Glossary | From Concept to Wall Street: A Complete Guide to Entrepreneurship and Venture Capital

Advisory Board: This group of experts, which typically consists of three to seven members, sits alongside the company's board of directors and is usually composed of reputable persons in the company's fields of activity. The board convenes periodically, but its decisions have no legally binding effect. Venture capital funds typically also have their own advisory board, composed of industry experts.

Agency Problem: Conflict between managers and owners of a company, where the manager (the agent) incentives, and hence actions, are not aligned with the those of the owners (the principals).

Agreement Among Underwriters: This agreement between members of an underwriters' syndicate appoints the investment bank which leads the offering as the lead underwriter, defines the underwriters' commitments according to their proportionate share in the offering, and authorizes the lead underwriter to allocate units to selling groups.

Allotment: A determination of the share of new securities issued which is assigned to each member of a syndicate, for underwriting and distribution.

American Depositary Receipt (ADR): A security issued in the United States to represent a share of a foreign company listed in another market.

Angel: A wealthy individual investing in private companies and ventures. Angels fulfill similar functions as venture capital funds, but invest their own capital rather than manage other investor's capital.

Beta b: A parameter which reflects the degree by which the returns of a stock, mutual fund or portfolio, vary with the return of the market (usually relative to the S&P 500 index). A share with a beta higher than 1 is more volatile than the overall market, whereas a share with a beta below 1 is less volatile than the market.

Black & Scholes Option Pricing Model: A model used to calculate the value of a call option. The model takes into account the price of the share, the exercise price, the date of expiration of the option, the risk-free interest, and the standard deviation of the return of the underlying asset.

Blue Sky Laws: Laws passed by many states which require sellers of new issues to register their IPOs and to provide financial details on their company.

Board of Directors: Individuals elected by a corporation's shareholders to oversee the management of the corporation. The members of a board of directors are paid in cash and/or stock, meet several times each year, and are legally responsible for the corporation's activities.

Bylaws: The official regulations which govern a corporation's management. They are drawn in writing at the time of incorporation, as is the charter.

Call Option: The right to buy a security at a pre-determined price (or a pre-defined formula for pricing) at a given period of time, or when a certain event happens.

Capital Gain (loss): The difference between an asset's purchase price and selling price.

Capital Asset Pricing Model (CAPM): An economic model for valuing stocks by relating risk and expected return, based on their returns sensitivity to the market returns volatility. The model is based on the concept that investors will demand additional expected return (which is known as risk premium) if asked to assume additional risk, and that any asset specific risk can be diversified away.

Carried Interest: In the context of venture capital funds, the major part of the profits, approximately 20%, which are allocated to the general partners of the fund.

Closing: The signing of an investment contract by an investor or a group of investors.

Comfort Letter: A declaration by the company's CPA which is provided to a company preparing for a public offering. This letter confirms that the financial figures in the prospectus are based on audited statements prepared in accordance with GAAP, and that no significant changes have occurred since the report was prepared.

Committed Capital: A commitment to invest capital in a private equity fund. In venture capital funds, investment commitments are customarily not paid at once, but as required by the fund manager.

Common Stock: A security which represents an ownership right in a corporation. The stock may confer voting rights and entitles the holder to a share of the company's success through dividends and/or capital appreciation. In the event of bankruptcy, common stock holders have rights to a company's assets only after liabilities are paid to bondholders, other creditors, and preferred stock holders. This is typically the type of shares held by founders and management, and the class to which all shares are converted to before an IPO.

Convertible Security: A security that can be converted to another security under specific pre-defined conditions and terms.

Corporate Venture Capital: A venture capital fund initiated by corporation in order to invest either in companies outside the corporation or in business ventures originating within the corporation which raise external capital.

Dilution: The reduction in the rate of holdings of a company's founders and other shareholders, as a result of the introduction of new investors to the company.

Distribution: The transfer of shares owned by a venture capital fund (or cash from the proceeds of selling such shares) to the fund's partners.

Dividend: A payment declared by a company's board of directors. It is given to the company's shareholders out of the company's current earnings or excess profits. They are usually given in cash, but may also be given in the form of stock (stock dividend) or in the form of other property.

Due Diligence: A review of a company's business plan and an assessment of its management team and legal condition before investing therein.

Earn-Up: An agreement under which an acquirer of a company provides the management and investors of the acquired company with performance-based financial compensation for their sold shares.

Employee Stock Ownership Plan (ESOP): A fund established for the purpose of granting options to a company's employees. The option plan is common in many companies and is designed to motivate employees. The plan also confers tax benefits on the company, and is also known as a stock option plan or stock purchase plan.

Endowment: A pool of assets owned by universities, pension funds, hospitals, and many nonprofit institutions, and mainly invested for long-term.

Equity: Ownership of a corporation, usually in the form of common stock or preferred stock; also, total assets less total liabilities. Hence, equity is also known as shareholder's equity, or net worth.

Equity Kicker: A transaction in which a number of shares or options are given as an additional consideration for a debt-based investment in a company.

Exercise Price: The price at which an option can be exercised.

Exit: The manner in which an investor closes out a certain position, usually by converting it to cash. In the context of a venture capital investment liquidating the investment by an offering or sale of the company.

Financial Statement: A report which describes the financial condition of a company in quantitative terms. It usually includes a balance sheet, an income statement, a cash flow statement, and changes in equity statement.

Financing Round: The raising of capital for a company through investors. Venture capitalists usually provide the capital in stages, and therefore a typical company supported by venture capital will receive several financing infusions over several rounds which are spread out over a few years.

Form 10-K: An annual report which every traded company is required to file with the Securities and Exchange Commission. The report provides a wide variety of concise data about the company. Foreign private issuers are required to file a Form 20-F.

Form 10-Q: A document of the Securities and Exchange Commission (SEC) used to file quarterly reports, which every domestic publicly traded company in the United States is required to file. These reports include the unaudited financial statements and any other material information which the company is required by the regulations to disclose to the public.

Form 20-F: A document of the Securities and Exchange Commission (SEC). This document can be used both for the registration of shares which are already traded in the country of origin when listed for trade in the United States (Seasoned Securities), and for the filing of the annual reports of all foreign companies traded in the United States.

Form F-1: A document of the Securities and Exchange Commission (SEC) used to list the shares of a foreign company for trade in the United States within the framework of a public offering.

GAAP (Generally Accepted Accounting Principles): A well-known and widely accepted set of rules, conventions, standards, and procedures for reporting financial information, which was established by the Financial Accounting Standards Board.

Gatekeeper: A financial advisor assisting investors (mainly institutional) in selecting investments. These advisors play a major role in advising the allocation of institutional investors funds between venture capital funds. They may also manage funds that invests in other funds (fund of fund).

General Partner: An individual or a company managing a limited partnership, who is responsible for the current performance of the fund. The general partners are responsible for all of the fund's liabilities.

Initial Public Offering (IPO): The sale of shares to the public of a company that has not yet been traded on a stock exchange; also, a company's first offering of stock to the public.

Institutional Investor: An entity with large amounts to invest, such as investment companies, mutual funds, brokerages, insurance companies, pension funds, investment banks, and endowment funds.

Investment Bank: A financial intermediary among whose specialties are the underwriting of securities offerings, and assisting in mergers and acquisitions.

Investment Committee: A group which in the case of a private equity fund is usually composed of general partners, which reviews the potential and existing investments, and makes investment decisions.

Lead Underwriter: The underwriter which manages the underwriters' syndicate (and which is also known as the Managing Underwriter).

Leveraged Buyout (LBO): The acquisition of a company or a business unit through debt.

Licensee: The party which, in a licensing agreement, receives the right to use a technology, a product, or a brand name in exchange for payments.

Limited Partner: An investor in a limited partnership. Limited partners can monitor the progress of the partnership but cannot be involved in its daily management.

Limited Partnership: A business organization with one or more general partners (which manages the business and bears the legal debts and responsibility), and with one or more limited partners, which do not participate in the daily management, and are liable only to the extent and scope of their investment. The organization has a contractual arrangement that limits the term of the partnership.

Lock-Up: A condition in the underwriting contract between an investment bank and existing shareholders which prohibits interested parties in the corporation and private investors from selling their shares at the time of the offering, and for a certain period of time thereafter.

Management Fee: A payment made to the general partners, in order to cover their salaries and other expenses. The fees is typically specified as a percentage of the partners' committed capital.

Market Maker: A broker or bank responsible for conducting the bids and trade of a company's shares, and are willing and able to buy or sell at publicly quoted prices.

Mezzanine Financing: An investment in subordinated bonds which are superior to equity but subordinate to bank debt. The same terms also represent equity financing round shortly before an initial public offering.

Milestone Payments: The spreading of payments in an investment agreement. The payments are made at pre-determined times or when certain technological or business objectives are achieved.

Net Present Value (NPV): A valuation method which calculates the expected current value of cash flows from an investment, by adjusting the nominal cash flows for the time and riskiness associated with achieving them (the cost of capital).

Non-Disclosure Agreement (NDA): A contract in which parties to a transaction agree not to disclose certain information for a certain period of time.

Option: The right to buy or sell a security at a pre-determined price (or range of prices) in a given period of time.

Over Allotment Option, Green Shoe: The option given to an underwriter in a public offering granting it the possibility, within a period of time ranging between 15 and 45 days (usually 30 days) after the closing date of the original transaction, to purchase additional securities from the issuer (usually up to 15% of the shares sold) at the original price of the offering to the public, in order to meet over-subscriptions for the securities.

Participating Preferred Stock: A convertible share, the holder of which receives, under certain conditions, both the return of his original investment and his proportionate share of the profits generated by the liquidation of the company's assets.

Partnership Agreement: A contract specifying the terms and conditions governing the relationships between the limited partners and the general partner.

Piggyback Registration Rights: The rights of an investor to register his shares and to sell them together with the company's shares in the event that the company conducts an offering.

Post-Money Valuation: The price paid for a share in a given financing round, multiplied by the total number of shares after the round.

Preemptive Right: The right of current shareholders to preserve the rate of their ownership of a company by buying shares proportionately to their holdings in the case of an issuance to additional investors.

Preferred Stock: Stock that is given preference over common stock with respect to dividend distributions or payments in the event of the company's sale or liquidation. Preferred stock shareholders may also enjoy additional rights, such as the ability to veto mergers or replace the management.

Pre-Money Valuation: The price paid for a share in a given financing round, multiplied by the total number of shares before the round.

Primary Offering: The issuance of new securities by a company.

Private Placement: The sale of securities which are not registered at the SEC for listing. These sales are typically to wealthy individuals or institutional investors.

Prospectus: A detailed document filed with the Securities and Exchange Commission which provides a wide variety of financial and business information about the company.

Quiet Period: A period created by U.S. securities laws, which starts when a company contacts an underwriter in order to conduct a future offering, and ends 25 days after the offering. During this period, the company is prohibited from publicly disclosing any information or intimation about the company and its financial condition.

Red Herring: An early version of the prospectus which is distributed among potential investors prior to a security offering.

Registration Statement: A document filed officially with the Securities and Exchange Commission, which reviews it before the company can sell its shares to the public. The registration statement provides a wide variety of concise information about the company, as well as copies of significant legal documents.

Regulation A: A regulation of the U.S. Securities and Exchange Commission which governs offerings with a value of less than $5,000,000.

Regulation D: A regulation of the U.S. Securities and Exchange Commission which governs private placements.

Regulation S: Rules promulgated under the American 1933 Securities Law, according to which no registration (prospectus filing) is necessary in an offering outside the United States to non-U.S. investors, if the company meets several criteria which are specified in the rules, which concern the extent of the connection of the company or the public offering with the United States.

Restricted Stock: A share that cannot be sold under the procedures of the U.S. Securities and Exchange Commission or that can only be sold in limited amounts.

Right of First Refusal: A contractual provision which grants a shareholder the right to purchase assets (for example shares) before they are sold to other potential investors.

Road Show: A marketing campaign of a public offering to potential investors.

Rule 10b-5: A regulation of the U.S. Securities and Exchange Commission that generally prohibits activities with fraudulent purposes in the purchase or sale of any securities.

Rule 144: A regulation of the U.S. Securities and Exchange Commission that prohibits the sale of restricted stock for one year after the purchase thereof, and which limits the amounts of shares sold in the second year after the purchase.

S Corporation: A form of incorporation which is recognized by the U.S. tax authorities, and which is designed for companies with up to 35 shareholders. This form of incorporation enables the company to enjoy the advantages flowing from operating as a company, while regarding the company as a partnership for tax purposes (for example, by having the company being handled as a pass-through organization).

Seasoned Equity Offering: An offering by a company which has already completed an initial public offering and whose shares are already publicly traded.

Secondary Offering: The sale of shares by existing shareholders (rather than by the company). In this type of offering, the company does not receive the proceeds from the sales of the shares.

Securities and Exchange Commission (SEC): The federal securities authority in the United States. Its responsibility is to promote due disclosure, and to protect investors from fraud and manipulative practices in the securities markets.

Staging: The infusion of capital to companies in installments, with each installment being conditioned on the achievement of certain business goals.

Syndication: The purchase of shares by two or more private investors together. The term also refers to the joint underwriting of securities offering by two or more investment banks.

Term Sheet: A document outlining the general principles of a stock purchase agreement or of an investment agreement, to which the parties usually agree before discussing the formal language of the contract.

Underwriting: The purchase (and typically immediate resale) by an investment bank of securities issued by a company (or the promise to purchase them under certain conditions).

Underwriting Agreement: An agreement between a corporation issuing new securities and the lead underwriter of the syndicate.

Venture Capital Method: A valuation method by which the value of a company is calculated for a specific future point in time when the VC expects the exit, and then the discount of that future value to current value, by using a high discount rate.

Vesting: The period of time which an employee of a company is required to be employed thereby in order to be able to exercise the right given to him in an option and to convert the same into shares.

Warrant: An option to buy a share from the company under pre-specified terms.