Glossary of venture capital terms
ANGEL
An individual who invests his/her personal funds directly in business
ventures, and often provides advice and assistance as well.
BOARD OF DIRECTORS
The group that makes important management decisions, oversees the
business development, and participates in hiring top management
for the company.
(Woodside Fund is frequently asked to serve on the Board of
the companies in which it invests.)
BUSINESS MODEL
The manner in which the company will generate revenues and profits
by utilizing capital. An attractive business model will allow for
high profits and cash flow with minimal capital investment over
time, as exemplified by Microsoft. In Internet companies, business
model can also refer to value creation or growth; for example, how
to get subscribers.
DUE DILIGENCE
The thorough investigation and analysis the investor makes of a
prospective investment to see if it meets the investor’s strategy
and criteria for funding. It includes an assessment of the industry,
market, business concept, management team, the company’s technology,
products and markets, and financial model.
EARLY STAGE VENTURE
Early stage venture is a generic term. It typically includes the
following: Seed stage, Startup stage, First Round and sometime
even Second Round of financing.
EXIT STRATEGY
The plan by which the entrepreneur and the venture capitalist can
realize some of the value created in building an enterprise. The
exit provides returns to the venture capitalists to deliver to their
own investors. It’s a source of compensation for venture capital firms.
FINANCIALS
"Financials" or financial statements are included in a
business plan and are part of the due diligence process. They include:
projected (also called "proforma") balance sheets and
income statements (also called profit and loss statements), and
a summary cash flow projection.
FINANCING ALTERNATIVES
BRIDGE
A transition financing in anticipation of larger equity financing.
Usually involves simple interest with a conversion premium or
warrant coverage.
BUYOUT
Financing a change in ownership. Two types:
Leveraged Buyout (LBO)
The purchase of a majority or controlling interest in a company
through the use of borrowed money. Often the lender, in addition
to normal interest rates, acquires some portion of the equity
securities in the acquired company.
Management Buyout (MBO)
When the management of a company acquires a controlling interest
in its company.
CRAMDOWN
A financing at a significantly lower valuation than prior rounds
that will be highly dilutive to prior shareholders.
FOLLOW-ON
Additional funding given by same investor to one of its investments
to further development.
MEZZANINE
An intermediate financing round that is well after the first,
but before the exit. Can be either equity or debt.
PAY TO PLAY
A follow-on financing by an existing shareholder in a cramdown
round in order to restore their position.
PIPE
A private investment in a public entity.
RECAP
A recapitalization of the balance sheet. Usually to replace burdensome
debt with equity.
ROLLUP
An acquisition strategy to merge many smaller businesses into
an organization with enough critical mass to achieve operating
efficiencies and a significant improvement in valuation.
SEED
The very first round of financing made to begin the financing
or attract additional funds for a long-term project.
SYNDICATION
Financing provided by an association of individuals or companies
formed to invest in an enterprise.
STARTUP
The first round of institutional financing for early stage ventures.
Also known as First or Series A.
WORKOUT or a TURNAROUND
A financing to restructure an ailing business.
SUBORDINATED DEBT
A loan that is lower in liquidation preference to senior creditors.
Usually includes warrant coverage to adjust for the additional risk.
(Woodside Fund provides seed, startup, follow-on, and syndicated financing.)
FOUNDERS STOCK
Equity ownership given to the investor to compensate the investor
for taking on the risks of the investment.
GENERAL PARTNER
An individual who actively manages the business as co-owner. He/she
has a vote in the management of a company. The General Partner is
personally responsible for the liabilities of the partnership.
GENERAL PARTNERSHIP
An association of two or more individuals or companies that want
to conduct a for-profit business as co-owners.
INITIAL PUBLIC OFFERING (IPO)
When a company looking to raise more than $5 million first offers
stock for sale to the general public. Commonly known as "going
public."
INTELLECTUAL PROPERTY
Set of laws, which provide for certain rights to intangible products
of the mind. Each right is defined and regulated by a separate branch
of the law. The main branches are Copyright Law, Patent Law, Trade
Secret Law, Trademark Law, and Semiconductor Chip Protection Law.
INVESTMENT STRATEGY
Guides the investor in making the decision about what companies
to invest in. Includes industry focus, the type of deal, and the
transaction size.
LIMITED PARTNER
A member of a partnership who has no vote in the management of the
partnership. Their potential loss is limited to their capital contribution
and usually they receive a fixed dollar return that is payable in
full before the General Partner shares in any profits.
LIMITED PARTNERSHIP
Association of companies or individuals that has one or more limited
partners and one or more general partners.
PARTNERSHIP
An association of two or more parties who pool their money and talent
to conduct a business.
PORTFOLIO COMPANIES
The companies in which a venture capital company invests, and manages
as a portfolio.
PRIVATE PLACEMENT
Sale of stock that is not advertised to the public and that is sold
to savvy and wealthy individual investors. Most venture capital
investments are made as private placements.
SEED
Typically refers to the concept or early technology development
stage, prior to the startup of the business.
STARTUP
The stage of development when the company has employees and begins operations.
(Woodside Fund specializes in financing startups.)
TERM SHEETS
The details of the agreement between the investor and the enterprise
receiving funding.
VALUE-ADDED INVESTOR
Contributes to the management and development of the company, in
addition to providing financing.
(Woodside Fund has decades of hands-on business and startup experience,
and a track record of adding value to its portfolio companies.)
VALUATION
The estimated value of a business. Often determined by comparing
your company to the value already given other similar companies.
It is based on your company’s stage of development, present value
of the projected profit and cash flows from the business plan.
Pre-financing valuation
The estimated value of the company just prior to financing --
value generated by the work of the entrepreneurial team and any
prior capital investments. Pre-financing valuation is the post-financing
valuation less the total amount invested.
Post-financing valuation
The estimated value of the company just after financing. Calculated
as either: (a) the product of the total number of shares outstanding
and the price per share of the financing, or (b) the amount invested
divided by the percentage of the company acquired.
(When negotiating a company's value, Woodside Fund takes the time
to understand what each party wants out of the transaction and works
hard at achieving mutual goals.)
VENTURE CAPITAL
Investment in a new, untried business venture. Venture capitalists
are compensated for such investments by receiving a portion of equity ownership.
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