital to the investee in exchange for share ownership or a debt instrument.

Co-investment/Syndication
When a group of investors invest alongside one another in an investee company. Frequently this includes individuals (usually general partners) alongside a private equity fund in a financing round.

Collar Agreement
This is when adjustments in the number of shares offered in a stock-for-stock exchange are pre-agreed to account for price fluctuations before the completion of the deal.

Company Doctor
An experienced, professional manager who specialises in providing executive services to a troubled company.

Company Voluntary Arrangement/CVA
If a company is failing, its principals may make a voluntary negotiated settlement with its creditors. This is also known as a Corporate Voluntary Arrangement or Corporate Voluntary Agreement.

Compliance
The process to ensure that the financial regulations are complied with. It has particular relevance for quoted companies. Many of the rules are designed to protect the public from misleading claims about returns they could receive from investments. Others outlaw insider trading. The Financial Services Act 2000 sets out the legal requirements relating to compliance by companies in the UK.

Convertible
Financial instruments which convert into others, usually ordinary shares. For example a convertible preference share will convert into a certain number of ordinary shares in the same company in certain circumstances which are defined when the original deal is done, eg when company profits reach a certain level, at a certain date or at the behest of one of the parties to the agreement.

Corporate Venturing
The practice of large, typically multinational, firms of providing funds to small firms to encourage a steady flow of new products, techniques and technologies and possibly, acquisitions.

Corporation tax
The tax on company profits.

Covenant
This is protective clause in an agreement pertaining to one or other of the shareholders/debt holders.

Cumulative Shares
Typically as in cumulative preference share. A preference share is entitled to a preference dividend, ie a first share of profits of a company, ahead of ordinary shares. A cumulative preference share is entitled to the first share of profits plus back payments on any such dividends, which were missed or postponed in previous years.

Current Assets
Assets of a company, such as cash, stock and debtors, which can be converted into cash either immediately or in the short term (ie within a few months).

Deal Flow
The number of investment opportunities which an investor receives each year.

Debt
In terms of financing a business there is a distinction between debt and equity. Debt is money borrowed from a bank or other institution or other party which is subject to interest paid at a specified rate at specific points in time. The total borrowed must be repaid either on a specified date or on demand. The debt holders have no rights over or interest in the equity of a company which has borrowed the debt.

Depreciation
This is the expense accrued to the profit and loss account from an asset on the balance sheet that is no longer as valuable as previously recorded. Value can be diminished frequently because time has passed and the asset has got "older" and is therefore no longer as valuable as when it was new. As it is a non-cash expense, it increases free cash flow while decreasing the amount of a company's reported earnings. See Amortization (qv).

Development Capital/Expansion Capital/Growth Capital
This usually refers to equity capital raised to provide for the company to grow ambitiously.

Dilution
When an existing shareholder sees his/her percentage shareholding reduced by the issuance of new shares. This can take place due to the conversion of other instruments into the class of shares or by a new financing round.

Dilution Protection
This is a provision frequently demanded by venture capitalists which mainly applies to convertible securities. Usually it is agreed that the conversion ratio is changed accordingly in the case of a stock dividend or extraordinary distribution to avoid dilution of a convertible shareholder's potential equity position if they were to convert on the original terms agreed. It is usually achieved through a share split or stock dividend in excess of 5% or by issuing stock below book value. Shareholder Agreements also typically contain anti-dilution provisions in the event of a downround financing later on at a lower valuation than they invested at.

Discount Rate
Similar to an interest rate. In the US it is equivalent to the UK bank rate. In terms of Net Present Value Calculations, it is a rate computed from the bank base rate adjusted for the rate at which it would cost the company to borrow commercially.

Dividends
Once a company is profitable is it able to declare that some or all of these profits should be paid out to its shareholders. Such payments are known as dividends.

Drag-along Rights/Pull-along Rights
A majority shareholders' right, obligating shareholders whose shares are bound into the shareholders' agreement to sell their shares into an offer the majority wishes to execute. See Tagalong Rights (qv).

Due Diligence
This is when potential investors analyse and assess the desirability, value, and potential of an investment opportunity. This can vary from a relatively light-handed procedure to an extensive exercise taking months. It is frequently a cause of the great length of time it can take to complete a financing round.

Early Stage
When a company that has completed its seed stage and its start-up stage, has a core management team, has proven its concept or completed its beta test, has achieved some sales, but is not yet profitable or cashflow positive. See Seed Stage (qv).

Earnout
Sometimes when a company is sold, part of the payment will be deferred. The seller will thus receive some cash now and some cash in each of the next few years. The amount of these deferred payments will often be linked to the profitability of the company in those years. This is known as earn out and is intended to reassure the buyer of the company's state at the time of exchange.

EASDAQ
The European arm of NASDAQ, the independent US stockmarket which attracted many smaller technology companies. The stockmarket was wound down at the end of 2003.

EBAN
The European Business Angel Network (EBAN) is the European trade association for business angels, seed funds, and other early stage market players. EBAN is an independent and non-profit association representing the interests of business angels networks, early stage venture capital funds and other entities involved in bridging the equity gap in Europe. Website: www.eban.org

EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization, used as a measure of cashflow as it adjusts for non cash items in the profit and loss account and also tax. It also indicates what funds a company might have available to fund loan payments on borrowings.

Elevator Pitch
A very short (5 minutes) presentation of an entrepreneur's idea, business model and case and details of competitive position delivered to potential investors.

Employee Share Option Plan/ESOP
When a company reserves shares for purchase by and issuance to key employees used to incentivise these people to build long-term value in the business. In the UK, ESOPs can be approved or unapproved by the Inland Revenue bringing different levels of relief to the individuals in the Plan.

Enterprise Investment Scheme/EIS
The EIS was launched as a successor to the BES (qv) in January 1994. It aims to encourage wealthy individuals to invest in smaller unquoted companies and to play an active part in their management, thereby becoming Business Angels (qv). An EIS investor receives capital gains tax and income tax relief at varying levels provided the shares which are held under EIS are owned for three years. If the investment fails further tax relief is available. Under the EIS a business angel investor may be paid a reasonable salary by the investee company and may become a director, but must not have been previously involved with the company before investing. There are restrictions on which types of company are eligible under EIS. If a company obtains a quotation on the Main Market of the London Stock Exchange within the qualifying period for EIS tax relief, the investor loses those reliefs, but the company can list on the AIM, OFEX and Sharemark markets without losing the relief.

Enterprise Value/EV
This is a more "true" measure of a company's value as it includes the debt and quasi debt that an acquirer would have to take on when buying a company as well as market capitalisation. It also adjusts for cash and cash equivalents which an acquirer would have access to if it controlled the company.

Enterprise Zone
Geographical area which attracts tax benefits for businesses located in the area.

Entrepreneur
Normally an owner of an independent business. Term used to describe an enterprising person, hence often related to the setting up of a new or growing company. Business owners who have no ambitions to grow their business beyond that which gives them a secure income would not be described as entrepreneurs. Entrepreneurs are also typically those who are seeking venture capital.

Earnings Per Share/EPS
Net profit divided but the number of ordinary shares in issue. Fully diluted earnings per share (qv).

Eurex
Eurex is the world's leading futures and options market for euro denominated derivative instruments. Its electronic trading platform provides access to a broad range of international benchmark products. With market participants connected from 700 locations worldwide, trading volume at Eurex exceeded 801 million contracts in 2002, surpassing the previous year's total by 19 percent. With 781 million contracts traded and cleared at Eurex in the first nine months of 2003, the exchange continues on its growth path. Source: www.eurexchange.com.

Equity
Equity or share capital is the risk capital provided to finance a business. If the business fails the equity capital will usually be lost. If the business succeeds, the profits belong to the shareholders.

Equity Kicker
This is usually used in mezzanine financings where a small number of shares or warrants are added to what is primarily a debt financing.

EVCA
The European Venture Capital Association, for more information visit www.evca.com

Exclusivity/No Shop/No Solicitation Clause
An exclusivity clause requires the company to negotiate exclusively with the potential investor, and not solicit an investment proposal from anyone else for a set period of time after the term sheet is signed. This protects the investor from facing the implications of another bidder entering a fundraising round and damaging negotiations.

Exercise price
The price at which an option or warrant can be exercised.

Exit Route/Exit Strategy
The method for liquidating an investment in a company obtaining the maximum possible return. Exit strategies can include selling or distributing the investee company's shares in and after an initial public offering (IPO), a sale of the investee to another company or a recapitalization. Increasingly venture capitalists are considering selling in the Secondary market (qv) as other exit opportunities are limited.

Factoring
A company goes to a factor to discounts its invoices, with the factor paying a percentage of the value of the invoice up front and the balance, less a fee, when the invoice is finally paid by the creditor. A similar exercise is called invoice discounting when the company manages its own sales ledger and debt collection rather than the factoring agency doing so.

Fees
Investment companies earn their rewards in the form of a dividend or interest payments, but the may also be entitled to fees in connection with putting together the deal and for monitoring the progress of the investment.

Fixed assets
Assets such as land and buildings which are fixed and which cannot be moved or sold easily or quickly (cf Current Assets).

Financial Services and Markets Act 2000
The UK Act that provides the regulation of the financial services industry in the UK.

Financial Structure
The debt, equity and other financial instruments used to provide finance for a company.

Flotation
When a company begins trading its shares on a stock exchange.

Follow-on Rounds
When a company seeks to and obtains additional rounds of financing from its shareholders. See "A" round (qv).

Founders' Shares
Shares owned by a company's founders when the company is set up.

Free Cash Flow
The cash flow of a company available to service the capital structure of the firm. Typically measured as operating cash flow less capital expenditures and tax obligations.

Friends and Family Shares
Shares to friends and family members issued early on in the life of a company. Usually these shares are issued at a heavily discounted rate to the price achieved at an eventual IPO.

FSA
The Financial Services Authority, the immensely powerful UK regulator of the financial services industry. Often referred to as "the Regulator".

Fully Diluted Earnings Per Share
This is the net profit adjusted for any income from capital raised from convertible shares converting or warrants being exercised, divided by the Fully Diluted Outstanding Shares (qv).

Fully Diluted Outstanding Shares
The number of shares representing total company ownership, including ordinary shares and assuming all current convertible shares, preferred shares, options, warrants, and other convertible securities are converted or exercised.

Fund of Funds
Specialist fund set up to invest in a range of private equity fund managers, who in turn invest the capital into investee companies. Used as a method by investors to spread risk across a wider private equity portfolio than would otherwise be achievable.

Gearing
The ratio of debt to equity in a company. In general the higher the gearing the higher the percentage of annual profits which must be used to pay interest and the greater the vulnerability of the company to events outside its control such as a rise in interest rates or a fall in sales. There is no precise and accepted definition of gearing and therefore the way the figure is calculated should be checked. Grey areas can be long-term loans from shareholders and convertible equity.

General Partner
The General Partner is responsible for all management decisions of a limited partnership. The General Partner has a legal duty to act in the best interests of the Limited Partners (qv) and is fully liable for its actions.

Golden Handcuffs
When an employee terminates his employment contract early thereby relinquishing unvested stock.

Golden Parachute
Senior management employment contract that provides significant compensation upon the occurrence of certain events such as a change of control in the company, that might lead to the individual losing the long term benefits of their contract.

Gross Margin
(Sales price-cost of materials and direct labour)/Sales price. See Mark-up (qv).

Hands-on/Hand-off
An investor who does/does not play an active part in the investee company. See Strategic Investor (qv).

High-tech
Innovative technological development especially in life sciences, biotechnology and mechanical engineering.

Hockey stick projections
The general shape and form of a chart showing the financial and associated projections that increase dramatically at some point in the future. Frequently used as a derogative term to describe the over-optimistic projections prepared by entrepreneurs.

Holding Company
A company which holds (ie owns) a number of subsidiary, usually trading, companies. Quoted PLCs are usually holding companies.

Hostile Takeover
The takeover of a company against the wishes of the incumbent management or board. Usually referred in the context of quoted companies. Note: All UK Plcs regardless of whether or not they are quoted are subject to the Take-Over Code (qv). Limited companies are not subject to the Take-over Code. Note, it is almost impossible to takeover an unquoted company on a hostile basis.

Hunting Licence
The permission of a senior executive within a venture capital firm for greater, in-depth investigation of a potential investment once a cursory, preliminary investigation has shown it to be promising.

Hurdle Rate
This is the internal rate of return that a fund must achieve before its general partners or managers may receive an increased interest in the proceeds of the fund. If an investment is not going to reach this internal rate of return it is unlikely that the general partners will be in favour of it.

Incubator
An incubator assists the entrepreneur through every stage of their development claiming a similar equity stake to that of a vc. Incubators often provide the entrepreneur with funding, personnel, office space and equipment so they are able to survive once they have left the incubator. However, if the entrepreneur fails to obtain second round funding they can be left by the incubator to survive on their own.

Indemnities
The promise that if warranties (qv) made by a warrantor are proved to be false then compensation will be paid to the people to whom the warranty has been addressed.

Industry Sectors
Classification of investments according to the nature of business that a company is involved in.

Intellectual Property
A company's intangible assets like patents, brand names, etc.

Internal Rate of Return/IRR
A measure of financial performance - the rate at which the present value of one or more investments is equal to the present value of the returns on those investments.

Invoice Discounting
A variation of factoring (qv).

IPO/Initial Public Offering
See Flotation (qv).

J-Curve Effect
This the curve realized by plotting the returns generated by a private equity fund against time (from inception to termination). In the early years of a fund start-up costs and management fees reduce the value of the fund and positive returns are only generated when the investments start yielding an income or are sold at a profit. In the early years therefore the fund shows a negative return, but when exits are achieved the returns rise significantly. It is not usually possible to estimate the likely returns from a fund from three to five years and the return will not be known for certain until the fund is wound-up.

Killer Application
This is usually used in software to describe a programme that is far superior to its competitors who, in turn, are unlikely to be able to emulate it.

landMARK
The London Stock Exchange market for quoted regional companies dedicated to highlighting their potential in every area of the UK and Ireland. It is composed of over 2,200 businesses traded on the main market and AIM which cover a range of industry sectors, sharing strong foundations in certain regions of the UK and Ireland. landMARK gives companies a strong basis for their own locally-focused investor relations campaigns. It provides a point of focus for press and broadcasters in their local financial and business coverage and creates the foundations for communities of investors, advisers and companies. landMARK is attribute-led which means that its companies benefit by being categorised according to region rather than by industry sector and so ensuring that they stand apart from other companies on the London markets, attracting the interest of both local investors and the media. For more information visit www.londonstockexchange.com/landmark/uk_overview.asp

Later Stage
A company that is already revenue generating and growing.

Lead Investor/Bell Cow Investor
The largest shareholder in a syndicate who is in charge of arranging the financing and most actively involved in the overall project.

Leaseback
Sale and leaseback. To raise capital by selling assets eg a factory which it previously owned and then leases it back off the acquirer (usually a financial institution). Other variations include lease and leaseback. These structures can also be tax driven.

Leasing
Payment for an asset by regular payments over a fixed period, with ownership of the asset held by the lessor. Depending on the terms of the lease, the asset can be retained by the lessor or acquired by the lessee. Can be an off-balance sheet method of financing and therefore not readily identifiable by third parties, although having a significant effect on gearing (qv).

Lemon
A bad investment. "Lemons ripen before plums"

Leveraged Buyout/LBO
A takeover of a company, using a combination of equity, but principally borrowed funds, usually using the investee company's assets as collateral for the debt financing taken out by the purchaser and the company's cashflow for financing the repayments on that debt. Sometimes an LBO is used by a management team to regain control of the company from other shareholders. Usually the shareholders who are being bought out receive a premium price for their shares.

Limited Partner/LP
An investor in a limited partnership who has no voice in the management of the partnership, has limited liability and has priority over General partners in the liquidation of a partnership.

Limited Partnership
A partnership comprised of a General Partner and Limited Partners. The General Partner receives a management fee and a percentage of the profits (or carried interest). The Limited Partners receive income, capital gains and tax benefits.

Liquidation
The sale of all of a company's assets, for distribution to creditors and shareholders in order of priority.

Liquidation Preference
The contractual right of an investor to priority in receiving the proceeds from the liquidation of a company. Eg, 2x liquidation preference equates to the right to receive two times the original investment upon liquidation.

Liquidity Event
When an investor realizes a gain or loss on an investment and ends its relationship with an investee company.

Listing
When a company trades it shares on a stock market.

Living Dead
An investment which is not going well, but which is managing to survive.

Loan Capital
Form of debt which has to be repaid at a specified time in the future (as distinct from a bank overdraft which may be called in at short notice).

Lock-up
The period of time that certain shareholders waive their rights to sell their shares and are physically prevented from selling post flotation of a company. Underwriters to a flotation generally insist upon lockups of at least 180 days from shareholders with 1% ownership or more in order to allow an orderly market to develop in the shares. The management and directors of the company, strategic partners are also usually subject to a lock-up.

Management Buy-in
Purchase of a business by an outside team of managers who have found financial backers and plant to manage the business actively themselves.

Management Buy-out/MBO
When the current management team in a business acquire or buy at least 50% of the business they manage. Frequently MBOs are backed by venture capitalists who take a significant stake in the business. It is a much less risky investment for investors than backing earlier stage businesses.

Management Fee
The fee paid out of a venture capital fund to the fund's managers eg the General Partner or the investment adviser in return for managing the fund. Usually paid annually and representing around 1-3% of the size of the fund.

Mark-up
(Sales price-cost of materials and direct labour)/cost of materials and direct labour. See Gross Margin (qv).

Marriage Bureau
Organisations which match investors and entrepreneurs, often a term used to describe a business angel network.

Mezzanine Financing
1. Financing for a company immediately prior to its IPO. Mezzanine level financing can be in the form of preference share, convertible bonds or subordinated debt. 2. A financing instrument which has elements of both debt and equity eg convertible debt.

Narrow-based Weighted Average Ratchet
This is a type of anti-dilution mechanism, which adjusts downward the price per share of the preferred stock of an existing investor when new preferred shares are issued to a new investor at a reduced price. The existing investor's shares are repriced to a weighed average of all the shares now in issue. A narrow-based ratchet uses only issued ordinary shares in the calculation for working out the new weighted average price. See Broad-Based Weighted Average Ratchet (qv).

NASDAQ
The National Association of Security Dealers Automated Quotation is the world's largest electronic stock market with approximately 3,600 of the world's most innovative companies listed. It is also the fastest growing. More companies are listed on NASDAQ than all other major US stock markets. Trades are executed through a sophisticated computer and telecommunications network - a system which transmits timely, critical investment information to more than 1.3 million users in 83 countries. It was launched in 1971 and is operated by the Nasdaq Stock Market Inc. Website: www.nasdaq.com.

Non-disclosure Agreement/NDA
The agreement issued by entrepreneurs to potential investors to protect the privacy of their ideas when disclosing those ideas to third parties.

Net Asset Value/NAV
The assets/investments in the company/fund divided by the outstanding number of shares of the company/fund.

Net Present Value/NPV
The sum of the cashflows of a project/investment including initial cash investment and final cash realised on exit discounted to come to a present value of those cashflows.

Newco
A generic name for any new company.

Non-executive Director
"Part-time" directors who share all the legal responsibilities of their executive colleagues on the board of a company. The general view is that they can operate as an independent director able to take a long term view of a company and protect the interests of shareholders. An investor will often appoint a non-executive to the board of an investee company as one way of monitoring his/her investment.

Observation Rights
The right taken by non-management shareholders to attend and observe, but not actively participate in a company's board meetings. See Shadow Director (qv).

OFEX
The OFEX market is a secondary market for the trading of unlisted and unquoted securities in the UK, off exchange. It is a prescribed market under Section 118 of the Financial Services and Markets Act 2000. The total number of companies using OFEX at present is 143, with a total combined market cap of £1,154m. OFEX plc is the operator of the OFEX market and a wholly-owned subsidiary of OFEX Holdings plc. OFEX plc is authorised and regulated by the Financial Services Authority ("FSA"). For more information visit www.ofex.com.

Off-the-shelf Company
A package of legal documents that may be easily purchased to allow an entrepreneur to trade through a registered company.

Option Pool
The number of shares set aside for future issuance to employees of a private company.

Pari Passu
Equal to.

Participating Preferred Shares
Shares that bear the right to a stated dividend (and frequently a return of the original investment upon flotation or sale of the company) and also to additional dividends related to payments of dividends to ordinary shareholders.

Partnership
An entity in which each partner shares in its profits, loses and liabilities. The entity itself is not taxed. Instead each partner is responsible for the taxes on its share of profits and losses.

Partnership Agreement
The contract that specifies the compensation and conditions governing the relationship between Limited Partner and General Partners for the duration of a private equity fund's life.

Phoenix Plan
A strategy intended to rescue a firm from a dire financial or commercial position.

Placing
The sale of a shareholding or block of shares, through a broker, to other investors, usually institutions.

Plum
A successful investment, "Plums ripen later than lemons".

Poison Pill
A right issued by a corporation as a preventative anti-takeover measure enabling a party to purchase shares in either their company or in the combined target and bidder entity at a substantial discount, usually 50%. This discount may make the takeover prohibitively expensive. Common in the US.

Portfolio Companies
The companies in which a venture capital fund is invested.

Post-Money Valuation
This is the valuation of the company immediately after a round of financing. It comprises the Enterprise value (qv) of the company and the amount of cash invested in the round. For example, a venture capitalist may invest £3 million in a company valued at £2 million "pre-money" (before the investment was made). As a result, the start-up will have a post-money valuation of £5 million.

Pre-money Valuation
The valuation of a company prior to a round of investment. This valuation is calculated using various methods, such as discounted Price Earnings Ratios multiplied by historical, current or future earnings or a Net Present Value computation, as well as a comparative valuation based on the market valuation of comparable quoted and prices achieved for exits of comparable private companies.

Preemption Right
A shareholder's right to acquire shares in the future when a new round of financing is held thereby preventing that shareholder from being diluted.

Preferred Dividend
A dividend accruing on preferred shares.

Preferred Shares/Preference Shares
A class of shares that may pay dividends at a specified rate and that has priority over common stock in the payment of dividends and the liquidation of assets.

Price Earnings Ratio/PER/P/E
The quoted market price per share/earnings per share. Alternatively market capitalisation/net profit after tax. Used by analysts as an indicator of the expected future performance of a company relative to its peers.

Private Equity
Shares in a company that not listed on a public exchange. Such shares are generally illiquid and thought of as a long-term investment. As they are not listed on an exchange, any investor wishing to sell shares in private companies must find a buyer in the absence of a marketplace and often has restrictions in the ability to transfer these shares under the terms of the Shareholders Agreement.

Private Placement Memorandum/Offering Memorandum
A document that outlines the terms of shares to be offered in a private placement. Can resemble a business plan in content and structure.

Put Option
The right to sell a security at a given price (or range) within a given time period.

Ratchet/Sliding Scale
Basis for offering increased equity interest in a company to its management, based on the results of the company.

Recapitalization
The reorganization of a company's capital structure.

Receivership
The common term for administrative receivership (qv).

Refinancing Bank Debt
An investment of money into a company in debt, in order to wipe out of pay off any loans then possess. This improves the potential of the company which no longer incurs interest payments. The investment can then be paid back at a later date.

Redeemable Preferred Shares/Exploding Preferred Shares
Shares that are redeemable at the shareholder's option after (typically) five years, which in turn gives the holders (potentially converting to creditors) leverage to induce the company to arrange a liquidity event.

Regional Venture Capital Funds/RVCFS
Regional Venture Capital Funds are an England wide programme to provide risk capital finance in amounts up to £500,000 to SMEs who demonstrate growth potential. The funds, managed by experienced venture capital professionals, are commercially focused, making commercial returns.

Replacement Capital
Capital provided as a substitute for funds removed by a previous shareholder, such as a retiring director, who now wishes to realise his stake.

Restructure
Usually involving major changes in the organisation of a company, possibly by changing the management and/or the share ownership structure.

Return on Capital Employed/ROCE
Earnings before interest and tax (EBIT)/(Capital employed + Short term borrowings - Intangible assets). ROCE provides an idea of the efficiency and profitability of a company's capital investments. As long as ROCE is higher than the rate that the overall interest rate at which the company borrows shareholder earnings will be protected. Return on average capital employed (ROACE) can also be calculated which takes the average of opening and closing capital employed for the time period and gives be a more measured result adjusting for movements in the company's assets over time.

Revlon Duties (US)
In the US, unlike the UK, some measures can be legally instituted by a company that promote the value of an auction process, but those that thwart the value of an auction process are not allowed. Usually Revlon Duties are triggered when there are a number of bidders for a company.

Right of First Refusal
This gives an offer for shares a right to meet any other offer before the proposed contract is accepted. It can be held by existing shareholders or a new bidder.

Rights Issue/Offer
This is when a company offers new shares to existing shareholder, usually at a discount to market price. Shareholders who do not exercise these rights are usually diluted by the offering. Rights are often transferable, allowing the holder to sell them on the open market to others who may wish to exercise them.

Risk
Investors accept risks when they invest. The principal risk is that they lose money on their investment. This can be due to inflation, interest rates, default, politics, foreign exchange, call provisions, etc. In private equity, the risks that the investors are likely to face are included in the Risk Factors section of the Private Placement Memorandum (qv).

Road Show
This is when a company makes a series of presentations to potential investors to tell them about their business and to invite them to invest. It is also known as a "dog and pony show." They will usually be accompanied by their financial advisers.

Roll-over Relief
Tax relief or more precisely tax deferral, on capital gains which is granted if the gains are reinvested in a suitable vehicle eg an EIS qualifying company.

Run Rate/Run-rate
1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period of time. The run rate helps to put the company's latest results in perspective. For example, if a company has revenues of £100 million in its latest quarter, the CEO might say: "Our latest quarter puts us at a £400 million run rate." All this is saying is that if the company were to perform at the same level for the next year, they'd have annual revenues of £400 million. The run rate can be a very deceiving metric, especially in seasonal industries. A great example of this is a retailer after Christmas. Almost all retailers experience higher sales during the holiday season. It is very unlikely that the coming quarters will have sales as strong as in the 4th quarter, and so the run rate will likely overstate next year's revenue. 2. The average annual dilution from company stock option grants over the most recent three year period recorded in the annual report. Source: www.investopoedia.com.

SBIC/Small Business Investment Company/Enterprise Capital Fund
A company licensed by regulatory authorities in the US (and it is expected soon in the UK with the name Enterprise Capital Fund) to receive government leverage in order to raise capital to use in venture investing.

Secondary Market
1. The market for the sale of partnership interests in private equity funds. Sometimes limited partners choose to sell their interest in a partnership, typically to raise cash or because they cannot meet their obligation to invest more capital according to the takedown schedule. Certain investment companies specialize in buying these partnership interests at a discount. 2. The term used to describe the trading of shares in a company post flotation on a stock market.

Seed Stage/Seed Capital
The first round of capital for a start-up business. Seed money usually takes the structure of a loan or an investment in preferred stock or convertible bonds, although sometimes it is common stock. Seed money provides start-up companies with the capital required for their initial development and growth. Angel investors and early-stage venture capital funds often provide seed money.

Seed Stage Financing
An initial state of a company's growth characterized by a founding management team, business plan development, prototype development, and beta testing.

Senior Debt
Element of a financial package which consists of bank lending. It is called senior because if things go wrong, the lender has higher priority than those who provided mezzanine or equity finance.

Shadow Director
A person who although they are not legally a director of a company, is deemed to play the de facto role of a director in that company eg has sufficient influence over decisions made by the company. This can be a significant issue for large shareholders in a company who may not wish to have a board seat, but can find themselves responsible for a company's actions if they have been involved in running the company or influencing how it is run.

ShareMark
ShareMark is an online share-trading and fund raising facility for small and medium sized companies, owned by The Share Centre. The facility allows companies to list and investors to buy and sell shares in those companies. ShareMark is different to all other markets currently operating in the UK because shares are traded at a single price meaning that there is no bid/offer spread. The single price is achieved through auctioning the shares of listed companies, ShareMark can operate as a 'closed market' for those companies wishing to restrict share trading to a pre-defined group, ShareMark is an electronic auction with its computer systems continually reviewing all of the orders submitted and pinpointing the price level at which demand meets supply. Rules govern the auction price calculations, ensuring that a fair price is established for investors, but the result is straightforward: a single dealing price each period. For more information visit www.sharemark.co.uk or email: Sharemark@share.co.uk.

Share Option/Stock Options
The right to purchase or sell a share at a specified price within a stated period. The transaction takes place between the existing shareholder and another party. Note: Frequently the term warrant is used interchangeably with option. Options are often used for employee incentivisation and compensation.

Silent Partner
An investor who is not involved in the running or strategic direction of a company of which he is a shareholder.

Slippage
Delay experienced by a company in achieving financial projections as forecast by the company's plan.

Sole Investor
See lead investor.

Sophisticated investor
An investor in high risk assets (eg private equity) who has been approved by a specialist in the relevant field as being an expert in investing in that asset class - defined in the Financial Services and Markets Act 2000 (qv). A sophisticated investor has less protection under the law than an Accredited Investor (qv) in the UK.

Spin-out
Emergence of a company in its own right from a larger entity eg a business or, more commonly in the UK, from a University research department.

Star
High-growth company performing well.

Start-up capital
Capital that is raised post the seed capital stage to enable the company to commence trading.

Strategic Investors
These are investors that add value to a company by using their industry and personal ties.

Subscription Agreement/Shareholder Agreement
The agreement signed by investors and the company and its directors in a financing round, setting out the terms and conditions of the investment and obligations of the signatories thereto.

Sweat Equity
Equity which is given to the founder of the company in recognition of the effort (sweat) which he has expended in getting the company started up.

Syndicate
Underwriters or broker/dealers who sell a security as a group.

Tag-along Rights/Rights of Co-sale
This is when a minority shareholder is given the right to include their shares in any sale of control and at the same price offered to the majority shareholders.

Take-over Code
The Code of Practice operated in the context of taking over companies, overseen by the Panel on Takeovers and Mergers.

Takedown Schedule
This is a document detailing the timing and size of the capital contributions from the limited partners of a venture fund.

Target Company
A company which has been identified as a suitable acquisition

techMARK
The London Stock Exchange market within a market, grouping together the innovative technology companies. Since its launch in 1999, techMARK has established itself as a leading global market for shares in businesses at the cutting edge of technological innovation. Associated with techMARK is techMARK mediscience, the world's first international market for healthcare companies. These companies are world leaders in the fields of science and technology and techMARK mediscience recognises the dynamism and huge potential within the healthcare industry. techMARK mediscience is designed to maximise these advantages by catering for the unique requirements of these businesses. The FTSE techMARK All-Share Index includes all techMARK companies; theFTSE techMARK 100 Index excludes the largest companies and focuses on medium and small techMARK companies at the generally faster-growing end of the market; and the FTSE techMARK mediscience Index is specifically for emerging healthcare companies in the early stages of growth. The market went live on the 4th November 1999 with over 190 companies from across the main market. For more information about techMARK visit www.londonstockexchange.com/techmark/default.asp

Tender Offer
An offer to purchase stock made directly to the shareholders.

Term Sheet
A summary of the terms the investor is prepared to accept. A non-binding outline of the principal points which the Subscription Agreement (qv) and related agreements will cover in detail.

Time Value of Money
The concept that all money can earn a cash return, therefore £1 today will be worth more in the future if invested, after adjusting for inflation.

Trade Sale
Sale of a company to another company. As a form of exit, it is an alternative to flotation and more common.

Treasury Stock
Redeemable Stock issued by a company, but later reacquired. It may be held in the company's treasury indefinitely, reissued to the public, or retired. Treasury stock receives no dividends and does not carry voting power while held by the company.

Turnaround
An investment in a company in trouble, which seeks to revive the company's fortunes and set it on a profitable course.

Underwrite
When a company raises capital there is always a possibility that all the money many not be forthcoming. This risk is often underwritten by an institution or individual which, for a fee, will agree to make up any shortfall.

Venture Capital Trust/VCT
A quoted closed-end investment company traded on the Main Market of the London Stock Exchange under a scheme established by the UK Government in 1995 to encourage investment in smaller companies. Individual shareholders in a VCT receive very generous tax reliefs each year on new investments in new VCTs. All dividends from the VCT are tax free and all gains on the sales of the shares in a VCT are tax free, provided they have been held for a fixed period. The VCT can invest up to a maximum of £1m per investee company and can only invest in unquoted companies or companies listed on AIM or Ofex. They must invest their capital in a fixed period.

Venture Capital
Originally capital supplied to early stage, innovative companies where the risks were high but so were the potential returns. The term in Europe has now come to encompass almost all types of investment in unquoted companies and including Management buy-outs. Often used interchangeable with the term Private Equity, although in professional circles Venture Capital now includes the inference that the investment is at the earlier stage of the business cycle.

Venture Capitalists
Capitalists who invest in unquoted companies taking an equity percentage of around 25%. In some cases they offer managerial advice/support in return for a management fee.

Venture Catalyst
Venture Catalysts help to speed up the process of a company raising investment by screening business plans.

Vintage Year
The year a fund starts to make investments.

Vulture Capital
A derogatory term used of venture capitalists, by people who believe that venture capitalists take too much and offer too little when they invest.

Warrant/Stock Purchase Warrants/Subscription Warrants
A type of security that entitles the holder to buy a proportionate amount of shares at a specified price at any time or at certain points for a period of years. Warrants are usually issued alongside another instrument eg ordinary or preferred shares or a bond to enhance the marketability of the accompanying securities.

Warranties
Assurances, which are given by the selling shareholder or the directors of a company, verifying that statements they have made about the company and the state of the finances are true. See also indemnities (qv).

Weighted Average Cost of Capital/WACC
A calculation of a firm's cost of capital that weights each category of capital proportionately. Included in the WACC calculation are all capital sources including all types of shares and debt. WACC is calculated by multiplying the cost of each capital component by its proportional weighting and then summing: WACC= E/V x Re + D/V x Rd x (1-Tc)
Where:
Re = cost of equity
Rd = cost of debt
E = the market value of the firm's equity
D = the market value of the firm's debt
V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = the corporate tax rate
WACC is the average of the cost of each of these sources of financing weighted by their respective usage in the given situation. A weighted average, shows how much interest the company has to pay for every £/euro/dollar it borrows from third parties whether shareholders or debt providers. A firm's WACC is the overall required return on the firm as a whole. It is the appropriate discount rate (qv) to use for cash flows similar in risk to the overall firm. Source: www.investopoedia.com

White Knight
An investor who rescues a company in distress. Also a bidder considered to be friendly to the interests of the management who is invited to bid for a company when the takeover target is facing a hostile bid.

Working capital
Capital which is used to finance the ordinary trading activities of a company eg raw materials, labour costs and to finance debtors or receivables. An accounting definition would be current assets less current liabilities. Note: For start-up businesses the working capital requirements can be larger than the requirements to acquire fixed assets. For some trading businesses a rise in sales can lead to a disproportionate increase in working capital requirements.

Workout
A negotiated agreement between the debtors and its creditors outside the bankruptcy process.

Write-off
This is when an asset's value is written down to nil on the balance sheet and the write-off amount is taken as an expense through the profit and loss account. It is a non-cash item.

Write-up/Write-down
An subjective upward or downward adjustment of the value of an asset on a balance sheet. In the case of a very large asset a company may seek an independent valuation from an expert to justify their write-up/write-down to investors and third parties.