| Accounts
payable-- Amount owing to creditors for goods and services on an open
account. Accounts receivable-- Amount due from customers for merchandise or services purchased on an open account. Accredited Investor: A high net worth investor (see About Accredited Investors in the Startup Roadmap) Angel Investor: an individual who provides capital to one or more startup companies. Asset-- Anything owned by a business or individual that has commercial or exchange value. Balance sheet-- Financial statement that presents a snapshot of what the business owns, what it owes, and what equity it has on a given date. Black-Scholes-Morton Formula: stock option valuation model Bridge Financing: Short-term financing provided to a company in expectation of some larger financing in the near future. Bridge Loan: Bridge financing in the form of a loan (often a Convertible Note). Broad Based Weighted Average: an investor protection provision which specifies that options and convertible securities may be exercised relative to the broad based weighted average at which securities were issued since the issuance of the option or convertible security. This reduces investor dilution. It is generally preferred by entrepreneurs, as opposed to the Full Ratchet. BSM - Black-Scholes-Morton Formula: stock option valuation model Capital expenditures-- Purchases of long-term assets such as equipment, used in manufacturing a product. Capital-- See Equity. Cash flow-- Incoming cash to the business less the outgoing cash during a given period. Also used to refer to the figure derived from net income plus non-cash items charged off in the accrual accounting process. CDA: Confidential Disclosure Agreement Closing: the final event to complete the investment, at which time all the legal documents are signed and the funds are transferred. Collateral-- Assets pledged to secure a loan. Collection period ratio-- Indicates how quickly your customers pay you. Average accounts receivable divided by net sales, multiplied by 365. Common Stock: Stock (ownership) shares in a Corporation that do not have special privileges (as opposed to Preferred Stock) Community Reinvestment Act (CRA) -- Under provisions of the Community Reinvestment Act of 1977, banks and thrift institutions seek opportunities to help meet the credit needs of their local communities, including low and moderate-income neighborhoods, consistent with safe and sound operation of the institutions. Compensating Balance-- Money a bank requires a company to leave in a deposit account as part of a loan agreement. Convertible Note – a form of debt that can be converted into stock. Frequently used in bridge financing. See “Convertible Notes” in the Startup Roadmap. Corporation-- Form of business ownership that is a legal entity on its own and puts stockholders and the board of directors in control. Owners have limited liability for the corporation's actions. A corporation as unlimited life and in most cases is taxed as an entity on its own. Cox-Ross-Rubinstein Binomial Model: stock option valuation model Cost of goods sold-- Figure representing the cost of buying raw materials and producing finished goods. Current assets-- Cash or other assets you expect to use in the operation of the firm within one year. Current liabilities-- Debts you expect to pay within one year. Current ratio-- Shows firm's ability to pay its current obligations from current assets. Current assets divided by current liabilities. D&O Insurance: Liability insurance for directors and officers D&O: Directors and Officers Days purchases in account payable ratio-- Indicates how quickly you pay your suppliers for inventory purchases. Average accounts payable divided by the cost of goods sold plus change in inventory; multiplied by 365. Days to sell inventory ratio-- Indicates the firm's efficiency at matching purchases to expected sales. Average inventory divided by the cost of goods sold, multiplied by 365. Deal Flow: the rate at which investment offers are presented to funding institutions. Debt ratio-- Indicates the firm's debt level, or leverage. Total liabilities divided by total liabilities plus capital. Depreciation-- Amortization of the cost of a fixed asset, i.e., plant and equipment, over several years, or the depreciable life. Dividend-- Distribution of earnings to shareholders. Due Diligence: the process of investigation and evaluation, performed by investors, into the details of a potential investment, such as an examination of operations and management and the verification of material facts. Equal Credit Opportunity Act (Federal Reserve Regulation B)-- Prohibits lenders from denying your application on the basis of race, color, religion, national origin, sex, marital status, or age, or from discouraging you from applying, or giving you less favorable terms than any other applicant, on such a basis. Regulation B also contains rules governing credit transactions. Equity Financing: issuance (sale) of shares of common or preferred stock to raise money. Equity-- The ownership interest in a business remaining after its liabilities are deducted. Also known as stock plus retained earnings, or capital. Exit Strategy: the way in which an investor or business owner will get out of (and get a return on) an investment that he/she has made. Exit Strategy is also called liquidity event. Typically an acquisition or public stock offering. Extraordinary items-- Unusual or nonrecurring event that must be explained to shareholders or investors, such as a manufacturer's sale of a building. FASB - Financial Accounting Standards Board; The designated private sector organization in the US that establishes financial accounting and reporting standards FASB 123R - Establishes standards for the accounting for share-based compensation for employees. This includes guidelines as to when such compensation creates a liability, and how such transactions result in P&L impact Finance company-- Competitors of commercial banks in providing credit to households and firms. Unlike banks, they do not accept deposits. Financial projections -- Estimates of the future financial performance of a firm. Financial statements-- Written record of the financial status of an individual or organization. Commonly includes profit and loss, or Income, Statement; the Balance Sheet, which includes a statement of the company's retained earnings; and the Cash Flow Statement. Fixed assets-- Long-term assets (i.e., buildings, equipment, property) that are not expected to be converted to cash in the near future. Fixed costs -- costs of doing business such as rent, utilities, depreciation, taxes, etc., that remain generally the same regardless of the amount of sales of goods or services. Full Ratchet: an investor protection provision which specifies that options and convertible securities may be exercised relative to the lowest price at which securities were issued since the issuance of the option or convertible security. The full ratchet guarantee prevents dilution, since the proportionate ownership would stay the same as when the investment was initially made. Entrepreneurs much prefer a less harsh protection such as an adjustment on a broad based weighted average. Gross income-- Net sales less cost of goods sold. Gross profit-- Indicates the revenues of the firm before consideration of its operating expenses. Net sales less cost of goods sold. Gross profit margin-- Measures a firm's profitability. Gross profits divided by net sales. Guarantee -- promise by an individual or organization to repay a loan in the event of default. Income statements -- financial statement showing a company's sales, expense and net income or loss for a specific period of time. Incubator: a company or facility designed to foster entrepreneurship and help startup companies, usually technology-related, to grow through the use of shared resources, management expertise and intellectual capital. Initial Public Offering: The first sale of stock by a private company to the public. Installment loan-- Loan type that is paid in periodic payments, such as an automobile loan. Internal Rate of Return: The implied interest rate of a sequence of cash inflows and outflows. Inventory-- Value of a firm's raw materials, work in process, supplies used in operations, and finished goods. Investor-- An individual who takes an ownership position in a company, thus assuming risk of loss in exchange for anticipated returns. I PO: Initial Public Offering. The first sale of stock by a private company to the public. IRR: Internal Rate of Return ISO: Incentive Stock Option Lead Investor: The venture capital firm that leads an investment round by structuring the deal (with a term sheet) and builds a syndicate (group) of investors to make the investment. Leverage-- Measures the firm's use of borrowed funds versus those funds provided by the shareholders or owners (equity). Leveraged Buy Out (LBO): an acquisition of a business using mostly debt and a small amount of equity. The debt is secured by the assets of the business. Liabilities -- debt owed by the company such as bank loans or accounts payable. Line of credit-- Although not a contract, a bank's promise to lend to a specific borrower up to a pre-agreed amount during a specific time frame. Usually reviewed annually and subject to cancellation without notice. Liquid assets-- Those assets that can be readily turned into cash. Liquidation Preference: The preference given to Preferred investors at a liquidity event. Generally speaking, Preferred investors get paid first in the case of an acquisition or merger. Liquidity Event: the way in which an investor or business owner will get out of (and get a return on) an investment that he/she has made. Typically an acquisition or public stock offering. Liquidity-- Gauges firm's ability to quickly turn assets into cash. Lock Up Provision: Prevents transfer of stock for some period of time after a public stock offering. Marketable securities-- Securities that are easily sold. Maturity -- the date when payment of principal on a loan is due. Mezzanine Financing: late-stage venture capital, usually the final round of financing prior to an IPO. NDA: Non Disclosure Agreement Net income-- The sum remaining after all expenses have been met or deducted. Also called profit. Net sales-- Gross sales minus returns and allowances. Net worth-- Excess of assets over debt. Niche-- Particular specialty in which a firm has gained a large market share. NSO: Non Qualified Stock Option Operating expenses-- Those costs associated with the day-to-day activities of the business. Operating profit (loss) -- Income or loss before taxes and extraordinary items resulting from transactions other than those in the normal course of business. Operating profit margin-- Measures a firms profitability by examining the pre-tax profit generated from primary operations (versus extraordinary items) in relation to net sales. Operating-profit divided by net sales. Pari Pasu: in term sheet use, this indicates that one series of equity will have the same rights and privileges as another series of equity. ('of equal step' in Latin) Partnership-- Can be general or limited, but in either case the general partners are in control. The tax burden is shared by all the partners at their personal rate, and the general partners have unlimited liability. Limited partners have limited liability. Pay-to-Play: Provision that encourages existing investors to participate pro-rata in the next equity round, generally be specifying some punitive event if the investor does not fully participate. (For example, the investor’s existing stock could be converted to Common.) Piggy Back Registration: Gives investors the right to participate in any stock registration (sale) initiated by the company Preferred Stock: Stock (ownership) shares in a Corporation that have special privileges (as opposed to Common Stock). For example, in return for providing capital to a company, Preferred Shareholders may, voting as a group, have the right to veto certain corporate decisions (e.g., a proposed acquisition) and, in the company is acquired, Preferred Shareholders generally are first in line to receive proceeds. In the case of an acquisition or IPO, Preferred Shares are converted to Common Shares. Principal-- The currently unpaid balance of a loan, not including interested owed. Also can refer to a primary owner or investor. Pro forma financial statements-- Financial statements for a business where certain amounts shown are hypothetical, or estimated, for the period depicted. Profit and loss statement-- Summary of the revenues, costs, and expenses for a business over a period of time. Also called the income statement. Profit-- Compensation an entrepreneur receives for the assumption of risk a business venture. Also called net income. Pro-rata – “In proportion”. Typically refers to an existing investor investing in the next round in the same proportion to his or her investment in the previous round. Quick ratio-- Liquidity ratio that focuses on the firm's most liquid assets by excluding inventory. Also known as the acid test ratio. Cash, marketable securities, and accounts receivable divided by current liabilities. Retained earnings -- Net profits kept to accumulate in a business after dividends are paid. Return on Investment: The implied interest rate of an investment. Often estimated using IRR (Internal Rate of Return). Round of Funding: the stage of financing a start-up company is in. The usual progression is from startup to first round to mezzanine to pre-IPO. Seasonal loan-- A loan made for the purpose of meeting predictable and periodic funding needs, such as funding of camping gear inventory before summer purchases. Seed Capital: money used to purchase equity-based in a new or existing company. This seed capital is usually quite small because the venture is still in the idea or conceptual stage. Series A Preferred Stock: the first round of Preferred Stock offered during the seed or early stage round by a portfolio company to the venture capitalist. Sole proprietorship-- A type of business where the owner has full control and unlimited liability. A sole proprietorship is taxes at the personal income tax rate. Syndication: the process whereby a group of venture capitalists will each put in a portion of the amount of money needed to finance a small business. Term Sheet: non-binding agreement setting forth the basic terms and conditions under which an investment will be made. The term sheet is a template that is used to develop more detailed legal documents. Triple Net: Term used in office leases that indicates that the lease expense does not include insurance, janitorial, or utilities. Variable costs -- those costs of doing business such as cost of goods, shipping, handling and storage, sales commissions, etc., which are directly related to the sales of goods or services. Warrants (Stock Warrants): A right to purchase some number of shares of stock at some particular price in the future. Warrants are often offered in conjunction with bridge financing to add an additional benefit in return for early investment. |
Glossary |