Accelerated vesting is a form of vesting that takes place at a faster rate than the initial vesting schedule. This allows the holder to receive the monetary benefit from the option much sooner. The conditions or events upon which an accelerated vesting occurs are usually determined in the shareholders’ agreement. Typically, accelerated vesting is triggered by an exit.
An angel investor is a person who provides a small amount of capital to a startup for a stake in the company. Such an angel investment typically precedes a seed round and usually happens when the startup is in its infancy. Although angel investors are rarely involved in the management of the startup, they often add value through their contacts and expertise.
The Anti-Dilution provision is used to protect the investor in the event a down round is negotiated. Within a down round the company issues equity at a lower valuation than in previous financing rounds. This protects the original investment or value from being diluted. (pre-money valuation new < post-money valuation old).
Typically, there are seen a few different versions of the anti-dilution provision. Examples are broad-based weighted average, narrow-based weighted average, and full ratchet anti-dilution.
Bootstrapping is a method of financing companies that works entirely without external financial backers. Bootstrapping describes a process in which founders finance themselves and set up a business without outside help.
A cap table or capitalization table shows the shareholders in a company, how many shares they hold and what they have invested in order to receive this ownership. The Cap Table should also also shows for each financing round the class of the shares issued (e.g.series A preferred shares), any options granted or created, e.g. under an ESOP, and other financing instruments like convertible notes.
The Cap Table should always be up to date and well prepared for each financing round.
See -> Vesting
Common shares are the most basic shares that are issued within a company. They have the lowest priority when it comes to a distribution of proceeds, when there are other share classes or debt within the company.
Convertible loans (sometimes also convertible notes) are often used by business angels in very early stages of the start up or as a bridge financing. With a convertible note a explicit valuation is not necessary. Convertible notes are structured like a loan when the financing is granted but can converted into equity when e.g. another equity financing occurs. The conversion is then done to the conditions of the actual financing mostly with a discount or a cap on the paid price.
The obligation to co-sell (Drag-Along) enables the majority shareholders to sell their shares to a third party and at the same time to force minority shareholders to co-sell their shares.
The data room is (mostly) a secure place where investors or potential buyser can review confidential data and information about the target company. The data room is set up before a due diligence starts. Next to client contracts, ip contracts also the shareholder agreements and investment agreements of previous financing rounds are crucial information to the investor / buyer.
Borrowed capital is usually granted by banks and must be repaid in full during the term in certain installments or at final maturity. In addition, interest is payable on the amount granted. Interest is based on the risk borne by the lender on the one hand and on the term of the loan on the other. A new form of debt financing, especially in the venture sector, is the so-called venture debt.
Dilution occurs when new shares are issued as part of a capital increase. The percentage share of the existing shareholders then decreases. This is a percentage or proportional dilution. In addition, there is a price-based dilution, which occurs when a new financing round takes place at a price below the previous price. In this case, the value of the shares also decreases. (Protection: Anti-dilution)
A Down Round occurs when the valuation of a company within a financing round is set lower then in the previous financing round.
After the Seed Stage comes the early stage where the prodcut has been testet and a proof of concept was achieved. However a greater financing is needed to start large production or scale up. Typically seen financing rounds in early stages are Series A and Series B.
ESOP stands for Employee Stock Option Plan and allows employees or the management team to participate in the company without holding “real” shares.
Equity is the most common type of VC financing. Due to its liability nature, in the event of liquidation, the owners of the company receive the last share to which they are entitled. On the other hand, they also receive 100% of the amount by which the assets exceed all liabilities. The equity can be divided into three types: Ordinary shares, preferred shares and options. In addition to the options, there are also so-called warrants, which are very similar to the options and can also be used for the later acquisition of ordinary shares. For more information see this article (only in German available)
A organized effort by a company to raise capital for its business activities. A financing round is often essential for a company to start or to expand operations.
A flat round occurs when a company is raising money at the post-money value of their previous financing round.
A founder lock-up period refers to a predetermined time of the people involved in starting up the business who hold stocks or shares to be able to sell it before it goes to the public.
Fully diluted shares represent the total number of shares that will be outstanding after all possible shares are granted. (Option Pools, Warrants, Convertible notes, etc.)
One of the co-owners of a general partnership who manages the venture capital fund and is paid by a management fee. The general partner has, unlike limited or nominal partner, a unlimited personal liability for the firm’s debts. Actions taken by one general partner are obligatory upon the other general partners.
In the context of Venture Capital financing a hurdle rate is the minimum return a venture capital fund has to achieve before he is allowed to claim carried interest to himself.
Private investors who acquire shares in young innovative companies are encouraged. The private investor receives 20 percent of the issue price of his investment back as a purchase subsidy if the investment is held for at least three years. Read More
IPO which stands for an initial public offering is a process through which a company sells shares or stocks to the public as a way to raise funds needed for further business expansion or activities.
The J-curve refers to a J shaped curve on the time series graph. The J-curve effect occurs during the life cycle of a private equity / venture capital investment. While negative cash flows occur at the beginning due to investments, these are typically followed by substantial profits.
The late(r) stage refers to which an investing company e.g venture capital firm supports a company whose sales growth has leveled up beyond the start-up phase development.
A loan is the lending of money to other individuals, organizations etc. In comparison to equity, interest payments and repayment of the amount are agreed upon.
The lead investor refers to a single individual or a single group who is more involved in the business process of startup companies by investing amount of money and informations to a successful funding.
A liquidity event is about turning the equity of the investors into cash from the sale of the company’s business.
Liquidation preferences stipulate that individual shareholders, usually venture capital investors, receive preferential proceeds before the other shareholders are involved. They come into play when the company is liquidated. In practice, such clauses usually regulate the distribution of proceeds from an exit or comparable transactions.
M&A which stands for Merging and Acquisitions and is a collective term for corporate transactions such as mergers, acquisitions, business transfers, leveraged buyouts, management buy-outs /-buy-ins, outsourcing/insourcing, spin-offs or carve-outs.
Management buy in (MBI) and Management buy out (MBO) are two types of deals in purchasing a business which are funded e.g. by a venture capital firm / private equity fund to supplement the money needed. However, the two deals work differently as MBI is a purchase of an existing business by an outsider management to replace the control over the company while MBO is a purchase of an existing business by a management working in the company to have the control of company’s assets and properties.
Mezzanine Financing is a term for financing instruments that have both equity and debt components.
The funding amount that venture capitalists provide to start up are usually provided in some tranches over time. With milestones an investor agrees to provide the company with further financing when the negotiated goals are hit.
Non-disclosure agreement is a private legal contract of parties or companies observing confidentiality of company’s sensitive informations about the business that must not be known to the public as such informations can be disclosed only in doing business transactions.
The option pool is a tool of a startup company to acquire talented or potential employees to do well in introducing the company to the public by rewarding them common stock shares.
Pari Passu is a type of financing arrangement with equal right of payment by venture capital firms to a startup company through loans, bonds and classes of shares.
A pay-to-play provision is a strong incentive for investors to participate in further financing rounds. In their simplest form these clauses force investors to invest within the next financing round on a pro rata basis, or they will lose some of their preferred rights.
The post money valuation is the pre-money valuation plus the new investments disclosed within the financing round. The shareholding is determined on the basis of the post-money valuation.
The pre-money valuation is the agreed net value of the company before the new financing round is closed.
Preferred shares refer to the ownership claims to the assets and earnings of the company. Owners of preferred shares may receive some additional rights or payouts than common shareholders
In the venture capital context, a ratchet provision is a special right that protects shareholders from having their shares issued at a lower price than the shareholder has previously paid in a subsequent financing round.
Return on Investment (ROI) measures the ratio of the money returned from the net profit of the company’s business of its investment significant to the money invested.
Seed round refers to the funding of very early investors e.g business angels who will fund to start the business of a startup company.
The seed phase describes a phase in the life of a young company where an idea of a product, a service or a prototype has not yet been developed. A business plan has to be drawn up, the foundation preparation begins and the organizational structure has to be planned.
Shareholders’ agreement is contract of startup company among its shareholders which outlines the shareholders’ rights and obligations fairly to ensure clarification what parties originally intended.
Syndication is a method of startup company forming partnership with other investor or company e.g venture capital firm to raise funds on a business which is a large transaction that can not be invested alone as such parties can share properties and shares of the business for an attractive return of investment.
These offer the minority shareholder the possibility of joining a sale of shares by majority shareholders. The minority shareholder can benefit from the negotiated sale by transferring his shares to the buyer on the same terms. The Tag-Along right therefore protects the rights of the minority shareholder.
Contains the most important parameters of the financing round, that are first negotiated and later incorporated into the participation & shareholder agreement.
Track record deals with the record of company’s business performance, achievements and failures in the past which can be used as a tool by venture capital firms to give an insight for good investments.
The investment is sold to another company, usually to a strategic investor. The trade sale represents an alternative to an IPO as an exit channel for investors if the company is not ready for the stock exchange.
A unicorn is a startup whose valuation has reached or exceeded one billion.
An up round occurs when a company is raising money on a valuation higher than the post-money value of their previous financing round.
The valuation of a start up is divided into the pre-money valuation and the post-money valuation.
Venture capital is private equity that provides an investment company with the opportunity to invest in companies that are considered to be very risky. It is mostly the only source of capital young, innovative corporates can get.
Vesting means that a founder or employee / management can freely dispose of its own shares only after the expiry of a defined blocking period. In the event of leaving the company during the vesting period, for example, the company can buy back or withdraw the shares.
The time frame in which vesting occurs.
The waterfall takes the current cap table and visualizes the distribution of multiple exit proceeds to different classes of shareholders based on different liquidation preference structures, conversion scenarios, and the seniority of different share classes.