Naturally, the book uses many professional terms that are part of the common venture capital jargon. There are also terms that are used to signify several different meanings. For instance, the term Venture Capital (or VC) is used to describe the area of investments of venture capital in startup companies, but in many cases it also refers to Venture Capital Funds or to the people working in such funds. The purpose of the following short glossary is to create a uniform, basic, and common denominator for all readers (for a more comprehensive glossary, see Appendix B).
A startup is a company founded by entrepreneurs on the basis of an idea, the majority of its assets, termed intellectual property (IP) are intangible. Initially, the company's activity focuses on Research and Development (R&D), in order to prove the feasibility of the idea and to develop the prototype/preliminary product.
Financing in the preliminary stage, or the Seed, is obtained in many cases from private investors, also known as Angels. These angels invest their personal funds in young companies in order to gain a high Rate of Return. Down the road, the company is financed in several Rounds by venture capitalists of various types, comprising the venture capital industry. The first class of investors is the venture capital funds, which specialize in high-risk investments and undertake such investments on behalf of several investors (usually Institutional Investors). The funds provide investors with screening and investment management services, and offer companies financing and assistance in business management and development. Other investors in startup companies and in venture capital funds are Corporate Investors, who typically invest in ventures in areas close to their lines of business, and other financial investors such as institutional investors who invest directly in companies. In consideration for their investment, investors receive part of the company's Equity, usually in the form of Preferred Shares, which grant the investors preference in dividends, and upon dissolution and sales, as well as other rights protecting the investment and its value. The main terms of the investment are fixed in the Term Sheet, after which a detailed investment agreement (Stock Purchase Agreement) is signed. In later stages, the company may also receive financing through Debt, or by a loan combining debt and equity (Mezzanine Loan).
Once the development has concluded and sales have commenced, the company can raise capital from the public through an IPO. Listing the company for trade also allows the investors in the company to make their investment more liquid, and after a Lock-Up Period, they can sell shares directly on the stock exchange or in the course of a Secondary Offering. The main Exit techniques are the sale of shares in an IPO, and, subsequently, a Private Placement or a Merger with, or Acquisition by, a strategic investor, in consideration for shares, cash, or a combination of the two.
Part I: Establishment and Development of Ventures