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A transaction in which a manager or management group from outside a company buys in to that company, often with the assistance of venture capital or private equity investors.
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144 Stock
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(USA) See ‘Rule 144 Stock.’
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1933 Act (or ’33 Act)
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(USA) See ‘Securities Act of 1933.’
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1934 Act (or ’34 Act)
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(USA) See ‘Securities Exchange Act of 1934.’
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83(b) Election
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(USA) An election by an employee to treat property (usually stock) that is subject to a risk of forfeiture (i.e., unvested stock) as being vested, with the result that the employee is taxed currently on the difference between the fair market value and the amount paid for it (often zero or a nominal amount) rather than being taxed on the value when the risk of forfeiture ends. This technique is frequently used when the property is expected to dramatically increase in value by the time the risk of forfeiture ends.
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Acceleration Order
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(USA) An order by the SEC declaring a registration statement effective (and thereby making sales of securities permissible) before expiration of the statutory 20 day period from the date of filing. The filing of an amendment to a registration statement by the issuing company restarts the 20 day clock. See ‘Acceleration Request,’ ‘Effective Date,’ and ‘Going Effective.’
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Acceleration Request
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(USA) A letter (or, in some cases, oral communication) to the SEC from both the issuer and the managing underwriters of a public offering, requesting that the SEC declare a registration statement effective. The SEC’s policy, often waived, is that the acceleration request be received at least two business days prior to the date the registration statement is to become effective.
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Accountant’s Opinion
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A report signed by an independent accountant, which describes the scope of the accountant’s review and expresses an opinion on the quality of the financial statements presented. Also called accountant’s letter. See ‘Long Form Report’ and ‘Short Form Report.’
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Accredited Investor
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(USA) A term defined in Regulation D under the 1933 Act to include any of certain financial institutions; certain corporations and trusts; an officer or director of the issuer; a natural person with a net worth (with spouse) of $1 million or more; or a natural person with individual income in excess of $200,000 in each of the two most recent years (or $300,000 jointly with spouse) and an expectation of the same level in the current year.
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Accreted Value
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The theoretical price a bond would sell at if market interest rates were to remain at current levels.
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Accrual Basis
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The most commonly used accounting method, which reports income when earned and expenses when incurred, as opposed to cash basis accounting, which reports income when received and expenses when paid. See ‘Cash Basis.’
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Accrued Expenses
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Expenses that are incurred, but for which payment is not yet made, as of a given date.
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Accrued Market Discount
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An increase in the market price of a discounted bond resulting from an approaching maturity date rather than from declining interest rates.
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Accumulated Earnings Tax
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An additional tax on earnings that a business retains in an attempt to avoid the higher income taxes the owners would be subject to if the earnings were paid out to them as dividends. Also called “accumulated profits tax.”
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Accumulated Profits Tax
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See ‘Accumulated Earnings Tax.’
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Acid Test Ratio
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See ‘Quick Ratio.’
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Acquisition
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The obtaining of control, possession or ownership of a company.
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Acting In Concert
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Persons acting in concert are persons who, pursuant to an agreement or understanding (whether formal or informal), actively cooperate, often in the context of an acquisition by any of them of shares in a company, to obtain or consolidate control of that company.
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Adjustable Rate Preferred Stock
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Preferred stock whose dividend rate changes periodically based upon changes in a reference interest rate.
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Adjusted Present Value Model
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This model is similar to the Enterprise DCF model, with the difference that the Adjusted Present Value Model separates the value of the company into two components: (a) the value of the company’s operations at the cost of capital as if the company had no debt; and (b) an additional element reflecting the impact on this value of the tax savings related to leverage.
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Admission
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The event evidencing commencement of trading of securities on either the Official List of the London Stock Exchange or on AIM.
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Admission and Disclosure Standards
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The London Stock Exchange’s Admission and Disclosure Standards are for companies admitted or seeking to be admitted to trading on the London Stock Exchange.
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ADV Form
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(USA) The form required to be filed with the SEC in order to register as an investment adviser under the Investment Advisers Act of 1940.
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Advisory Board
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A group of external advisors to a private equity group or portfolio company. Advice provided varies from overall strategy to portfolio valuation. Less formal than a Board of Directors and without any of the Board of Directors’ legal authority.
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Affiliate
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(USA) A person that controls, is controlled by, or is under common control with (directly or indirectly) the entity specified. The SEC takes the position that a corporate officer, director, or 10% stockholder is presumed to be an affiliate of the corporation. An individual officer’s, director’s or 10% stockholder’s spouse and children living at home are normally considered affiliates as well.
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Aftermarket
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The trading activity in a security in the period immediately following its offer to the public.
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All Hands Meeting
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A meeting during the public offering process attended by representatives of the issuer, underwriters, their respective lawyers, and issuer’s accountants. A public offering will typically involve several all hands meetings to conduct due diligence and to draft the registration statement and prospectus.
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Allocation
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The number of securities assigned to an investor, broker, or underwriter in an offering.
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All-or-None
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An offering of securities that provides that unless all the offered securities are sold, the offering is terminated and all funds received by the issuer, underwriter, or escrow agent are returned to the investors. See ‘Best Efforts Underwriting’ and ‘Firm Commitment Underwriting.’
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Alternative Investment Market (AIM)
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The London Stock Exchange’s global market for smaller and growing companies. AIM offers the benefit of operating both an electronic quote and order trading facility. Dealings began on AIM in June 1995. Unlike the Official List of the London Stock Exchange, there is no general three year trading history requirement as a precondition of admission on AIM.
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Alternext
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Created by Euronext in April 2005, Alternext is an unregulated stock market dedicated to small and mid-cap companies.
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American Depositary Receipts or American Depositary Shares (ADR or ADS)
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The terms ADR and ADS are interchangeable with GDR and GDS, and typically refer to depositary receipt facilities based in the United States. See ‘Global Depository Receipts or Global Depository Shares (GDR or GDS)’
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American Stock Exchange (AMEX)
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(USA) An exchange or a securities market which generally lists securities of small or newer corporations than those listed on the New York Stock Exchange, located in New York, has historically been popular for trading of companies involved in the production and sale of natural resources and option trading. In 1998, Nasdaq and the American Stock Exchange combined into one corporate organization: The Nasdaq-Amex Market Group.
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Analyst
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A research analyst, usually employed by an investment bank, who ‘follows’ a company and issues reports regarding the condition and prospects of the company and its securities. The quality and reputation of an investment bank’s analyst will often be a key component in selecting an underwriter, since analyst coverage of the company after the public offering helps to generate interest in the company’s securities.
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Angel
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A person or entity that typically provides financing to companies that have progressed beyond the start-up phase but are not yet ready for venture financing. Also known as “Business Angels.”
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Angel Financing
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Capital raised for a private company from Angels and generally used as seed financing.
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Angel Network
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A typically informal network of Angels that invest together as a group.
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Annual General Meeting (AGM)
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(UK) An annual meeting called by the directors of a company that allows shareholders to stay informed and involved with company decisions and workings.
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Anti-dilution Provisions
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Provisions in an option or a convertible security (such as convertible preferred stock, which is the typical form of venture capital or mezzanine investment) which protect the holder’s investment from price dilution as the result of later issues of stock at a lower price than the investor paid by adjusting the option price or conversion ratio. Allowance is usually made for some degree of dilution without adjustment as a consequence of issuance of options to employees under share in stock option plans. See ‘Anti-dilution, Full Ratchet’ and ‘Anti-dilution, Weighted Average.’
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Anti-dilution, Full Ratchet
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(USA) Anti-dilution provisions that apply the lowest sale price for any shares of common stock (or equivalents) sold by the company after the issuing of an option or convertible security with anti-dilution protection as the adjusted option price or conversion ratio. As an example, if a prior round of financing raised capital at $2.00 per share with investors receiving full ratchet anti-dilution protection, and a subsequent round of financing was completed at $1.00 per share, the prior round investors would have the right to convert their shares at the $1.00 price, thereby doubling the number of shares they would receive. See ‘Anti-dilution Provisions’ and ‘Anti-dilution, Weighted Average.’ In the UK, ‘ratchet’ is customarily associated with a mechanism whereby the equity share of a management team may vary depending on achievement of milestones or level of exit valuation. See ‘Ratchet.’
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Anti-dilution, Weighted Average
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Anti-dilution provisions that apply a weighted average formula to adjust the option price or conversion ratio of an early-round investor, based on the sale price and number of common equivalent shares sold by the company after the issuing of the option or convertible security. As an example, if a first round of financing raised $2 million of capital at $2.00 per share and the first round investors received weighted average anti-dilution protection, the company has 2 million shares outstanding on an as converted to common stock basis and a second round of financing was consummated for another $1 million at $1.00 per share, then the first round investors would have the right to convert their shares at a weighted average adjusted price of $1.67 per share. See ‘Anti-dilution Provisions’ and ‘Anti-dilution, Full Ratchet.’
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Anti-flowback Rules
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(USA) SEC rules under Regulation S that apply to offerings initially made outside the USA to prevent subsequent sales into the USA in violation of applicable restrictions or registration requirements. See ‘Regulation S.’
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Anti-takeover Provisions
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(USA) Provisions in a company’s organizational documents that are designed to discourage undesired takeover bids. See ‘Blank Check Preferred Stock.’ ‘Poison Pill.’ ‘Shark Repellent,’ and ‘Staggered Board of Directors.’ In the UK, company law, combined with the provisions of the Takeover Code, which discourages attempts to frustrate bona fide takeovers, would likely result in such provisions being unenforceable.
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Antitrust Laws
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(USA) The United States laws regulating competition and monopolies. Although similar in general purpose to the European Union’s competition regulations, US rules may differ in details forbidding businesses from monopolizing a market or restraining free trade.
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Archangel
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(UK) Usually an outsider hired by a syndicate of Angel investors to perform due diligence on investment opportunities and coordinate allotment of investment duties among members. Archangels typically have no financial commitment to the syndicate.
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Arm’s Length
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The relationship between persons (whether companies or not) who deal on purely commercial terms, without the influence of other factors such as common ownership, a parent/subsidiary relationship between companies, or existing family or business relationships between individuals.
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Arrearage
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Unpaid dividends due to holders of preferred stock. See ‘Cumulative Preferred Stock.’
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As Converted Basis
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The determination of preferred stock rights, such as vesting and participation in a dividend, on a common stock equivalent basis, taking into account any adjustments that might be necessary.
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Asset Allocation
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A fund manager’s allocation of his investment portfolio into various asset classes (e.g., stocks, bonds, private equity).
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Asset Class
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A category of investment, which is defined by the main characteristics of risk, liquidity and return.
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Asset Cover
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One of the indicators used by banks to calculate debt ceiling. It is the extent to which debt is secured against the company’s assets. Banks apply different weighting factors to various classes of asset, depending on their liquidity and the typical reliability of the valuation.
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Asset Deal
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A sale of assets not essential for the vendor’s core business. Compare with Share deal.
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Asset Purchase Agreement
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Agreement to which one or more purchasers buy assets and take on certain liabilities (related to the purchased assets) from one or more sellers. The agreement will set out/forth the details of the sold assets and the transferred liabilities, the representations and warranties, indemnification in the event of misrepresentation, and the required approvals and actions in order for the transfer of the assets and liabilities to be valid and/or effective towards third parties. It usually includes post-closing covenants (such as the obligation for the sellers to continue to service the obligations of which the transfer cannot, cannot easily, or is deliberately not to, be enforced on the creditors and other third parties to the transfer).
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Asset Stripping
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Dismantling an acquired business by selling off operational and/or financial assets.
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Association of Private Client Investment Managers and Stockbrokers (APCIMS)
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APCIMS is the rapidly growing trade association of more than 240 firms who, on more than 400 sites, deal in stocks and shares for the UK’s 12 million private investors, as well as many overseas clients. In March 2002, APCIMS merged with the European Association of Securities Dealers (EASD) to create a pan-European association to address the concerns of investment firms.
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Auction
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A process in which an investment bank invites several private equity houses to look at a particular company that is for sale and to offer a bid to buy it.
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Audit Committee
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A committee of the board of directors responsible for selecting and overseeing the work of outside auditors and the conduct of various audit activities, normally composed of independent directors. Public issuers traded on major US markets are now required to appoint an audit committee of not less than three financially knowledgeable independent directors, one of whom must have a background in finance. The definition of an ‘independent’ director may vary from one market to another. In the EU, audit committee requirements can vary and in some instances may not exist.
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Authorization
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The process by which organizations are vetted and licensed to conduct investment business under the Financial Services and Markets Act 2000. Such organizations are known as Authorized Persons.
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Automatic Execution Suspension Period (AESP)
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The period during which automatic execution is suspended on the London Stock Exchange. An AESP is applied to a security during continuous trading, if the potential execution price of that security breaches the price tolerance levels.
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Average IRR
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The arithmetic mean of the internal rates of return (IRRs). See ‘Internal Rate of Return (IRR).’
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Backdoor Listing
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A technique used by a private company to become a public company without going through the customary initial public offering process. Such transactions typically involve the private company being merged into a public shell company. Also known as a ‘reversing-in’ process. In the UK, commonly known as a ‘reverse takeover’ or ‘RTO.’ See ‘Shell.’
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Bad Leaver
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An employee who leaves the company within a short time or who is dismissed for cause, or under other circumstances where the employee is not permitted to retain the benefit of options or other profit-sharing arrangements, such as increased value of shares or carried interest.
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Balloon Note
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A form of promissory note requiring repayment of little or no principal until the final payment. See ‘Balloon Payment.’
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Balloon Payment
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The final payment under a balloon note, commonly representing a large portion of the principal. See ‘Balloon Note.’
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Basis
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An investor’s total investment in an asset, including purchase price, commissions, and other expenses, used to determine capital gains and capital losses for tax purposes. Also called cost basis or tax basis. Also the difference between the cash price and the futures price of a given commodity.
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Basis Point
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One hundredth of a percent (0.01%). Used to measure changes in, or differences between, yields or interest rates.
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Bearer Securities
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Shares of capital stock or bonds evidenced by certificates that are not registered in any name. They are negotiable without endorsement and transferable by delivery. Bearer securities often carry numbered or dated dividend coupons. See ‘Registered Securities.’
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Beauty Parade
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An accepted mechanism for a portfolio company to select a provider of financial and professional services. The company normally draws up a short list of potential providers, who are then invited to pitch for the business.
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Benchmark
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A previously agreed upon point of reference or milestone at which venture capital investors will determine whether or not to contribute additional funds to an investee company.
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Beneficial Owner
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The person who enjoys the economic benefits of ownership of securities, although the securities may be registered in another name.
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Best Efforts Underwriting
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(USA) An underwriting arrangement in which an underwriter agrees only to use its best efforts to sell the securities as the issuer’s agent. The underwriter does not purchase the securities itself and has no obligation to purchase any amount not purchased by investors. In the UK, such a limited duty of an underwriter would be described as being on a ‘reasonable endeavors’ basis. See ‘All-or-None’ and ‘Firm Commitment Underwriting.’
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Best Execution Requirement
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The obligation of market makers, broker/dealers, and others to execute customer orders at the best price currently available, usually with reference to the then-current market price.
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Beta
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A statistical measure of a security’s volatility as compared to the overall market (a beta lower than 1 would indicate less volatility than the general market; a beta of greater than 1 would indicate more volatility).
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BI / MBO
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Buy-In/Management Buy-Out. A combination of a Management Buy-In (MBI) and a Management Buy-Out (MBO). In a BI/MBO, an entrepreneurial manager or group of external managers financed by venture capitalists buys into a company and teams up with members of the target management team to run it as an independent business.
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Big Bang
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27 October 1986, when the London Stock Exchange’s new regulations took effect and the automated price quotation system was introduced.
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Black-Scholes Formula
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(USA) A statistical method of estimating the present value of stock options or warrants based upon the exercise price, fair market value of the underlying security, length of the exercise period of the option or warrant, and the volatility of the underlying security.
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Blank Check Preferred Stock
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(USA) Authorized preferred stock, the terms of which are left open under the company’s organizational documents, allowing the board of directors to fix the terms without stockholder approval. Blank Check Preferred Stock may be used as an anti-takeover device. See ‘Anti-Takeover Provisions,’ ‘Poison Pill,’ ‘Shark Repellent,’ and ‘Staggered Board of Directors.’
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Blue Chip
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Generally accepted as referring to stock or shares of a large company with a solid record of stable earnings and/or dividend growth and a reputation for high quality management and/or products. More generally, anything of very high quality.
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Blue Sky Law
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(USA) State laws regulating the offer and sale of securities and the registration of broker/dealers. All securities issued by a company must be offered and sold in compliance with or under an exemption from Blue Sky Laws and Regulations of each state in which securities are sold. The name ‘Blue Sky’ comes from the preamble to an early Wisconsin law designed to prevent companies from selling pieces of the blue sky to unsuspecting investors.
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Board Minutes
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Minutes of the meetings of the board of directors that record actions taken, typically written after a board meeting and approved at the subsequent meeting.
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Board of Directors
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Group of individuals elected by the shareholders of a company to promote and safeguard the shareholders’ interests, to oversee the general direction of the Company and appoint its officers.
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Bond
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A debt obligation, often secured by a mortgage on some property or asset of the issuer.
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Book Manager
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The lead managing underwriter who maintains the Book. See ‘Book.’
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Book or Syndicate Book
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The list of investors who have indicated an interest in purchasing shares in a public offering maintained by the lead managing underwriter during the offering process. See ‘Hard Circle.’
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Book Value Per Share
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A company’s net worth (assets minus liabilities) divided by the number of shares outstanding. Tangible book value is the company’s net tangible worth (tangible assets minus liabilities) divided by the number of shares outstanding. See ‘Fully Diluted Earnings Per Share.’
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Bookbuilding
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Process pursuant to which the lead underwriter(s) in a public offering solicit institutional and retail investors to commit to subscribe to shares prior to the closing of the offering.
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Book-Entry Securities
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Securities whose ownership is evidenced by an entry on the books of the issuer or the transfer agent and not by physical certificates.
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Bookrunner
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The underwriter in charge of the bookbuilding process.
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Bootstrapping
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Means of financing a small firm by employing highly creative ways of using and acquiring resources without raising equity from traditional sources or borrowing money from the bank.
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Break Fee
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A Break Fee (also referred to as an ‘Inducement Fee’) is a sum agreed between the offeror and the target company to be paid to the offeror by the target company only if specified events occur which prevent the offer from proceeding or if the offer fails.
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Break-even Point
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A point reached when a company’s revenue equals its expenses.
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Bridge Loan, Bridge Financing, or Bridge Round
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A loan or equity investment to provide financing for a relatively short time period until the issuer can complete a longer term financing such as a public offering.
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Bring-along Rights
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Contractual rights pursuant to which minority shareholders are required to sell their securities in connection with a sale by the majority shareholders. Such rights typically apply in connection with an acquisition transaction, such as a sale of all the shares of stock or substantially all the assets of a company. Also known as ‘Drag-along Rights.’
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Bring-down Letter
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A letter confirming, as of a later date (usually the date of a closing), the representations, warranties, or covenants made at an earlier date in a legal document.
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Broker
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One who acts as an intermediary between the buyer and seller of securities.
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Broker/Dealer
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Any individual or firm, other than a bank, which is engaged in the business of buying and selling securities for itself and others. In the USA, broker/dealers must register with the SEC as well as with the states in which they conduct business.
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Buffer
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Unused credit facility or cash reserves.
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Burn Rate
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In venture capital financing, the rate at which a start-up company spends capital to finance operations before generating a positive cash flow from operations.
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Business Angel
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A private investor who provides both finance and business expertise to an investee company.
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Business Model
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The underlying model of a company's business operation.
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Business Plan
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A document that describes the entrepreneur’s idea, market problem, proposed solution, business and revenue models, marketing strategy, technology, company profile, competitive landscape, as well as financial data for coming years. The business plan opens with a brief executive summary, with the most important element of the document due to the time constraints of venture capital funds and angels.
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Buy Side or Buy Side Trader
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The individual within an institutional investor who affects trades (particularly securities purchases) for the institution.
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Buy-and-Build Strategy
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Active, organic growth of portfolio companies through add-on acquisitions.
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Buyback
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A corporation’s repurchase of stock or bonds it has issued. Also the purchase of a long position to offset a short position.
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Buying on Margin
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See ‘Margin.’
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Buy-out
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A transaction in which a business, business unit or company is acquired from the current shareholders (the vendor). See ‘Management Buy-Out (MBO,.’ ‘(MBI),’ ‘Institutional Buy-out (IBO),’ ‘Leveraged Buy-out (LBO).’
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Buy-out Fund
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Funds whose strategy is to acquire other businesses and may also include mezzanine debt funds that provide (generally subordinated) debt to facilitate financing buyouts, frequently alongside a right to some of the equity upside.
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C Corporation
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(USA) A corporation that is subject to taxation as a separate entity. Compare with ‘S Corporation’ and ‘Limited Liability Company.’
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Call Option or Call
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A contract that gives the holder the right to purchase securities at a specified price during a specified period of time. Compare with ‘Put Option.’
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Capital Asset Pricing Model (CAPM)
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Determines the cost of equity of a quoted company. This cost depends on the risk free interest rate, return of a market index and security’s volatility, compared to the overall market. See ‘Beta.’
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Capital Gain
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When an asset is sold at a higher price than that at which it was bought.
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Capital Stock or Share Capital
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Stock that a company may issue evidencing its equity ownership. The capital stock may be either common stock (USA), ordinary shares (UK), and/or preferred stock or shares. A company’s organizational documents usually indicate the amount of authorized capital stock or share capital that a company may issue.
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Capital Under Management
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The total amount of funds available to fund managers for future investments plus the amount of funds already invested (at cost) and not yet divested.
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Capital Weighted Average IRR
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The average IRR weighted by fund size.
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Capitalization
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Generally accepted as referring to the sum of a company’s long-term debt, stock and retained earnings. Also called “Invested Capital.” The items comprising ‘capitalization’ may vary in different jurisdictions. See also ‘Market Capitalization.’
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Capitalization Rate
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The discount rate used to determine the present value of a stream of future earnings. Equals normalized earnings after taxes divided by present value, expressed as a percentage.
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Capitalization Ratios
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The percentage of a company’s total capitalization that each capital component (debt, preferred stock, common stock, other equity) contributes.
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Capitalization Table or Cap Table
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A table showing the total amount of the various securities issued by a company. This typically includes the amount of investment obtained from each source and the securities distributed -- e.g., common and preferred shares, options, warrants, etc. -- and respective capitalization ratios.
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Capped-Style Option
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An option with an established profit cap. A capped-style option is automatically exercised when the underlying security closes at or above the option’s cap price for a call, or at or below the option’s cap price for a put.
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Captive Fund
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A fund in which the main shareholder of the management company contributes most of the capital, i.e., where parent organization allocates money to a captive fund from its own internal sources and reinvests realized capital gains into the fund. Compare with ‘Semi-captive Fund.’ ‘Independent Fund.’
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Carried Interest
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The percentage of a venture capital fund’s profits allocated to the general partner/ sponsors of the fund as compensation for their entrepreneurial efforts in organizing and running the fund.
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Cash Alternative
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If the offeror offers shareholders of the target company the choice between offeror securities and cash, the cash element is known as the ‘Cash Alternative.’
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Cash Basis
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The accounting practice of recording sales and expenses only when cash is actually received or paid out, as opposed to accrual basis. Generally, Cash Basis accounting is simpler than Accrual Basis accounting. See ‘Accrual Basis.’
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Cash Flow
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Net earnings after tax plus depreciation plus non-cash items.
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Cash Flows to Equity Valuation
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A variant of the DCF model, where future cash flows to the equity owners of the company are discounted at the cost of the equity, thus directly calculating the equity value.
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Cede & Co.
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(USA) The nominee of depository trust company that acts as the record owner of securities held in ‘street name’ for a large number of major brokerage firms and other financial institutions. See ‘Street Name’ or ‘Nominee Name.’ See also ‘Depository Trust Company.’
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Chapter 11
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The part of the U.S. Bankruptcy Code that provides for reorganization of a bankrupt company’s assets.
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Chapter 7
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The part of the U.S. Bankruptcy Code that provides for liquidation of a company’s assets.
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Cheap Stock
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Stock (or rights to acquire stock) issued to employees, consultants, promoters, etc., of the issuer at a price lower than the public offering price, particularly if issued within one year prior to the public offering.
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Chinese Wall
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The term used for the procedures within a multi-dimensional securities firm or universal bank to separate non-public information obtained by the corporate finance department from use by the trading desk, lending functions, or analysts.
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Churning
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The unethical practice of buying and selling shares simply in order to earn more commission.
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City Code
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The City Code on Takeovers and Mergers is a non-statutory code regulating takeover activity of publicly traded companies in the UK. See ‘Takeover Code.’
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Class Action Suit
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A lawsuit brought by one person on behalf of a larger group of individuals, all having the same legal claim.
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Class or Class of Securities
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Classes of Securities are securities that share the same terms and benefits. Classes of Capital Stock are generally alphabetically designated, e.g., ‘Class C Common Stock’ or ‘Class A Preferred Stock.’
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Classified Stock
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(USA) The separation of a company’s capital stock into multiple classes (e.g., Class A, Class B, etc.).
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Claw Back Option
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The right to require repayment of funds set aside for a specific purpose that have been disbursed in a manner inconsistent with or contrary to the rules or agreements governing the disbursement. In the context of an acquisition, a buyer may have ‘Claw Back Rights’ with respect to part of the purchase price if the target company fails to meet agreed upon milestones after the acquisition. In the context of a venture capital fund, investors may have claw back rights if interim distributions result in the fund promoters receiving more than the contemplated carried interest.
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Clearstream
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An international clearing and settlement organization offering a comprehensive service for bonds and equities – both domestic and cross-border. Clearstream was formed in 2000 from the merger of Cedel International and Deutsche Bank Clearing. Clearstream is now a subsidiary of Deutsche Borse. See ‘Euroclear.’
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Cliff Vesting
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A feature of some stock option plans and pension plans. When used in stock options, a large portion of the stock options granted by the employer are vested (become the property of the employee) after a certain specified date, rather than vesting gradually over time. When used in pension plans, all matching contributions provided by the employer become the property of the employee after a certain specified date, rather than accrue gradually. See ‘Stock Option.’
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Closed Corporation
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A corporation in which all of the voting stock is held by a few shareholders, such as management or family members. Also called a ‘Private Company.’
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Closed-End Fund
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Fund with a fixed number of shares. These are offered during an initial subscription period. Unlike Open-end Mutual Funds, Closed-end Funds do not stand ready to issue and redeem shares on a continuous basis.
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Closely Held
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A corporation in which most of the stock is held by a small number of shareholders.
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Closing or Completion
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The date on which a financing or acquisition closes or is formally completed.
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Collateral
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Securities or other property pledged by a borrower to secure repayment of a loan.
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Combination Stock Option Plan
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(USA) A plan under which a company can grant both Incentive Stock Options and Non-Qualified Stock Options. See ‘Incentive Stock Options’ and ‘Non-Qualified Stock Options.’
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Comfort Factor
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An indication of the extent to which an investor can seek to reduce his risk by checking up on aspects of the business such as the state of relationships with its customers or whether its products are highly rated by reputable authorities. Comfort factors can often be provided by due diligence.
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Comfort Letter or Cold Comfort Letter
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A letter delivered by the auditors for an issuer at the time of a registered public offering which typically (a) confirms certain numerical information in the registration statement which can be derived from the issuer’s financial records, and (b) provides limited negative assurances concerning changes in the issuer’s financial condition since the last audit. See ‘Long Form Report’ and ‘Short Form Report.’
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Comment Letter
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(USA) A letter prepared by an examiner at the SEC setting forth the SEC’s questions and comments with regard to an SEC filing, such as a registration statement.
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Commercial Paper
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Commercial Paper
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Commission Bancaire et Financiere / Commissie voor het Bank en Financiewezen (CBF)
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The Belgian Banking and Finance Commission is the competent authority regulating the securities industry in Belgium. See ‘Competent Authority.’
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Commission des Operations de Bourse (COB)
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The Commission des Operations de Bourse, or COB, is the competent authority regulating the securities industry in France. See ‘Competent Authority.’
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Commitment
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A limited partner’s obligation to provide a certain amount of capital to a private equity fund when the general partner asks for capital. See ‘Drawdown.’
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Common shares/stock
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See ‘Ordinary Shares.’
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Common Stock
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(USA) The basic form of equity ownership in a corporation. Generally equivalent to ordinary shares in the United Kingdom.
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Common Stock Equivalents
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Debt and/or equity type securities capable of subscription, exchange or conversion into common stock of the corporation. In calculating dilution, earnings per share, etc., the amount of common stock is often adjusted to reflect conversion of common stock equivalents.
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Common Stock Ratio
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A company’s common stock divided by its total capitalization, expressed as a percentage.
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Compagnie des Agents de Change 40 Index (CAC-40)
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An index based on 40 of the largest and most liquid stocks traded on the Paris Stock Exchange. See ‘Index.’
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Company Buyback
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Redemption or repurchase by an issuer of its securities.
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Compensation Committee
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A committee of the board of directors responsible for reviewing and setting the compensation of certain executive officers of the company. The Compensation Committee may also be responsible for the allocation of stock options to employees. The Committee is typically comprised of independent (i.e., non-employee) directors of the company. The definition of an ‘independent’ director may vary from one market to another.
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Competent Authority
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A term used within directives produced by the European Commission (see ‘Investment Services Directive’ and ‘Prospectus Directive’) to describe a body that has been identified by a member state of the European Union as being responsible for specified functions related to the securities market within that member state. Areas of competence include the recognition of firms permitted to offer investment services, approval of prospectuses for public offerings, recognition and surveillance of stock markets, etc. A member state may nominate different competent authorities for different areas of responsibility.
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Completion or Consummation
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The moment when legal documents are signed. Normally, also the moment at which funds are transferred by investors.
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Compliance
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The process of ensuring that any other person or entity operating within the financial services industry complies at all times with the regulations currently in force. Many of these regulations are designed to protect the public from misleading claims about returns they could receive from investments, while others outlaw insider trading. Especially in the UK, regulation of the financial services industry has developed beyond recognition in recent years.
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Conditions Precedent
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Certain conditions a venture capitalist may insist be satisfied before a deal is completed. See also ‘Comfort Factor.’
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Confidentiality and Proprietary Rights Agreement
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An agreement by which an employee, customer, or vendor agrees not to disclose the company’s trade secrets or other confidential information to any third party or to use such trade secrets or confidential information other than in connection with company business. Also referred to as a ‘Non-disclosure Agreement.’ If such an agreement is made between a company and its employee, the employee typically also agrees to convey to the company all inventions which the employee develops while employed by the company, and represents that the employee is not bound by obligations to a former employer that would restrict the employee’s services to the company.
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Conflict of Interest
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Term used when fiduciaries also have a private interest or potential gain in a matter.
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Connected Persons
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Companies related by ownership or control of each other or common ownership or control by a third person or company, and individuals connected by family relationships, or, in some instances, by existing business relationships (such as individuals who are partners).
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Consolidated Financial Statements
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Financial statements for a company and all of its subsidiaries as if for a single enterprise rather than for the company on a stand-alone basis.
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Contributed Capital
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Contributed capital represents the portion of capital that was initially raised (committed by investors) which has been drawn down in a private equity fund.
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Conversion
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The act of exchanging one form of security for another security of the same company (i.e., preferred stock for common stock, debt securities for equity.)
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Conversion Parity
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The equal dollar relationship between the price of a convertible security and that of the underlying security into which it can be converted. As an example, if a $1,000 debt instrument is convertible into 50 shares of common stock, conversion parity occurs when the common stock price is at $20.00 per share. If the prevailing common stock price is other than $20.00 per share, conversion parity does not exist.
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Conversion Premium
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The dollar or percentage amount by which the price of the convertible security exceeds the current market value of the common stock into which it could be converted.
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Conversion Ratio
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The ratio indicating the number of underlying securities that can be acquired upon exchange of a convertible security.
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Conversion Rights
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Rights by which preferred stock “converts” into common stock. Usually, one has this right at any time after making an investment. Company may want rights to force a conversion upon an IPO; upon reaching of certain sales or earnings’ targets, or upon a majority or supermajority vote of the preferred stock. Conversion rights may carry with them anti-dilution protections.
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Convertible Debt or Convertible/Equity Related Loan
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A debt obligation of a company that is convertible into stock.
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Convertible Preferred Stock
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Preferred stock that is convertible into common stock.
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Convertible Security
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A financial security (usually preferred stock or bonds) that is exchangeable for another type of security (usually ordinary shares) at a fixed price. The convertible feature is designed to enhance marketability of preferred stock as an additional incentive to investors.
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Cooling-off Period
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(USA) A delay imposed informally by the SEC before declaring a registration statement effective in those cases where it believes the issuer has engaged in ‘gun-jumping’ or other impermissible marketing activities in relation to a public offering. The delay, which can be anywhere from a few days to 30 days or more, is to allow the effect of the promotional activities to dissipate and the market to ‘cool off.’ This is different from the waiting period and quiet period. The basic concept of a cooling-off period exists in other markets, although its exact meaning may vary from market to market. See ‘Gun-Jumping.’ ‘Quiet Period,’ and ‘Waiting Period.’
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Corporate Venturing
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There is no single definition of corporate venturing that seems to satisfy all parties, so we distinguish indirect corporate venturing – in which a corporate invests directly in a fund managed by an independent venture capitalist – from a direct corporate venturing program, in which a corporate invests directly by buying a minority stake in a smaller, unquoted company.
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Co-sale Agreement
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See ‘Tag Along Agreement.’
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Co-sale Provisions or Rights
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Allows investors to sell their shares of stock in proportion to and on the same terms as the founders, managers, or other investors, should any of those parties receive an offer.
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Cost Basis
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See ‘Basis.’
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Covenants
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Provisions in a venture capital investment agreement, underwriting agreement, or other financing document whereby the investee company agrees whether or not to do something in the future. Covenants may remain in effect as long as the investors hold a stated amount of securities or may terminate on the occurrence of certain events (i.e., completion of a public offering). Affirmative covenants define acts that the company must perform, and may include payment of taxes, maintenance of corporate existence, insurance, property and equipment, environmental and legal compliance, representation of venture capital firm on the board, etc. Negative covenants define acts that the company may not perform, and could include a prohibition on mergers, sale or purchase of assets, amendments to its organizational documents, incurring of indebtedness, issuance of securities, distributions and redemption of securities, etc.
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Cram-down Round
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A financing round whereby previous investors, founders, and management suffer significant dilution. Usually as a result of a Cram-down Round, the new investor gains majority ownership and control of the company. Also known as ‘Burn-out Round.’ or ‘wash-out round.’
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CREST
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The UK’s share settlement system, based in London. In September 2002, CREST merged with Euroclear. See ‘Euroclear.’
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Cross-collateralization
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When collateral for one loan or obligation is also serving as collateral for other loans or obligations.
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Crossover Fund
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A mutual fund that invests in both public and private equity.
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Cumulative Dividend
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A dividend that accumulates if not paid in the period when due and must be paid in full before other dividends are paid on the company’s common stock. See ‘Arrearage.’
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Cumulative Preferred Stock
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A form of preferred stock that provides if one or more dividends is omitted, those dividends accumulate and must be paid in full before other dividends may be paid on the company’s common stock.
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Cumulative Voting
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A technique permitted by the laws of some states in the USA that is intended to assure minority shareholder representation on the board of directors. A shareholder is allowed to cumulate votes equal to the number of shares owned multiplied by the number of directors to be elected, and vote them all for one nominee.
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Data Room
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A location where one or more parties can review information for due diligence purposes about a company.
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DAX
|
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A price-weighted index of the most heavily traded stocks on the Frankfurt Stock Exchange. See ‘Index.’
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Deal Flow
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The flow of investment opportunities available to a private equity house.
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Dealer
|
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Any individual or firm, other than a bank, that is engaged in the buying and selling of securities for itself.
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Death Spiral Deal
|
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A convertible security where the conversion price is tied to the market price (frequently at a fixed percentage discount) at the date of conversion. Also known as a ‘Toxic Convert.’
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Debenture
|
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A note or bond usually backed only by the general credit of a company, and not secured by specific property.
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Debenture, Subordinated
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See ‘Subordinated Debenture.’
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Debt
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A fixed obligation to pay money at a stated time.
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Debt Capital
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Capital raised through the issuance of bonds.
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Debt Financing
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Financing by selling bonds, notes, or other debt instruments.
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Debt Ratio
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Debt capital divided by total capital.
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Debt Service
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Cash required in a given period to pay interest and matured principal on outstanding debt.
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Debt/Equity Ratio
|
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A measure of a company’s leverage, calculated by dividing long-term debt by common shareholders’ equity.
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Deemed Liquidation or Liquidity Event
|
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Term used to describe trigger events for a liquidation preference. Usually defined to cover, among other things, a merger, acquisition, change of control or consolidation of the company, or a sale of all or most of its assets.
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Default
|
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Failure to discharge an obligation when due.
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Defined Benefit Plans
|
|
A pension plan that promises a specified monthly benefit to be paid to the employee at retirement. See ‘Defined Contribution Plans.’
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Defined Contribution Plan
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(USA) A retirement plan in which the employer’s obligation is to make a definite contribution into the retirement plan and the employee bears the risk of investment performance by the plan. In the UK, such plans are known as ‘defined contribution pensions’ or ‘personal pensions.’ A defined contribution plan is the opposite of a defined benefit plan where the employer’s obligation is to make a definite payment to the retired employee and the employer bears the risk of investment performance by the retirement plan. In the UK, this is known as a defined benefit or final salary pension scheme.
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Delisting
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The removal of a company from listing on a stock exchange, either because the company no longer satisfies certain minimum financial or market capitalization standards or because the company violated one of the rules or regulations of the exchange.
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Demand Registration Rights
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(USA) The contractual right of a security holder to require an issuer to file a registration statement to register the holder’s securities so that the holder may sell them in the public market without restriction. See ‘Piggy-Back Registration Rights’ and ‘Registration Rights.’
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Depository Receipt
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Commonly known as ‘DRs,’ Depository Receipts are negotiable certificates that enable domestic investors to own shares in foreign companies. DRs are created when a broker purchases a non-UK company’s shares in the home stock market and delivers those shares to the depository’s local custodian bank. The custodian then instructs the depository bank to issue DRs to the investor. Each DR represents a given number of a company’s shares and can trade as freely as any other security in the UK. Several types of DRs can be listed and traded in London, including Global Depositary Receipts (GDRs) and American Depositary Receipts (ADRs) that are denominated in US dollars.
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Depository Trust Company (DTC)
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|
(USA) DTC is the world’s largest securities depository. It serves as a clearing house in the USA for the settlement of securities trades and performs securities custody-related services for its participating banks and broker-dealers. DTC is owned by members of the financial services industry and their representatives who are its users.
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Derivative or Derivative Security
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A financial instrument or security whose characteristics and value depend upon the characteristics and value of an underlying instrument or asset, typically a commodity, bond, equity, or currency. Examples include futures, options, and mortgage-backed securities.
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Deutsche Borse
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Deutsche Borse operates the Frankfurt Stock Exchange (FWB), the largest of the eight German stock exchanges.
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Development Capital
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See ‘Expansion Capital.’
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Development Fund
|
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Venture capital funds focused on investing in companies in need of expansion capital.
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Diluted Earnings Per Share
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See ‘Fully Diluted Earnings Per Share.’
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Dilution
|
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A decrease in the value of securities or percentage of equity ownership as the result of the issuing, or potential issuing, of additional securities.
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Direct Public Offering
|
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A public offering in which shares are sold directly to investors, rather than through an underwriter.
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Directors & Officers Insurance
|
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Professional liability coverage for legal expenses and liability to shareholders, creditors or others caused by actions or omissions by a director or officer of a company.
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Disciplinary and Appeals Handbook
|
|
The Disciplinary and Appeals Handbook, as issued by the London Stock Exchange from time to time, setting out procedures for issuers in relation to appeals regarding the London Stock Exchange’s application and interpretation of Standards.
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Disclosure Letter/Disclosure Schedule
|
|
A document disclosing exceptions to representations and warranties.
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Discounted Cash Flow (DCF)
|
|
A method of assessing the value of an investment based on predicted cash flows discounted taking into account that a euro tomorrow is worth less than a euro today.
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Discretionary Client
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A client who gives an investment manager total authority to manage his assets.
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Distribution
|
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The sale of a block of securities to a number of investors. Often this is accomplished through a syndicate of investment banks or stockbrokers that buy the securities from the underwriter or underwriters and sell them on to their clients.
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Distributions to Paid-In Capital (D/PI)
|
|
A measure of the cumulative distributions returned to the limited partners as a proportion of the cumulative paid-in capital. DPI is net of fees and carried interest. See ‘Realization Ratio.’, ‘Residual Value.’, ‘RV/PI’, and ‘TV/PI.’
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Divestment
|
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See ‘Exit.’
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Dividend
|
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The payments designated by the Board of Directors to be distributed pro-rata among the shares outstanding. On preferred shares, it is generally a fixed amount. On common shares, the dividend varies with the fortune of the company and the amount of cash on hand and may be omitted if business is poor or if the Directors determine to withhold earnings to invest in capital expenditures or research and development. Dividends can be paid either in cash or in kind, i.e. additional shares of stock.
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Dividend Cover
|
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A ratio that measures the number of times a dividend could have been paid out of the year’s earnings. The higher the dividend cover, the safer the dividend.
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Double Dip
|
|
Generally refers to participating preferred stock that entitles a holder to a liquidation preference and also to participate in the residual value. See ‘Participating Preferred Stock.’
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Dow Jones Industrial Average (DJIA)
|
|
An index based on 30 major stocks listed on the New York Stock Exchange. The companies included in the DJIA are all major factors in their respective industries, and their stocks are widely held by individuals and institutional investors. The DJIA is one of the oldest and most widely recognized stock indices and has been published daily for more than 100 years.
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Down Round
|
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A round of equity financing at a valuation lower than a prior round of financing. Also sometimes referred to as a ‘Punitive Round.’
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DPI - Distribution to Paid-In
|
|
The DPI measures the cumulative distributions returned to investors (Limited Partners) as a proportion of the cumulative paid-in capital. DPI is net of fees and carried interest. This is also often called the ‘Cash-on-Cash Return.’ This is a relative measure of the fund’s “realized” return on investment.
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Drag-along Rights
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See ‘Bring-Along Rights.’
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Drawdown
|
|
When investors commit themselves to back a private equity fund, all the funding may not be needed at once. Some are used as drawn down later. The amount that is drawn down is defined as contributed capital. See ‘Commitment.’ ‘Contributed Capital.’
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DTC
|
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See ‘Depository Trust Company.’
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Dual Listing or Trading Facility
|
|
The listing of a security on more than one exchange. Increasingly, securities are being listed on both a local exchange and an exchange with more widespread coverage. In addition, issuers may list on both a US exchange and a European or Asian exchange.
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Due Diligence
|
|
An examination of the books and records of an issuer and interviews with officers, partners, etc., to confirm information about the issuer’s business as well as legal and accounting affairs. It typically includes a review of such matters as significant customers and suppliers, background of key employees (to learn of prior employment problems, criminal convictions, disciplinary actions by market regulators, fraudulent resumes), material contracts, facilities, real property owned, subsidiaries, judgments and lawsuits, insurance, patents and other intellectual property rights, licenses and permits, and tax status. The phrase derives from the fact that under USA law certain persons (including the directors, underwriters, and auditors) are personally liable for a misstatement of material fact in a registration statement unless they can demonstrate that after reasonable investigation they had reasonable grounds to believe, and, in fact, did believe, that the statement was true. Conducting the due diligence examination enables these persons to raise a ‘due diligence defense’ if sued.
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Early Stage
|
|
Seed and start-up stages of a business. See ‘First Stage/Round.’, ‘Seed,’ ‘Start-up.’ Compare ‘Later Stage.’
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Earnout
|
|
An arrangement in which sellers of a business may receive additional future payments for the business based upon economic performance of the sold business or the buyer (including the sold business) after the sale.
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EASDAQ (archaic)
|
|
See ‘Nasdaq Europe’ (also archaic).
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EBIT
|
|
Earnings before interest and taxes – a financial measurement often used in valuing a company.
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EBITDA
|
|
Earnings before interest, taxes, depreciation and amortization – a financial measurement used in valuing a company.
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EDGAR
|
|
See ‘Electronic Data Gathering, Analysis, and Retrieval.’
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Effective Date
|
|
(USA) The date of the SEC order declaring the registration statement for a public offering to be effective, at which time the sale of shares to the public can commence. See ‘Acceleration Order,’ ‘Acceleration Request,’ and ‘Going Effective.’
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Effective Par
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(USA) The par value for preferred stock that would ordinarily correspond to a given dividend rate.
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Electronic Data Gathering, Analysis, and Retrieval (EDGAR)
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(USA) The SEC’s system required to be used since 1995 by substantially all public companies to file electronically with the SEC required reports, such as quarterly and annual reports, enabling electronic retrieval of these filings through the Internet. Until 2002, foreign companies registered as public companies in the USA were not required to file electronically. Beginning in November 2002, foreign companies were also required to file electronically through EDGAR.
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Elevator Pitch
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The short, oral summary of a business idea, so named for the time comparison of the period an entrepreneur has to gain the interest of a venture capitalist in his business idea with an elevator ride.
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Employee Retirement Income Security Act (ERISA)
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(USA) The Employee Retirement Income Security Act of 1974, the principal USA law regulating retirement and employee benefit plans.
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Employee Stock Purchase Plan
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(USA) A plan under which key employees are given the right to purchase shares of the company at a future date on favorable terms. Under the USA Internal Revenue Code, if a plan meets certain requirements, employees can purchase stock at 85% of market price without any USA tax consequence, although the rules in other countries are different.
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Employee Stock Repurchase Agreement
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(USA) An arrangement in which a corporation sells stock to its employees but reserves the right to repurchase it under certain conditions.
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Enterprise DCF Model
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Variant of the DCF model, which looks at the company’s operations and calculates the present value of future free cash flows by discounting them with the weighted average cost of capital. See ‘Free Cash Flow’ and ‘Weighted Average Cost of Capital.’
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Entrepreneur In Residence (EIR)
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An entrepreneur that has experience in creating a business and works in a venture capital fund using the funds’ network, deal flow and resources to develop new or existing portfolio companies.
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Envy Ratio
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(UK) The ratio between the effective price paid by management and that paid by the investing institution for their respective holdings in the NewCo in an MBO or MBI.
Envy ratio = (IC/I%):(MC/M%), where:
- IC = investors amount to be invested in NewCo
- I% = investors’ ownership in NewCo.
- MC = management amount to be invested in NewCo
- M% = management percentage ownership of NewCo (i.e. percentage of ordinary shares owned)
Example: If the VC invests £5m for 60% equity and the management invests £0.2m for 40% ordinary shares the Envy Ratio is: Envy Ratio=(5/60)/(0.2/40)=16.7
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Equity
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Ownership interest in a company, represented by the shares issued to investors.
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Equity Kicker
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Option for private equity investors to purchase shares at a discount. Typically associated with mezzanine financings where a small number of shares or warrants are added to what is primarily a debt financing.
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Equity Ratio
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One of the indicators used by banks to calculate debt ceiling. It consists of net equity divided by the company’s total assets. Banks apply yardstick ratios for different industry sectors to arrive at a minimum level of funding that shareholders are required to contribute.
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ERISA
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See ‘Employee Retirement Income Security Act.’
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ETF (Exchange Traded Fund)
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A collective investment vehicle which tracks indices - it can allow low cost exposure to the performance of an index as quickly and efficiently as the most liquid UK stocks.
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EURIBOR
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The interest rate at which Euro denominated interbank term deposits are offered within the Eurozone.
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Euroclear
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An international clearing organization based in Brussels, Belgium, specializing in securities clearance, settlement, and custody services. In September 2002, Euroclear merged with CREST. See ‘CREST.’
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EURONEXT
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The name of the exchange resulting from the merger of the Amsterdam, Brussels, and Paris Stock Exchanges in 2001.The Madrid Stock Exchange has since joined and EURONEXT has acquired LIFFE, the London International Financial Features and Options Exchange.
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European Association of Securities Dealers (EASD)
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An association of securities houses, investment banks, venture capital firms, professional advisors, and others formed to promote the development of securities markets in Europe for growth companies. EASD’s ambition was to be the most effective organization to foster the best conditions for seamless European investment and trading. The creation of the EASDAQ stock market (now Nasdaq Europe) was one of its first initiatives. EASD has merged with APCIMS.
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European Option
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See ‘European-Style Option.’
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European Private Equity and Venture Capital Association (EVCA)
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An association formed to promote and facilitate European private equity and venture capital. It has over 900 member organizations in 36 countries and is headquartered in Brussels.
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European-Style Option
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An option that can only be exercised for a short, specified period of time just prior to its expiration, usually a single day. Also called ‘European Option.’
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EVCA Corporate Governance Guidelines
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Guidelines set out by EVCA concerning good practice in the management and governance of privately held companies in the private equity and venture capital industry. Its aim is to define principles of good governance for private equity and venture capital investing and regarding the conduct as shareholders, board members and management.
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EVCA Professional Standards
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EVCA Professional Standards are a unique set of behavioral principles that encompass the relationship between limited partners, general partners and portfolio companies. The EVCA Professional Standards encompass a Code of Conduct, Governing Principles, and Corporate Governance, Valuation and Reporting Guidelines.
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Exemption or Exempt from Registration
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(USA) An exemption from the statutory requirement to register the offer and sale of a security with the SEC under the Securities Act of 1933. Exemptions are provided for certain types of securities (such as government issues and pension plans) and certain types of transactions (such as private placements and offerings to existing security holders). Similar concepts exist in the UK and other jurisdictions but the meanings and applicability may vary widely.
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Exercise Price
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The price at which shares that are subject to a stock option may be purchased or sold. Also known as the ‘Strike Price.’
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Exit
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Liquidation of holdings by a private equity fund. Among the various methods of exiting an investment are: trade sale; sale by public offering (including IPO); write-offs; repayment of preference shares/loans; sale to another venture capitalist; sale to a financial institution.
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Exit Strategy
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The method by which an investor anticipates liquidating its investment, such as sale of the business, public offering, etc.
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Exiting Climates
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The conditions which influence the viability and attractiveness of various exit strategies.
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Expansion Capital
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Also called ‘Development Capital.’ Financing provided for the growth and expansion of a company, which may or may not break even or trade profitably. Capital may be used to: finance increased production capacity; market or product development; or provide additional working capital.
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Expense Allowance
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An amount paid by the issuer of a security to an underwriter (most common in smaller, higher risk offerings) to reimburse it for expenses incurred in connection with a securities offering. An expense allowance may be accountable (reimbursement against documented out-of-pocket expenses) or non-accountable (typically a percentage of the offering amount without documentation of the expense).
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FASB
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(USA) The Financial Accounting Standards Board. The quasi-public body primarily responsible for developing rules governing USA generally accepted accounting practices.
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Federal Deposit Insurance Corporation (FDIC)
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(USA) A US federal agency that insures deposits in member banks and thrift institutions up to $100,000.
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Final Prospectus
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The final version of a prospectus that includes the final price, delivery date and the underwriting spread. It is given to all investors who wish to purchase the issue.
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Financial Services Authority (FSA)
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The Financial Services Authority is an independent non-governmental body in the UK which exercises statutory powers under the Financial Services and Markets Act 2000 (and certain other legislation). The FSA is the competent authority regulating the securities industry in the UK, including banks, brokers, investment houses, and financial advisers. It was created by the merger of functions previously performed by the Securities Investment Board, or SIB, Investment Management Regulatory Organization, or IMRO, the Bank of England, and other agencies. See ‘Competent Authority.’
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Firm Commitment Underwriting
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An underwriting arrangement in which an underwriter agrees to purchase all of the securities being offered for resale to the public, thereby, in theory, assuming the risk of finding buyers. In practice, this risk is very slight by the time an underwriter becomes legally obligated to purchase the securities from the issuer, as the underwriters will already have ‘built a book’ of investors who have indicated an interest in buying the securities. Compare with ‘All-or-None’ and ‘Best Efforts Underwriting.’
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First Preferred Stock or Shares
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Preferred stock that takes precedence over other preferred and common stock with regard to dividends and assets. Also called ‘Senior Preferred Stock or Shares.’
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First Refusal
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See ‘Right of First Refusal.’
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First Stage/Round
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The first round of financing that involves an institutional venture capital fund.
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Five-year Rolling IRR
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The Five-year Rolling IRR shows the development of the Five-year Horizon IRR, measured at the end of each year.
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Flat Pricing
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(UK) In a flat priced deal, the entrepreneur/management team and the venture capitalist pay the same price for their ordinary shares. The balance of the funds contributed by private equity investors is used to purchase other forms of “institutional” equity (e.g. convertible loan stocks, preference shares). See ‘Envy Ratio.’
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Float or Free Float or Public Float
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The number of shares not held by corporate insiders that are freely tradable in the public market or markets on which a company’s securities are listed.
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Flotation
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The process by which a company obtains a listing from the UKLA and is admitted to trade on the London Stock Exchange.
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Flowback
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(USA) Term used to describe securities initially offered outside the USA that are subsequently resold to USA residents, which may be in violation of applicable restrictions or registration requirements. This term is also used in Europe in the same context. See ‘Anti-Flowback Rules.’
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Follow-on Investment
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An additional investment by existing investors, which may be provided for in documentation relating to the initial investment.
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Forms
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See ‘Registration Statement’ and ‘Reporting Company Forms.’
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Forward Pricing
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(USA) The SEC requirement that open-end investment companies (popularly called ‘mutual funds’) set their share price based on net asset value and base all incoming buy and sell orders on the immediately subsequent net asset value.
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Founder’s Stock
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Stock issued to the founders of a company, usually at a low price in comparison to that paid by investors.
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Free Cash Flow
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The after-tax operating earnings of a company, plus non-cash charges (e.g. depreciation), less investment in working capital, property, plant and equipment, and other assets.
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Free Float
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See ‘Float.’
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Freeze-Out
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A process whereby a controlling stockholder of a company prevents dividends or other benefits from flowing to minority stockholders, usually as a prelude to buying out their stock at a low price.
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FTSE 100
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An index based on the stock of the top 100 companies (by market capitalization) traded on the London Stock Exchange (Official List). See ‘Index’ and ‘Official List.’
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Full List
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See ‘Official List.’
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Fully Diluted Earnings Per Share
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Common stock earnings per share calculated as if all warrants and stock options were exercised and all convertible bonds and preferred stock (and certain convertible debt) were converted. Fully diluted earnings per share are usually a more accurate reflection of the company’s real earning power.
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Fully Diluted Outstanding Shares
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The number of shares representing total company ownership, including common shares and current conversion or exercised value of the preferred shares, options, warrants, and other convertible securities.
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Fund
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A vehicle for enabling pooled investment by a number of investors in securities of companies (investee/portfolio companies). These are generally private companies whose shares are not quoted on any stock exchange. The fund can take the form of either a company or an unincorporated arrangement such as a limited partnership. See ‘Limited Partnership.’
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Fund Age
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The age of a fund (in years) from its first drawdown to the time an IRR is calculated.
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Fund Capitalization/Fund Size
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The total amount of capital committed by the limited and general partners of a fund.
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Fund Focus (Investment Stage)
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The strategy of specialization by stage of investment, business sector of investment, or geographical concentration. This is the opposite of a generalist fund, which does not focus on any specific geographical area, sector or stage of business.
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Fund of Funds
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An investment fund that invests in other investment funds.
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Fundraising
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The process by which venture capitalists themselves raise money to create a fund. These funds are raised from private, corporate or institutional investors, who make commitments to the fund which will be invested by the general partner. See ‘General Partner.’ ‘Limited Partner.’ ‘Commitment.’
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Gatekeeper
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Specialist advisers who assist institutional investors in their private equity allocation decisions. Institutional investors with little experience of the asset class or those with limited resources often use them to help manage their private equity allocation. Gatekeepers usually offer tailored services according to their clients’ needs, including private equity fund sourcing and due diligence through to complete discretionary mandates.
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General Partner
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A partner in a partnership who has unlimited personal liability for the debts and obligations of the partnership and the right to participate in its management.
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General Partner’s Commitment
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Fund managers typically invest their personal capital right alongside their investors’ capital, which often works to instill a higher level of confidence in the fund. The limited partners look for a meaningful general partner investment of 1% to 3% of the fund.
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General Partnership
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Form of partnership in which all partners are general partners. See ‘Partnership.’
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Generally Accepted Accounting Principles (GAAP)
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Rules and procedures generally accepted within the accounting profession in a particular jurisdiction (for example, ‘US GAAP’ or ‘UK GAAP’). See ‘IAS.’
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Global Coordinator
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The lead underwriter in simultaneous public offerings in several countries or on several exchanges. The Global Coordinator is responsible for coordinating the activities of the several underwriters responsible for their respective offering markets. See ‘Lead Manager/Lead Underwriter.’
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Global Depository Receipts or Global Depository Shares (GDR or GDS)
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GDRs are a mechanism used to facilitate the trading of a particular security in more than one market. A GDR is a negotiable receipt that represents an ownership interest in a specified number of securities that have been deposited with the depositary by the holder of such securities. A GDR is the physical certificate that evidences Global Depository Shares or GDSs (in much the same way that a stock certificate evidences shares of stock). See ‘ADR or ADS.’
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Going Effective
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(USA) The time at which the SEC declares a registration statement effective under the Securities Act of 1933, so that sales (not just offers) of the securities being registered can be made. See ‘Acceleration Order,’ ‘Acceleration Request,’ and ‘Effective Date.’ In the UK, the equivalent term is ‘Admission.’ See ‘Admission.’
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Going Private
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The transformation of a company from public to private ownership status, usually used in the context where old management remains involved with the company. A company may go private either by repurchasing its publicly traded shares or by having a third party purchase all, or substantially all, of the company’s outstanding shares. In the UK, the term ‘P2P’ (public to private) is also commonly used.
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Golden Handcuffs
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A method of insuring that key employees remain with the company for a certain period of time by granting the employees options or restricted shares of stock that vest over a period of time.
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Golden Parachute
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A contractual arrangement between a key employee and the company that provides for the payment of a large bonus or other payment to the employee upon the occurrence of certain events, such as termination of employment without cause or the merger or sale of the company.
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Goodwill
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The value of a business over and above its tangible assets. It includes the business’s reputation and contacts.
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Grandstanding
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When young, developing companies are rushed to an IPO by an inexperienced private equity organization in order to demonstrate a successful exit record for the management team.
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Green Shoe or Shoe
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Term for an underwriter’s over-allotment option. This name derives from the fact that the over-allotment option technique was first used in a public offering of the securities of the Green Shoe Company. See ‘Over-Allotment Option.’
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Greenmail
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Acquiring a large block of a public company’s securities and threatening a takeover, tender offer, proxy fight, or other action for the purpose of inducing the company to repurchase the securities at an above-market price.
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Gun-Jumping
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(USA) The offering of a security prior to the filing of a registration statement or during the registration process, or the publication of materials deemed to promote the sale of the company’s securities, other than through a prospectus filed with the SEC. See ‘Cooling-Off Period.’ ‘Quiet Period’ and ‘Waiting Period.’
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Hamster Wheel
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(UK) The situation in a sub-critical mass business with no potential to reach critical mass. So-called because the managing director ends up accomplishing nothing and becoming very frustrated.
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Hard Circle
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Prospective purchasers of securities in a public offering, listed in the ‘book’ maintained by the lead managing underwriter, who are considered very likely to buy shares in the offering. See ‘Book or Syndicate Book.’
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Hedge
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A hedge is typically accomplished by making offsetting transactions that will largely eliminate one or more types of risk. Hedging investors can use derivatives and covered warrants to hedge investments. For instance, if an investor owns a particular stock, he or she can neutralize the impact of an impending fall in price by buying a put option, selling futures or buying a put warrant.
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Hedge Fund
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A private investment fund that invests in a variety of assets, utilizing investments and strategies with various long and short exposures and degrees of leverage.
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High Yield Bonds
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These play a similar role to mezzanine finance in bridging the gap between senior debt and equity. High Yield Bonds are senior subordinated notes not secured against the assets of the company, and thus attract a higher rate of interest than senior debt.
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Highly Confident Letter
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A letter from an investment bank indicating that it is highly confident that it will be able to raise financing for a transaction, but without legally obligating itself to do so.
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Hi-Lo Index
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Moving average of the number of stocks that reach new highs and lows each day, used as a technical analysis tool for measuring the strength of the overall market.
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Hockey Stick Projections
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The general shape and form of a chart showing revenue, customers, cash, or some other financial or operational measure that increases dramatically at some point in the future. Entrepreneurs often develop business plans with hockey stick charts to impress potential investors.
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Holdback
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A contractual condition in which money is withheld until a specified event occurs.
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Holding Period
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The length of time an investment remains in a portfolio. Can also mean the length of time an investment must be held in order to qualify for capital gains tax or certain securities law exemptions.
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Horizon Internal Rate of Return or Horizon IRR
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An indication of performance trends within an industry sector. Horizon IRR uses the beginning net asset values as an initial cash outflow and net asset values at the period end as the terminal cash flow. Through these values plus/minus any net interim cash flows, it calculates IRRs for the defined time period. See ‘IRR.’
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Hostile Offer or Hostile Bid
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An offer that is made for a target company but is not recommended for acceptance by shareholders by the board of the target company.
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Hot Issue or Hot Stock
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A security that quickly rises in price following its initial trading as a result of high market demand.
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Hurdle Rate
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A rate of return on investment after which economics of the investment are adjusted or capped.
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Incentive Stock Options or ISOs
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(USA) Stock options available only to full time employees that are entitled to special tax treatment under the USA Internal Revenue Code. The employee who exercises the option does not have to pay tax until the employee actually sells the stock. However, the employee may be subject to alternative minimum tax. The company does not get a tax deduction. Similar arrangements exist in other jurisdictions, subject to local and tax and legal requirements. Compare with ‘Non-qualified Stock Options’ and ‘Combination Stock Option Plan.’
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Inception
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The starting point at which IRR calculations for a fund are calculated; the Vintage Year or date of first capital drawdown. See ‘IRR.’ and ‘Horizon IRR.’
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Independent Fund
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One in which the main source of fundraising is from third parties. Compare with ‘Captive Fund.’ and ‘Semi-Captive Fund.’
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Independent or Outside Director
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A member of the board of directors who is not an employee of the company nor affiliated with a controlling stockholder of a company. The definition of ‘independent’ may be further defined in different jurisdictions or markets.
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Index
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A benchmark against which financial or economic performance is measured, such as the S&P 500, FTSE 100, etc.
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Indication of Interest
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(USA) A non-binding expression of interest by a dealer or investor in purchasing securities. In the US, securities may be offered after a registration statement has been filed, but may not be sold until the statement is declared effective by the SEC. During the period after filing and before effectiveness, underwriters obtain non-binding Indications of Interest.
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Information Rights
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The contractual rights to obtain information about a company, including, for example, attending board meetings. Typically received by venture capitalists investing in privately held companies.
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Initial Investment
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First venture-backed investment made in an investee company. Compare with ‘Follow-up Investment.’
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Initial Public Offering (IPO)
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The registered public offering of securities of an issuer to the public for the first time. In the UK, also referred to as a ‘Flotation.’
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Inside Spread or Inside Quote
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The difference between the highest bid and lowest asking price being quoted by market makers for a security.
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Insider Dealing
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A range of possible offenses centered on the possession of non-public information by a party and the illegal or improper use of that information to deal or encourage others to deal in securities, or to disclose that information to anyone other than in the proper performance of their duties.
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Insider Trading
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The term commonly used in reference to the buying and selling of the company’s securities based on material information relating to the company that has not been made public. Insider Trading, according to this definition, is against the law in most countries. The term may also be used to refer to the buying and selling of shares of a public company by its officers, directors, and major stockholders. In the USA transactions by officers, directors, and 10% stockholders must be reported monthly to the SEC under Section 16 of the Securities Exchange Act of 1934. Reporting rules for similar trading may also exist in other countries or markets. See ‘Tipper and Tippee.’
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Insiders
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Directors, officers, key employees, and any other persons privy to material non-public information relating to a company. This may be further defined in different countries or markets.
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Institutional Buyout (IBO)
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When outside financial investors (e.g. private equity houses) purchase a business. The existing management may be involved from the start and purchase a small stake. Alternatively, the investor may install its own management. See ‘Buyout.’
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Institutional Investor
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An institution, such as an investment company, mutual fund, insurance company, pension fund, or endowment fund, that generally has substantial assets and experience in investments. In many countries, institutional investors are not protected as fully by securities laws because it is assumed that they are more knowledgeable and better able to protect themselves. They account for a majority of overall trading volume in most major securities markets.
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Integration
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(USA) A concept under the Securities Act of 1933, which requires that nominally separate offerings be ‘integrated’ and treated as a single offering for the purpose of determining if they are exempt from the registration requirements of that Act.
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Intellectual Property
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Patents, copyrights, trademarks, trade secrets and similar rights in ideas, concepts, etc.
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Interest Cover
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One indicator used by banks to calculate debt ceiling. It consists of EBIT divided by net interest expenses. This ratio is a measure of the company’s ability to service its debt.
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Internal Rate of Return (IRR)
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Compounded rate of return on an investment that an investor receives on an investment at the time of sale or other exit.
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International Accounting Standards (IAS)
|
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Accounting rules and procedures developed by the International Accounting Standards Committee and to be administered by the IASB. All EU countries were required to adopt IAS by 2005. More information can be obtained at www.iasc.org.uk.
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International Accounting Standards Board (IASB)
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The quasi-public body established in 2001 to develop a uniform set of international accounting standards (IAS).
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In-the-Money Option
|
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An option is described as ‘In-the-Money’ when the market price of the underlying security or commodity is higher than the strike price of the option.
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Invested Capital
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See ‘Capitalization.’
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Investee Company
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See ‘Portfolio Company.’
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Investment Bank or Banker
|
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A person or firm engaged in the investment banking business, which typically includes activities such as underwriting the sale of securities, valuing businesses, advising on the financial aspects of mergers and acquisitions, etc.
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Investment Letter
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A written agreement between an investor and a seller of securities in a private placement.
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Investment Philosophy
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The stated investment approach or focus of a management team.
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Investment Services Directive (ISD)
|
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Directive produced by the European Commission regarding the provision of investment services within the member states of the European Union. The Directive has been described as the ‘passport to Europe’ for securities houses. The key feature of the Directive is that of ‘mutual recognition.’ in that:
a) any firm approved to provide investment services within its home state is mutually recognized by all other member states as being allowed to provide the same services within those other member states; and
b) any stock market or exchange that is recognized by its competent authorities within one member state is mutually recognized in all other member states as being allowed to offer its services (including the installation of trading system computer terminals) within those other member states.
A new ISD is currently being negotiated with a focus on establishing a single marketplace for securities covering all member states of the European Union. See ‘Competent Authority.’
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IPO
|
|
See ‘Initial Public Offering.’
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IPO Participation Rights
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Rights sometimes negotiated by investors during periods when public markets are strong, entitling the investors to be allotted a portion of the stock to be sold to the public in an IPO.
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Irrevocable Undertaking
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A binding agreement entered into by the shareholders (including directors/shareholders acting as shareholders) of the target company to accept the proposed offer in relation to shares held by them. A "hard" Irrevocable Undertaking is an unconditional binding agreement to accept the offer in any circumstances and is usually only given by those shareholders who are also part of the participating management team. A soft Irrevocable Undertaking is a conditional commitment to accept the offer subject only to a higher offer not being made and is usually given by institutional shareholders. Irrevocable Undertakings are sometimes simply referred to as ‘Irrevocables.’
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IRS
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(USA) Internal Revenue Service, the USA federal taxing authority.
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Issued and Outstanding Stock
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Issued stock of a corporation that is still outstanding and has not subsequently been repurchased by the corporation. Compare with ‘Treasury Stock.’
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Issuer
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The legal entity offering its securities for sale or subscription, whether it be a corporation, partnership, trust, or other appropriate entity.
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J-Curve
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The curve generated by plotting the returns generated by a private equity fund against time (from inception to termination). The common practice of paying the management fee and start-up costs out of the first draw downs does not produce an equivalent book value. As a result, a private equity fund will initially show a negative return. When the first realizations are made, the fund returns start to rise steeply. After about three to five years, the interim IRR will give a reasonable indication of the definitive IRR. This period is generally shorter for buyout funds than for early stage and expansion funds.
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Key Man Insurance
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A life and/or critical illness insurance policy taken out by a company to provide a cash sum if a key executive dies or becomes ill, thus covering some or all of the resulting financial loss to the business.
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Lagging Indicator
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An economic indicator that varies after the overall economy has changed. Examples include labor costs, business spending, unemployment rate, prime rate, outstanding bank loans, and inventory book value.
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Later Stage
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Expansion, replacement capital and buyout stages of investment. Compare with ‘Early Stage.’
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Lead Investor
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Investor who has contributed the majority share in a private equity joint venture or syndicated deal. See ‘Syndicated Deal.’ and ‘Syndication.’
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Lead Manager/Lead Underwriter
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The single underwriter that assumes leadership and financial responsibility for placing the securities offered in a public offering. On the cover of a prospectus, the Lead Manager/Underwriter is typically listed on the bottom of the page on the left-hand side, with the other underwriters listed to the right of the Lead Manager/ Lead Underwriter. See ‘Global Coordinator.’
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