FS6 Glossary of Business & Investment Terms
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INVESTMENT BY TYPE
Angel Investor: An angel investor (also known as a private investor, seed investor or angel funder) is a high net worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for equity ownership in the company. Often, angel investors are found among an entrepreneur's family and friends. The funds that angel investors provide are generally one-time investments to help the business get off the ground. Occasionally, an angel may make additional investments in a company, but that is unusual.
Banks and SBA Lenders: Banks and SBA Lenders have small business programs for capital investment. These are loans. A business might qualify for an SBA loan that includes the real property purchase, along with capital for machinery. Many businesses don't realize that the SBA has funding programs valued for millions of dollars depending on the project, industry and size of the company.
Corporate Venture Capital: The investment of corporate funds directly in start-up companies. [This] definition excludes investments made through an external fund managed by a third party, even if the investment vehicle is funded by and specifically designed to meet the objectives of a single investing company. It also excludes investments that fall under the more general rubric of “corporate venturing”—for example, the funding of new internal ventures that, while distinct from a company’s core business and granted some organizational autonomy, remain legally part of the company. Our definition does include, however, investments made in start-ups that a company has already spun off as independent businesses. Generally, it is unwise to take corporate money as an early stage startup. Corporates have their own strategic agenda and your startup, while being aligned when an investment first happens may find that their interests diverge. Generally, corporate investors are better suited for Series B or even Series C rounds of financing.
Crowdfunding: Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. Crowdfunding makes use of the easy accessibility of vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together, with the potential to increase entrepreneurship by expanding the pool of investors beyond the traditional circle of owners, relatives and venture capitalists.
Family Offices: Family offices are private wealth management advisory firms that serve ultra-high-net-worth (UHNW) investors. They are different from traditional wealth management shops in that they offer a total outsourced solution to managing the financial and investment side of an affluent individual or family. For example, many family offices offer budgeting, insurance, charitable giving, family-owned businesses, wealth transfer, and tax services.
Friends and Family: [Friends and family funding] is one of the most common forms of startup funding out there. Banks and independent investors might not want to risk money on you. But those who are close to you and believe in you might be willing to take a chance on your fledgling business… It could be a gift, a loan or an equity investment in the business. Each have pluses and minuses, and each should be recorded in writing, in all cases a legal document. This is crucial for your Friends and Family investors, but also, crucial for later investors who will require that you have written agreements with all shareholders, noteholders, or anyone else with a claim on the company. Be prepared that this money should come from people who can afford to write off their investment entirely, and Thanksgiving dinners might get rocky if the business doesn’t do well.
Impact Investing: Impact investing refers to an investment strategy that not only generates financial returns but also creates constructive outcomes. The strategy actively seeks to make a positive impact by investing, for example, in companies that up-cycle a production waste stream into a new product, or in a marketplace that benefits farmers growing sustainable food. Impact investing attracts individuals as well as institutional investors including hedge funds, private foundations, banks, pension funds, and other fund managers, who have an impact objective in addition to a goal of financial return.
Private Foundation: A private foundation is a charitable organization that, while serving a good cause, was formed from funding by a single source or specified source. As such, rather than funding its ongoing operations through donations from many sources, a private foundation generates income by investing its initial endowment, often disbursing the bulk of its investment income each year to desired charitable activities, but at minimum 5% of assets annually.
Venture Capitalist: A venture capitalist (VC) is a private equity investor that provides capital to companies exhibiting high growth potential in exchange for an equity stake. This could be funding startup ventures or supporting small companies that wish to expand but do not have access to equities markets. Venture capitalists are willing to risk investing in such companies because they can earn a massive return on their investments if these companies are a success. The difference between a VC and angel is particularly, that VCs invest on behalf of other people, while angels deploy their own personal capital.
GENERAL INVESTMENT VOCABULARY Blended Capital: Blended capital is a fundraising approach that combines disparate forms of investment capital, enabling different investors to invest in a way that aligns with their risk/reward and other objectives. This can take the form of philanthropic capital joining with return-oriented capital in creative ways where each sees an opportunity aligned with their goals and the combination increases the likelihood of success for each. It can also mean combining equity & debt creatively. A company that requires some large CapEx for real estate or equipment, in addition to operating capital to run and build the business, could be solved by seeking out investors willing to loan money against real estate or other fixed assets, while a different investor could invest in the operating company for equity. This would solve the capital needs of the company by blending two types of investment and delivering the risk/return that each investor is seeking.
Capitalization Table (Cap Table): A capitalization table, also known as a cap table, is a spreadsheet or table that shows the equity capitalization for a company. In general, the capitalization table is an intricate breakdown of a company’s shareholders’ equity. Cap tables must include all of a company’s equity ownership capital, such as common equity shares, preferred equity shares, option pool, and warrants. Generally, convertible notes, SAFE notes and the like are tracked separately since they are future claims, but not on the cap table prior to conversion. While the company must maintain the complete detail, summary versions are appropriate to share in the early process with prospective investors.
Common Stock: Common stock is a security that represents ownership in a corporation. Holders of common stock elect the board of directors and vote on corporate policies, subject to the corporation’s charter and bylaws. However, in the event of liquidation, common shareholders have rights to a company's assets only after bondholders, preferred shareholders, and other debt holders are paid in full. Common stock is reported in the stockholder's equity section of a company's balance sheet.
Convertible Note: A convertible note is short-term debt that converts into equity. In the context of a seed financing, the debt typically automatically converts into shares of preferred stock upon the closing of a Series A round of financing. In other words, investors loan money to a startup as its first round of funding; and then rather than get their money back with interest, the investors receive shares of preferred stock as part of the startup’s initial preferred stock financing, based on the terms of the note.
Due Diligence: Due diligence is an investigation or audit of a potential investment or product to confirm all facts. Due diligence refers to the research done before entering into an agreement or a financial transaction with another party.
Equity: [Equity] represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company's debt was paid off. Equity is found on a company's balance sheet and is one of the most common financial metrics employed by analysts to assess the financial health of a company. Shareholder equity can also represent the book value of a company. Equity can sometimes be offered as payment-in-kind.
Preferred Stock: There are two types of equity - common stock and preferred stock. Preferred stockholders have a higher claim to dividends or asset distribution than common stockholders. The details of each preferred stock depend on the Preferred Stock terms in contract.
SAFE Note: SAFE (simple agreement for future equity) notes are a simpler alternative to convertible notes. They were created in 2013 by Y Combinator, a Silicon Valley accelerator, and allow startups to structure seed investments without interest rates or maturity dates. SAFEs are short five-page documents. The valuation caps are the only negotiable detail. A SAFE note is a convertible security that, like an option or warrant, allows the investor to buy shares in a future priced round. It addresses many of the drawbacks and challenges posed by convertible notes and can be a balanced option for investors and founders. Startups may prefer SAFE notes because, unlike convertible notes, they are not debt and therefore do not accrue interest.
Security Agreement: A security agreement refers to a document that provides a lender a security interest in a specified asset or property that is pledged as collateral. Terms and conditions are determined at the time the security agreement is drafted. Security agreements are a necessary part of the business world, as lenders would never extend credit to certain companies without them. In the event that the borrower defaults, the pledged collateral can be seized by the lender and sold.
Seed Capital: Seed capital is the initial funding used to begin creating a business or a new product. Obtaining seed capital is the first stage required for a startup to get on the road to become an established business. Seed capital includes friends and family, angel, and even priced round financings typically called the Series Seed round.
Series A Financing: Series A financing refers to an investment in a privately-held, start-up company after it has shown progress in building its business model and demonstrates the potential to grow and generate revenue. The main difference between seed capital and Series A funding is the amount of money involved. Seed capital will usually be in smaller amounts, e.g. tens or hundreds of thousands of dollars, while Series A financing is typically in the millions of dollars. Total dollars and what these financings are called varies greatly.
Shares: Shares are units of ownership interest in a corporation or financial asset that provide for an equal distribution in any profits, if any are declared, in the form of dividends. The two main types of shares are common shares and preferred shares.
Stock: A stock (also known as "shares" or "equity") is a type of security that signifies proportionate ownership in the issuing corporation. This entitles the stockholder to that proportion of the corporation's assets and earnings.
Stock Option: A stock option, in the context of startups, is typically offered to employees as part of their incentive compensation. As a company matures, RSU Restricted Stock Units becomes the more typical employee compensation tool, primarily due to tax consequences.
Stock Warrant: A stock warrant gives the holder the right to purchase a company's stock at a specific price and at a specific date. A stock warrant is issued directly by the company concerned; when an investor exercises a stock warrant, the shares that fulfill the obligation are not received from another investor but directly from the company.
Term Sheet: A term sheet is a nonbinding agreement setting forth the basic terms and conditions under which an investment will be made. It serves as a template to develop more detailed legally binding documents. Once the parties involved reach an agreement on the details laid out in the term sheet, definitive agreements that conform to the term sheet details are then drawn up.
Vesting: Vesting is the process of earning an asset, like stock options, over time. Companies often use vesting to encourage you to stay longer at the company and/or perform well so you can earn the award. Vesting can be designed in two ways: an option can vest over time and the recipient doesn’t hold ownership on a share until that share has vested based on the time or other terms described in the option grant; or an option can be structured so that the recipient can exercise the entire option, and the company maintains the right to repurchase the shares at cost. The company’s right to repurchase is what vests away over time. The benefit of the second approach is that the recipient gains the benefit of the cost basis of the option and, typically, if exercised right away, there is no tax due, because the value per share will be the same as the option price if exercised very close in time.
Vesting Cliff: Most time-based vesting schedules have a vesting cliff. A cliff is when the first portion of your option grant vests. After the cliff, you usually gradually vest the remaining options each month or quarter. Usually a vesting cliff should be aligned with the probationary period.
Warm Introduction: The referral of an emerging company to a venture capital source, corporate strategic or other entity through a contact who is familiar with both parties.
GENERAL BUSINESS VOCABULARY 501(c)(3) Foundation or Charity: Being "501(c)(3)" means that a particular nonprofit organization has been approved by the Internal Revenue Service as a tax-exempt, charitable organization. "Charitable" is broadly defined as being established for purposes that are religious, educational, charitable, scientific, literary, testing for public safety, fostering of national or international amateur sports, or prevention of cruelty to animals and children.
501(c)(6) Membership Based Nonprofit: A 501(c)(6) membership-based nonprofit is an organization that exists to promote its members' business interests, without the goal of making a profit. In addition, these organizations must make sure that no one individual or shareholder benefits financially from the organization's income. While charitable nonprofits must serve a public good and be supported by the public, a trade association and similar organizations do not have to serve the public good.
The 501(c)(6) designation includes membership-based organizations or clubs that promote the business interests of their members, such as trade associations and sports leagues. Adjusted Gross Margin: Adjusted gross margin is a calculation used to determine the profitability of a product, product line or company. The adjusted gross margin includes the cost of carrying inventory, whereas the (unadjusted) gross margin calculation does not take this into consideration. The adjusted gross margin thus provides a more accurate look at the profitability of a product than the gross margin allows because it takes additional costs out of the equation that affects the business's bottom line.
B-Corp: Certified B Corporations are social enterprises verified by B Lab, a nonprofit organization. B Lab certifies companies based on how they create value for non-shareholding stakeholders, such as their employees, the local community, and the environment. Once a firm crosses a certain performance threshold on these dimensions, it makes amendments to its corporate charter to incorporate the interests of all stakeholders into the fiduciary duties of directors and officers. These steps demonstrate that a firm is following a fundamentally different governance philosophy than a traditional shareholder-centered corporation.
Benefit Corporation: A benefit corporation is a legal tool to create a solid foundation for long term mission alignment and value creation. It protects company missions through capital raises and leadership changes, creates more flexibility when evaluating potential sale and liquidity options, and prepares businesses to lead a mission-driven life post-IPO.
A benefit corporation is a traditional corporation with modified obligations committing it to higher standards of purpose, accountability and transparency:
Business Model: A business model is a company's plan for making a profit. It identifies the products or services the business will sell, the target market it has identified, and the expenses it anticipates.
Business Plan: A business plan is a written document that describes in detail how a business—usually a new one—is going to achieve its goals. A business plan lays out a written plan from a marketing, sales, engineering / development, financial and operational viewpoint.
COGS: Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs. Cost of goods sold is also referred to as "cost of sales."
Cooperative: A cooperative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise.
The cooperative principles are guidelines by which cooperatives put their values into practice.
G&A: General and administrative (G&A) expenses are incurred in the day-to-day operations of a business and may not be directly tied to a specific function or department within the company. General expenses pertain to operational overhead expenses that impact the entire business. Administrative expenses are expenses that cannot be directly tied to a specific function within the company such as manufacturing, engineering, marketing, or sales. G&A expenses include rent, utilities, insurance, legal fees, and certain salaries (CEO, finance & HR). G&A expenses are a subset of the company's operating expenses, excluding selling costs.
Gross Margins: Gross margin is a company's net sales revenue minus its cost of goods sold (COGS). In other words, it is the sales revenue a company retains after incurring the direct costs associated with producing the goods it sells, and the services it provides. The higher the gross margin, the more capital a company retains on each dollar of sales, which it can then use to pay other costs or satisfy debt obligations. The net sales figure is simply the gross revenue, less returns, allowances, and discounts.
Incorporation: Incorporation is the legal process used to form a corporate entity or company. A corporation is the resulting legal entity that separates the firm's assets, income, and most importantly, liabilities from its owners and investors.
C-Corp: A C corporation (or C-corp) is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity. C corporations, the most prevalent of corporations, are also subject to corporate income taxation. The taxing of profits from the business is at both corporate and personal levels, creating a double taxation situation.
LLC: A limited liability company (LLC) is a corporate structure in the United States whereby the owners are not personally liable for the company's debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship. While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of an LLC is a feature of partnerships.
S-Corp: An S corporation, also known as an S subchapter, refers to a type of corporation that meets specific Internal Revenue Code requirements. The requirements give a corporation with 100 shareholders or fewer, the benefit of incorporation while being taxed as a partnership. The corporation may pass income directly to shareholders and avoid double taxation. Requirements include being a domestic corporation, not having more than 100 shareholders—which includes only eligible shareholders (including only US individuals) —and having only one class of stock.
Net Profit Margins: The net profit margin is equal to how much net income or profit is generated as a percentage of revenue. Net profit margin is the ratio of net profits to revenues for a company or business segment. Net profit margin is typically expressed as a percentage but can also be represented in decimal form. The net profit margin illustrates how much of each dollar in revenue collected by a company translates into profit.
P&L Statement: The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a fiscal quarter or year. The P&L statement is synonymous with the income statement. These records provide information about a company's ability or inability to generate profit by increasing revenue, reducing costs, or both. Some refer to the P&L statement as a statement of profit and loss, income statement, statement of operations, statement of financial results or income, earnings statement or expense statement.
Pro Forma: Pro forma is a Latin term that means “for the sake of form” or “as a matter of form.” In the world of accounting and investing, pro forma refers to a method by which firms calculate financial results using certain projections or presumptions, as pro forma financial statements. A pro forma income statement is usually a financial statement that uses the pro forma calculation method, often designed to draw potential investors' focus to specific figures when a company issues an earnings announcement. Startup companies generally call the future looking financials, pro forma financials. This is as opposed to the financials for earlier periods of time, which are actual.
R&D: Research and development (R&D) refers to the activities companies undertake to innovate and introduce new products and services. It is often the first stage in the development process. The goal is typically to take new products and services to market and add to the company's bottom line.
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In this glossary:
501(c)(3) Foundation/Charity 501(c)(6) Membership Based Nonprofit Adjusted Gross Margin Angel Investor B-Corp Banks and SBA Lenders Benefit Corporation Blended Capital Business Model Business Plan C-Corp Capitalization Table COGS Common Stock Convertible Note Cooperative Corporate Venture Capital Crowdfunding Due Diligence Equity Family Offices Friends and Family Funding G&A Gross Margins Impact Investing Incorporation LLC Net Profit Margins P&L Statement Preferred Stock Private Foundation Pro Forma R&D S-Corp SAFE Note Security Agreement Seed Capital Series A Financing Shares Stock Stock Option Stock Warrant Term Sheet Venture Capitalist Vesting Vesting Cliff Warm Introduction |
