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Similar to an incubator (see definition below) but at a later stage of growth, an accelerator provides mentoring, signposting and sometimes a physical co-working space to help early-stage companies build out an initial business, over a set time frame of between a few weeks and a few months.
Where a company acquires a young start-up mainly to acquire the talent that the young company possesses, rather than mainly the intellectual property which that company has produced.
This is when a company asks HM Revenue and Customs if a particular investment that it plans to offer will meet the requirements for a tax-advantaged investment scheme. Investors expect a company seeking tax-advantaged investment to have advance assurance in place before they will commit. The assurance does not say whether a particular investor will meet the requirements.
Advance subscription agreement (ASA)
An agreement enabling investors to subscribe in advance for common/ordinary shares, converting automatically on a ‘qualifying financing’ and/or at the option of the holder on a ‘non-qualifying financing’, as well as automatically converting on the maturity date, an exit or an insolvency.
As a reward for early funding, investors are usually given the benefit of a ‘valuation cap’ and/or a ‘discount rate’. Where there is both, the investor will benefit from the most favourable outcome providing the greater number of conversion shares for them. This is used in the UK as a quick and easy mechanism for seed fundraising without setting a fixed valuation, and is structured in such a way that UK tax-paying angel investors would be able to benefit from attractive Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS) tax reliefs.
In order to comply with the Seed Enterprise Investment Scheme and Enterprise Investment Scheme rules, the advance subscription agreement will not be repayable (i.e. must always convert) and generally will have a maturity date for conversion of no more than six months and will not bear interest.
An adviser charge is a fee paid by investors for professional advisory services. It can be charged as a percentage of total assets or it may be associated with a broker-dealer transaction.
An agile company is one that is able to quickly implement changes to its products, services, business and commercial model (also described as ‘pivoting’) allowing it to respond to changing client/market demands.
A sub-market of the London Stock Exchange that was launched in 1995 (formerly the Alternative Investment Market). It allows smaller companies to list their shares with a more flexible regulatory system than is applicable to the main market and at lower cost.
Alpha is the return achieved through active investment management. Alpha gauges the performance of an investment against a market index or benchmark which is considered to represent the market’s return as a whole.
An investment or fund that invests in asset classes other than stocks, bonds and cash.
An angel investor is an individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. They often invest at the earliest funding rounds after friends and family. Angels often contribute to the company in other ways, such as joining the board and making introductions to potential customers or investors.
Annual management charge (AMC)
A fee charged by investment managers, each year, to cover managing the portfolio, as well as the funds invested. This is typically calculated as a percentage of the funds invested. In theory, the more actively managed a fund is, the greater the annual management charge. In some cases, this is charged up front, while in others it is deferred until the fund has exited several investments.
Annually recurring revenue (ARR)
A key metric used by ‘software as a service’ (see definition below) or subscription businesses that have defined contract lengths for their customers. ARR is the value of the contracted recurring revenue normalised to a one-year period.
A contractual term that protects the investor from dilution caused by the company issuing securities at less than the subscription price paid per investor share (a ‘down round’), effected either via the issue of bonus shares or an adjustment to the conversion price. This can be calculated on the basis of the following:
- a ‘broad-based weighted average’: the weighted average price taking into account the fully-diluted share capital – this is seen as the balanced approach and is the most common
- a ‘narrow-based weighted average’: the weighted average price based only on the issued share capital – this is more investor friendly
- a ‘full ratchet’: this effectively assumes that the investors subscribed at the lower issue price of the relevant ‘down round’ without taking into account/averaging out the issue price of the other shares in issue – this is the most favourable investor position but is rarely agreed
Application programming interface (API)
A ‘go-between’ that enables a software program to interact with other software, often pulling information from one program to populate another. In the context of trading, an API often refers to the interface that enables your software to connect with a broker to obtain real-time pricing data or place trades.
A fee charged to investee companies by a fund manager to cover the cost of sourcing the deal and carrying out the necessary due diligence for the investment.
Articles of association
A document that specifies the regulations for a company’s operations and defines the company’s purpose. Most start-ups use standard Articles provided by Companies House.
Artificial intelligence (AI)
A piece of computer software able to perform tasks normally requiring human intelligence, such as decision-making, creating images and video, speech recognition (see natural language processing, below) and translation between languages.
Asset allocation attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame.
A security whose income payments and hence value are derived from and collateralised by a specified pool of underlying assets. Asset-backed investments mitigate the investor’s risk as even if equity investments are nullified, the underlying assets can be sold in order to provide some return to investors.
Assets under advisement (AUA)
When the firm is responsible for the allocation of funds which do not technically belong to it, such as when acting as the investment adviser for a fund managed by another firm.
Assets under management (AUM)
The total value of the funds and investments that an investment fund manages directly.
Barrier to entry
When there are fixed costs that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or have not had to incur. Typically these costs put them at a competitive disadvantage to existing parties within the industry. High barriers to entry tend to allow markets to have less competition and put less pressure on profit margins.
Bid discount to net asset value
A discount that signals to market investors that the securities in the fund may be valued below their comprehensive net asset value (see definition below).
The highest price that a buyer (also called the ‘bidder’) is willing to pay for an asset.
Biotechnology is the use of living (or formerly living) systems to find solutions for treating disease, growing more food or increasing productivity.
Blockchain is the decentralised storage of information (the ‘block’) in a public database (the ‘chain’). Blockchain allows multiple users to enter information about individual transactions and then organises the information into blocks. There is no single holder of the ledger, increasing the transparency of information stored. Blockchain also forms the basis of certain cryptocurrencies, such as Bitcoin.
A start-up that grows its business with little or no outside investment. A bootstrapped start-up will instead fund its operations by relying on the founders’ personal wealth and the revenue generated by the company.
The point at which a company is no longer losing money and begins to generate a profit. ‘Cash breakeven’ is the point at which a company is no longer burning cash, even though it may still be loss-making because of non-cash charges.
A form of short-term financing that is meant to get a company from A to B, where B is the point at which a more permanent form of financing can be secured.
British Business Bank
The British Business Bank is the UK’s economic development bank. Its aim is to increase the supply of credit to small and medium enterprises as well as providing business advice services. Its commercial subsidiary British Patient Capital is the UK’s largest investor in venture capital funds.
British Private Equity and Venture Capital Association (BVCA)
The industry body and public policy advocate for the Private Equity and Venture Capital in the UK.
Software development term to describe software that is built on top of existing software. Brownfield software development is often contrasted with ‘greenfield’ software development, which involves creating a software program from scratch.
Business relief (BR)
Business relief was formerly known as business property relief (BPR). It has been a part of inheritance tax legislation since 1976. Once qualifying assets have been owned for at least two years, they can be passed on, free from inheritance tax, on the death of the owner. Assets that qualify for business relief include agricultural land, forestry, trading businesses and shares in qualifying companies, including those quoted on AIM.
Business to business (B2B)
A business model in which a company sees its primary customer as other businesses. Each transaction tends to require more work to secure, however sales tend to be larger and more stable than the large number of smaller sales typical in direct-to-consumer businesses.
Business to business to consumer (B2B2C)
Companies who have consumers as the end customer but sell their services to other businesses to better target them. For example, companies who help retailers identify and target potential customers would count as B2B2C.
Business to consumer (B2C)
A business model in which a company has consumers as its end customer.
A company buying shares in itself from other investors. For example, an investor wanting to take their invested funds out of a venture capital trust, and the venture capital trust then using its own cash reserves to buy the relevant shares off of the investor. This typically occurs at a discount, often pre-determined, such that the amount paid to the investor will be below the underlying asset value of the shares.
An investment strategy which aims first and foremost to maintain the value of the funds invested. A capital preservation strategy seeks to reduce investment risk.
Most commonly called the cap table and providing key information about the ownership rights in start-ups and early-stage companies. Cap tables include all of a company’s equity ownership capital, such as common equity shares, preferred equity shares, warrants and convertible equity.
Carried interest (carry)
Also known as ‘carry’, this is a key component of renumeration for venture capital fund managers. As well as receiving an annual management fee from their investors and a return on their own capital invested (alongside external investors into their fund), venture capital fund managers will typically receive a performance-related reward, calculated as a percentage of the profits generated for external investors into the fund. Typically, this will be around 20% of these profits, often above a ‘hurdle’ of around 8%.
Cash burn rate
A start-up’s burn rate is the rate at which a company is depleting its cash reserves. Divide the capital amount by the burn rate to determine the maximum interval until the next funding round.
In a private equity or venture capital setting, cash-on-cash return describes the exit value of an investment divided by the initial investment amount.
A metric commonly tracked by ‘software as a service’ businesses, churn rate describes the annual percentage rate at which customers stop subscribing to a service.
In a start-up setting, employee stock options vesting packages will often include a cliff, which is the point after which shares begin to vest.
In a private equity or venture capital setting, the closing date means the date on which a fund first accepts capital commitments from investors.
A minority investment in a company made by investors alongside a private equity sponsor or venture capital fund.
Usually represents the share class with the least preferential rights, often being the shares that the company is incorporated with and held by the founders and management, as well as investors looking to benefit from favourable tax (Seed Enterprise Investment Scheme/Enterprise Investment Scheme) treatment on their investment. Employee options will also invariably be over this class of shares.
A method of equity valuation wherein ratios from an industry, peer group or similar companies are used to estimate a company’s equity valuation.
The risk that arises due to having a large percentage of one’s holdings in a particular investment, asset class or market segment relative to the overall portfolio.
Convertible debt/convertible loan notes
Convertible debt (which sometimes takes the form of loan notes) is convertible into shares (often the lender will require this be the most senior class). The loan may convert automatically (on a ‘qualifying financing’ typically) or at the option of the lender (e.g. on a ‘non-qualifying financing’) and will have a maturity date.
This is usually interest-bearing, with interest often converting alongside the principal.
As a reward for early funding, investors are usually given the benefit of a ‘valuation cap’ and/or a ‘discount rate’. Where there is both, the lender will benefit from the most favourable outcome providing the greater number of conversion shares for them.
The funds may be converted and/or repaid (often at the option of the lender) on the maturity date or an exit, and are immediately repayable on certain events of default (e.g. insolvency of the company).
Corporate venture capital (CVC)
A subset of venture capital wherein corporations invest corporate funds directly into external start-up companies. These CVCs will often invest in order to capture some of the upside of partnering with a start-up in a way that can meaningfully improve a start-up’s
prospects for success.
The right of investors to participate in any sale of shares made by certain persons (e.g. the founders or key management) after the application of pre-emption rights on transfers, and often on a substitution basis.
Crossing the chasm
A phrase popularised by Geoffrey Moore in 1991 that is used to describe the act of broadening a high-tech product’s market adoption from the early adopter subset of consumers to the mass market.
Financing a project or venture by raising small amounts of capital from a large number of people. This can be especially effective where the investors are also customers of the business. The crowdfunding platform manages the process and holds shares as a nominee on behalf of the investors.
A decentralised digital currency that uses blockchain ledgers to record and validate transactions.
Financial institution that holds customers’ securities for safekeeping in order to minimise the risk of theft or loss.
Customer acquisition cost (CAC)
Describes the average marketing and promotion costs of attracting each new customer. This is often assessed alongside the ‘lifetime value’ (see definition below) of a customer, in order to evaluate the unit economics of a start-up’s business model.
Deal flow refers to the number of investment opportunities seen by an investment manager.
‘Propriety deal flow’ or ‘off-market’ deals refer to deal flow that only the manager has access to and is considered a plus as the manager has less competition to access deals. Less competition might have beneficial effects in terms of the valuation invested at.
In a private equity or venture capital setting, investing on a deal-by-deal basis involves general partners presenting investors with investment opportunities on a case-by-case basis for their consideration. This model provides greater flexibility to investors than the traditional fund model.
A class of non-voting shares with no economic value, often used in connection with vesting provisions to take value away from unvested shares, or in the case of a ‘bad leaver’. Administratively simpler and likely to be more tax efficient than a share buyback mechanism.
Deployment rate means how quickly a manager can invest the money raised into investments. Venture Capital Trusts have to deploy their fundraised money within a certain time because of government rules, while Enterprise Investment Scheme managers have to deploy funds within a tax year in order to generate certificates for investors to claim their Enterprise Investment Scheme tax break.
Dilution happens as further shares are issued and one’s share in the company dwindles as a percentage. Anti-dilution rights often allow investors to maintain the same ownership stake by being allowed to take part in further funding rounds.
Often investors might take a seat on an investee company board. In exchange for the cost of undertaking the work associated with serving on the company’s board of directors, the investor will often charge a fee, known as a ‘director’s fee’.
The agreed percentage discount applied to the subscription price at the relevant subsequent financing round to determine the exact conversion price in relation to a convertible debt/convertible loan notes or an advance subscription agreement. Therefore, the higher the discount rate, the more attractive it is for the lender/loan note holder.
Discounted cash flow (DCF)
A valuation method used to estimate the value of an investment based on its future cash flows.
A form of investment management whereby an investor has granted an investment manager the ability to identify and execute investment opportunities on the investor’s behalf, rather than simply providing investment advice.
A situation wherein a new technology or business model displaces an established technology or business model, or even creates an entirely new industry. Popularised by the late Clayton Christensen in his seminal book ‘The Innovator’s Dilemma’.
Finance theory shows that a greater number of investments reduces what is called ‘idiosyncratic risk’, i.e. the risk that one poorly performing stock can massively affect a portfolio’s performance. With sufficient numbers of investments, these bad news effects can be balanced against unexpected good news effects and thereby lessen the risk to the portfolio as a whole.
A funding round where the investee company is raising money at a lower valuation than it had raised at previously. This can either offer better value for investors or signal that a company has hit more challenging times.
Prevents minority shareholders from blocking a sale by refusing to sell their holding. Drag-along rights allow a defined majority of shareholders (e.g. 75%, but almost always more than 50%) to sell the shareholding in its entirety, forcing other shareholders to sell.
Dry powder is a term used in private equity to denote the amount of money, or pledged commitments, yet to be deployed into investments by the fund.
Due diligence (DD)
A comprehensive appraisal of a business undertaken by a prospective investor, especially to establish its assets and liabilities and evaluate its commercial potential. There are different types of specialist DD, including legal DD, commercial DD and tech DD.
For those investors who pledge money some time before a fund’s closing date, some managers offer a discount to initial fees that would otherwise be charged. This is known as an ‘early bird’ discount.
In a start-up setting, early stage describes a company with a product or service that is being tested or still in development.
Employee share option pool (ESOP)/Employee Share Incentive Scheme
Options granted over a certain class of shares (usually common/ordinary shares) to incentivise present and future employees and directors. There are various types of options schemes and some potentially more tax-efficient than others (e.g. enterprise management incentive options in the UK which are for the benefit of full-time employees). The ESOP is usually capped at a certain percentage of the share capital (often calculated with reference to the fully-diluted share capital) and this cap may be set by reference to either the pre-new money or post-new money. It is important to identify whether any existing ESOP is taken into account for the purposes of determining the pre-money valuation – investors will typically require this.
Enhanced voting rights
Weighted voting rights on voting at the board and/or at the shareholder level which may be used by the founder to retain a requisite level of control in relation to board and/or shareholder resolutions. Institutional investors may also ask for enhanced voting rights which may be triggered in certain limited circumstances, for
example, in the case of a default under the investee company’s documents. These rights enable the investor to secure a majority of voting rights irrespective of their shareholding.
Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme is a tax-advantaged investment scheme which provides tax relief to investors investing in young, high-risk companies. Each company can raise up to £5 million in a year, and £12 million over the lifetime of the company, including amounts received from venture capital schemes. The company must be within the first seven years of its life. Investors can gain income tax relief of 30% of funds invested, for up to £1 million per year of relief (or £2 million if £1 million of investments are into knowledge-intensive companies), provided the investment is held in new-issue shares of a qualifying company for at least three years. The tax relief is gained up-front.
Entrepreneur in residence (EIR)
A seasoned entrepreneur who is employed by a venture capital firm to help vet potential investments and mentor the firm’s portfolio companies.
An investment fund that has no end date and can continue to raise funds and invest them in perpetuity. By comparison, ‘closed-ended’ or ‘limited life’ funds have a fixed duration and, typically, a fixed fundraising window and investment period. At the end of its planned duration, a limited life fund will be wound down, unless an extension is agreed.
A sale in which the consumer has chosen only to receive the specific investment without any
related financial advice. This tends to be used when a consumer has sufficient knowledge about the investments in question that they are able to make their own investment decisions.
Typically used to mean a share sale, an asset sale or an initial public offering, in which early investors realise some or all of the value of their investment.
Fair market value
Price at which the market dictates an asset should change hands between a willing buyer and a willing seller.
Financial technology. Innovations that seek to disrupt, improve and compete with traditional financial services methods. Such innovations leverage the use of computers and smartphones, and are heavily reliant on new software and algorithms. Initially the terminology was used for innovations to the business systems of financial institutions, however it is increasingly used to describe consumer-focused innovations.
Where an investor invests further money into an investment that they already have a financial interest in at a second valuation point.
The entrepreneur who starts a company and normally starts off as the company’s chief executive.
Founders may be prohibited by lock-in arrangements from transferring their shares (perhaps subject to permitted transfers) without investor consent for a set period of time.
A type of business model that aims to accelerate adoption of a product or service by offering customers both free and extra-cost versions of a service, such as software.
Friends and family investment
At the earliest stage of a company’s development, an entrepreneur will often rely on support from friends and family to get up and running. Normally, even the earliest stage investors like to see a minimum viable product (see definition below), or at least a very developed business plan, before investing at seed stage, which means that all money which precedes this tends to be from people known to the entrepreneur before they set out on their venture.
Fully-diluted share capital
The shares of the company, assuming the exercise of all options and warrants, and the conversion of all convertible notes and other similar rights.
Gearing refers to the level of a company’s debt related to its equity capital, usually expressed in percentage form. It is a measure of a company’s financial leverage and shows the extent to which its operations are funded by lenders versus shareholders.
A type of private equity investment, usually a minority investment, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a significant acquisition without a change of control of the business.
A form of business plan that outlines what a business’ growth metrics are and how they will be achieved.
Growth shares are issued to key management of a company to incentivise them to grow the business. The shares give them the right to participate in exit proceeds to the extent that the value of the business on the exit is above an agreed ‘hurdle rate’.
His Majesty’s Revenue and Customs (HMRC)
A non-ministerial department of the UK government responsible for the collection of taxes, the payment of some forms of state support and the administration of other regulatory regimes including the national minimum wage.
In a private equity or venture capital setting, ‘hockey stick’ is a colloquial term used to describe a pattern of initial value loss followed by breakeven and then exponential growth, usually in relation to a company’s revenue or enterprise value. This is also known as the ‘J-curve’.
Amount of time an investment is held by the investor.
The amount of profit that must be delivered to the investors into a private equity or venture capital fund, before a fund manager is eligible to receive carried interest. For private equity funds, this is typically 8% annually compounding, but this figure is usually lower (sometimes 0%) for venture capital funds.
Income rights/dividend rights
The rights to dividends and other income returns. This is often on a pro-rata basis but there may be a preference in favour of investors, which is unusual in the UK but more common in the US. This may include a cumulative or a non-cumulative preference return, often seen as a compensation for the money invested and referable to interest earned in a bank savings account. Note that, depending on the exact nature of the preference right, the shares benefiting from any income preference rights, may need to be accounted for as debt (as opposed to equity) in the company’s books.
An incubator is an organisation that fosters early-stage companies through the developmental phases until they have sufficient financial, physical and human resources to function on their own. Incubators often seek to benefit from network effects by co-locating founders during the programme. Some incubators require a fixed equity stake (in return for a fixed payment) as a condition of participation.
Also called an investment memorandum (IM). A legal document that a company presents to potential investors to explain the objectives, risks, and investment terms surrounding a funding round.
Information rights sought by investors include, for example, the delivery of annual (un)audited accounts, monthly/quarterly management accounts, and annual budget, as well as inspection rights and any other rights to cater to an investor’s reporting requirements such as environmental, social and governance metrics.
Initial public offering (IPO)
A public listing on a stock market such as the London Stock Exchange main market or AIM, which is often the desired end result of a venture capital investment.
Internal rate of return (IRR)
Expressed as a percentage, IRR is a performance metric often used by investors into venture capital funds. Whereas a ‘money multiple’ performance metric only illustrates the ratio of amount invested to amount returned (disregarding how quickly this return has been achieved), IRR measures the rate at which returns have been achieved.
Internet of things (IOT)
The interconnection via the internet of computing devices embedded in everyday objects, enabling them to send and receive data.
A company that has received direct investment from the investor/investment fund in question.
An ‘investment committee’ (IC) is the body that has ultimate authority to make an investment decision. Analysts will often submit papers analysing an investment for the IC’s consideration, who will then either give their approval or ask the analyst to reconsider or move onto another opportunity.
The length of time an investor is aiming to maintain their portfolio before selling their securities.
The lead investor, or an investor majority, will typically have the right (perhaps subject to certain share ownership thresholds) to appoint a director and/or an observer.
Issued share capital
The shares of the company in existence at any given point, excluding options, warrants, convertible notes or similar rights.
A trend line showing an initial loss (negative return) in the early stages of a fund/investment, followed by a steep gain. The line approximates the letter ‘J’, hence the name. The term is often used to describe the return curve of a private equity or venture capital fund.
A classification of company that gives it access to preferential Enterprise Investment Scheme terms. Knowledge intensive companies are typically carrying out research, development and innovation at the time of investment. To qualify they need to be developing intellectual property as their main business and 20% or more of employees doing the research must have a masters of higher degree for at least three years from the date of employment.
In a start-up setting, late stage describes a company that has demonstrated viability as a going concern and generally has a well-known product with a strong market presence.
In a venture capital setting, a lead investor is the venture capitalist or individual that takes charge of an investment round, and usually has the ability to act on behalf of the other investors.
‘Lean Startup’ book
A book by Eric Ries which introduces a methodology for launching a start-up where an minimum viable product (see definition below) is produced and iterated based on feedback from early customers. This helps shows that there is demand before the product is launched
rather than launching and hoping that ‘product/market fit’ emerges.
In a finance setting, leverage involves the use of debt instruments instead of equity in the purchase of an asset.
Lifetime value (LTV)
How much revenue the average customer will generate for the company over the course of their relationship. This metric is more useful than simply looking at an initial spend or just the retention rate of a customer and is typically used by ‘software as a service’ and consumer goods companies.
In a private equity or venture capital setting, a limited partner is an investor that commits capital to a fund without taking part in the active management of the fund. Unlike a fund’s general partner, a limited partner has limited liability.
Liquidation preference/liquidation waterfall
The rights to a return of surplus assets on a liquidation or other return of capital after deducting liabilities.
The basic position is that on a distribution of assets on a liquidation or on an exit, proceeds are distributed to the shareholders pro-rata to their respective shareholdings.
Investors in early-stage companies (subject to whether they are individuals looking for Seed Enterprise Investment Scheme/Enterprise Investment Scheme tax reliefs) will generally look for a 1x liquidation preference. Arguably, this provision is the most important economic provision in any equity documentation.
An exit strategy for a company, which typically converts the ownership equity held by a company’s founders and investors into cash. Examples of liquidity events include mergers, acquisitions and initial public offerings.
A tax provision stipulating that trading losses can be relieved in a number of ways, such as being carried forward and offsetting future trading profits of the same trade.
When lifetime value is higher than customer acquisition cost, this means that customers are generating more revenue than it costs to acquire them and that scale will help generate profits for the business. If the LTV:CAC ratio is less than 1:0 the company is destroying value and its strategy is not sustainable.
Machine learning (ML)
Machine learning is the use of algorithms and statistical models to allow computer systems to learn and improve over time through their own experience. The final goal is to allow a computer to learn automatically.
Management buyout (MBO)
When a company’s management buys the company that they have been managing. Often carried out when a business wants to sell divisions that are not central to the strategy of the business. Financing usually comes from personal funding, private equity and seller financing. In cases where company assets are used for debt financing, it is called a leveraged management buyout (LMBO).
In a private equity or venture capital setting, a management fee is a periodic payment that is paid by an investment fund to the fund’s investment adviser for investment and portfolio management services.
Positive undertakings from the founder/managers to act in the best interests of the company and to undertake certain actions (e.g. maintaining directors and officers insurance and key person insurance policies).
The market value of a publicly traded company’s outstanding shares.
Minimum viable product (MVP)
Part of ‘Lean Startup’ methodology. A version of a product that is produced to test how various features are received and whether demand exists, as well as to get live feedback early in product development. Often applied to apps, websites and software that can be readily updated in light of customer feedback.
Fees charged by a private equity sponsor to an investor for the advisory service provided to them.
Monthly recurring revenue (MRR)
A measure of the company’s predictable revenue stream. The primary purpose of MRR is to permit performance reporting across dissimilar subscriptions terms. This is a key metric for ‘software as a service’ companies.
Natural language processing (NLP)
The process of programming computers to process and analyse large amounts of natural language data.
Net asset value (NAV)
The overall value of a portfolio once liabilities are deducted from the overall value of the underlying companies.
The additional finance being raised by a company as part of a funding round. Investors may sometimes require a condition that a certain amount of new money be raised as part of a funding round before they agree to participate.
Nil rate band
Term used within tax legislation that establishes the threshold below which some or all of the value of a gift, income or capital gain is subject to a zero rate of tax.
Investors holding shares with a non-participating preference get their money out first (typically an amount equal to the money invested plus accrued dividends, if any, but this may instead be a greater multiple of the investment). Once they have been paid their due, the other shareholders share in the remaining proceeds, on a pro-rata basis.
A financing whereby the company raises less than the qualifying threshold of funds through an issue of equity securities, which would otherwise trigger a conversion of convertible debt/convertible loan notes or an advance subscription agreement.
In a private equity or venture capital setting, observer rights enable investors to attend and observe board meetings, to receive board packets of information, to inspect the corporation’s books, records or the minutes of the board meetings, or to attend committee meetings.
Option commonly available to underwriters that allows the sale of additional shares that a company plans to issue in an initial public offering or secondary/follow-on offering.
Investors holding shares with a participating preference get their money out first (typically an amount equal to the money invested plus accrued dividends, if any, but this may instead be a greater multiple of the investment). Once the preference element has been paid, participating preference shareholders also share in the remaining proceeds with other shareholders, on a pro-rata basis.
This generally requires investors to invest on a pro-rata basis in subsequent financings or lose some or all of their preferential rights (e.g. anti-dilution rights).
Payment made to an investment manager for generating positive returns.
Transfers which can be made without price or other restrictions (e.g. without complying with any pre-emption rights on transfers or right of first refusal on transfers). This is normally reserved for close family members or family trusts (in the case of individuals) and as members of the same group or fund group (in the case of corporates or funds).
In a private equity or venture capital setting, a pipeline is a colloquial term used to describe the potential investment opportunities that the fund currently has at its disposal.
In a venture capital setting, a pitch or ‘pitch deck’ is of the presentation that a founder provides to an investor, to demonstrate that their business is worth investing in.
Occurs when a company makes a fundamental change to their business after determining, whether through market research or trading experience, that their product isn’t meeting the needs of their intended market.
A group of technologies that are used as a base upon which other applications, processes or technologies are developed. As a business model, a platform creates value by facilitating exchanges between two or more interdependent groups, usually consumers and producers.
In a private equity or venture capital setting, a portfolio company is an entity in which a fund has invested.
The value of the company once all of the investor monies have been invested, usually with reference to the fully-diluted share capital. The post-money figure is used to gauge the investors’ ownership once the round is concluded.
Pre-emption rights on allotments
A right to participate in new share allotments, subject to customary carve-outs (e.g. the exercise of enterprise management incentive options). This may either be done on a pro-rata basis or new shares may be offered to investors first. It is often possible to waive the application of such rights through a requisite shareholder resolution being passed (e.g. via a special resolution requiring 75% consent of shareholders).
Pre-emption rights on transfers
A right to require that transfers by existing shareholders be offered to the other shareholders before third parties (subject to permitted transfers). This may either be done on a pro-rata basis or the offer may be made to investors first. It is often possible to waive the application of such rights through the board and a specified investor majority consenting to deem such transfer as a permitted transfer.
Shares (typically held by investors) with rights attaching to them in preference to other share classes, which may include (for example) a liquidation preference, anti-dilution rights or preferred dividend rights. As a company undertakes further funding rounds, subsequent classes of preference shares may be created.
The value of the company prior to the relevant funding round, usually with reference to the fully-diluted share capital, which will determine how many shares the investors’ money will buy.
A term originally coined by Marc Andreesen, which means ‘being in a good market with a product that can satisfy that market’. Demonstrating product-market fit is a key consideration for any founder when making their pitch.
Proof of concept (POC)
A trial (often staged with a potential customer) to test the ability of a start-up to do what it claims. A successful POC might lead to a decision to scale the product more widely into the customer company.
A financing whereby the company raises at least a certain threshold of funds through an issue of equity securities, which would trigger a conversion of convertible debt/convertible loan notes or an advance subscription agreement.
In a venture capital setting, a ratchet is a term whereby, if another venture capital later pays a lower price for shares in the start-up, the venture capital that bought shares earlier with the ratchet protection gets a price adjustment to that lower price.
In a finance setting, realisation describes the conversion of assets, goods or services into cash or receivables through a sale.
After a certain period or on certain default events, investors may have the option to redeem their shares at the issue price plus accrued but unpaid dividends. These are redemption rights.
When an investor does not have legal cover to carry out investments, it can use the services of a regulatory manager with the necessary authorisations from the Financial Conduct Authority. The investor then acts as ‘investment adviser’ to the regulatory manager, identifying investment opportunities and undertaking fundraising.
Reserved matters/veto rights
Certain key matters which may have an effect on investment value (e.g. an exit, the creation of a new share class, commencement of litigation, or capex spending over a certain amount) will be subject to certain consent thresholds (e.g. the holders of 50% or more of the investor shares and/or an investor director).
There is a balance to be struck between protecting investor value and ensuring that the founders/directors can effectively operate the business on a day-to-day basis.
Contractual restrictions on the founders and potentially other key employees while they remain with the company and usually for a set period afterwards, often 12 to 24 months.
Return on investment (ROI)
Investors look to ensure that, for each expenditure by an investee company, it generates more revenue than it costs. All else equal, companies with a high ROI are preferable to those with a low (or negative) ROI.
Right of first refusal (ROFR)
The right of the company and/or investors to have a first right of refusal before the other shareholders or third parties on a transfer of shares, typically by the founders or key management.
The amount that is required in order to run a business, such as salaries, heating, lighting and rent. This is also known as operating expenditure (Opex).
In a technology setting, scaleability describes the ability of a computer application or product to continue to function well when it is changed in size or volume in order to meet a user need.
In a venture capital setting, the seed is an investment round, typically the first one in which a start-up accepts institutional capital (rather than Angel finance). This is a fluid definition as some institutions seek to invest at the ‘pre-seed’ stage, meaning before other institutions would usually be interested.
Seed Enterprise Investment Scheme (SEIS)
SEIS is a tax-advantaged investment which provides tax relief to investors investing in early-stage companies that have just begun to trade. Each company can raise up to £150,000 through SEIS, while investors can claim tax relief on up to £100,000 of investment every year. There are numerous stringent qualification requirements for investee companies. All investments have to be held for at least three years. Investors can claim tax relief up front.
In a venture capital setting, the series A is an investment round, typically the second one in which a start-up accepts institutional capital.
In a venture capital setting, the series B is an investment round, typically the third one in which a start-up accepts institutional capital.
An investor may wish to have new service agreements in place, particularly for the founders/key management, covering key issues such as intellectual property (IP) to ensure that the company owns the relevant IP created by any founder/key management, termination (including summary dismissal) and gardening leave. The termination provisions may also tie in with the vesting provisions/leaver provisions.
Simple agreement for future equity (SAFE)
An agreement for a right to subscribe for more (senior) shares in the company at the next funding round with a fixed pre-money valuation. US based accelerator Y-Combinator introduced the SAFE as a means of incentivising company and seed investors to simplify funding discussions during the early stages of a company.
The agreement will also typically grant investors the benefit of a ‘valuation cap’ and/or a ‘discount rate’, as a reward for investing at an earlier stage. Where there is both, the investor will benefit from the most favourable outcome providing the greater number of shares.
The investor’s right generally has no maturity or expiration date, and the shares may be converted and/or repaid at the option of the holder on an exit, and will be immediately repayable on certain events of default (e.g. insolvency of the company).
Skin in the game
A colloquial term used to describe having incurred risk (monetary or otherwise) through one’s own involvement in an investment or project.
Small and medium-sized enterprises (SMEs) or businesses (SMBs)
These are business that meet certain definitions in legislation. ‘SMEs’ are defined in EU law whereas the Companies Act defines micro, small and medium-sized companies. The definitions are based on turnover, balance sheet and employee criteria. In practice, the number of employees is the most commonly used metric, with a micro business having fewer than 10, small businesses fewer than 50 and medium businesses fewer than 250 employees. The great majority (over 99%) of UK businesses are micro businesses.
Software as a service (SaaS)
SaaS refers to software that is accessed on a subscription basis rather than a one-off purchase. This has now become the norm, with updates delivered over the Internet as part of the subscription. SaaS businesses are popular with investors as they can scale quickly and are capital-light.
This term, which was originally used to describe a newly-established business has come to mean any business that has not yet reached the maturity of being acquired or listed on an exchange in an initial public offering. According to this definition, start-ups may be large businesses with hundreds or even thousands of employees. Individual programmes may adopt their own definitions, for example a business must be under three years old to qualify for a Start Up Loan.
A benefit in the form of an option given by a company to an employee to buy shares in the company at a discount or at a stated fixed price.
In a start-up setting, a strategic adviser is an individual who assists in guiding the strategic direction of a company and typically receives equity in return.
An arrangement to receive a regular benefit by paying in a scheduled manner. A favoured business model for many start-ups due to the ‘sticky’ revenues that such a model often generates.
A temporary professional financial services alliance formed for the purpose of handling a transaction. Syndication allows investors to pool their resources and share risks.
A minority protection right to ‘tag-along’ to a sale of shares which would result in a change of control of the company. Intended to allow small shareholders the opportunity to receive liquidity.
A document that outlines the terms by which an investor will make an investment. Term sheets tend to consist of three sections: funding, corporate governance, and what happens in the event of a company liquidation.
Total addressable market (TAM)
The total market demand for a product or service. The serviceable available market (SAM) is the segment of the TAM targeted by the company’s products and services which is within geographical reach. The serviceable obtainable market (SOM) is the portion of SAM that a start-up can capture.
Total expense ratio (TER)
A measure of the operational efficiency of an investment fund . The total cost associated with managingand operating thefund is divided by the fund’s total assets to arrive at apercentage.
The actual rate of return of an investment or a pool of investments over a given evaluation period.
In a start-up setting, traction describes a situation whereby a company is able to demonstrate that their product or service is resonating with customers, usually aided by company-specific metrics and measurements.
A start-up company that is valued above $1 billion without being acquired or listed on an exchange in an initial public offering.
Money lent to a company which is not secured against any of the company’s assets.
This provides a ceiling on the company valuation at which a convertible debt/convertible loan note or an advance subscription agreement may convert, effectively capping the conversion price. The lower the valuation cap, the more attractive it is for the lender or loan note holder.
In a start-up setting, the value proposition describes an innovation, service or feature intended to make a company or product attractive to customers.
Capital invested in a project in which there is a substantial element of risk, typically a new or expanding business.
Venture capital trust (VCT)
A tax-efficient UK closed-end collective investment scheme designed to provide venture capital for small expanding companies.
Loans to early-stage businesses, often supported by an equity warrant instrument (see definition below) to give the lender some economic upside. Venture debt is typically more expensive than bank borrowing and is taken by companies that cannot obtain conventional bank loans because they do not meet the bank’s lending criteria.
The use of venture debt is becoming more frequent but is still not the norm. Founders may prefer to take venture debt to avoid potential equity dilution, if their business is revenue generating and has the ability to service the debt.
In a start-up setting, vesting is the process by which an employee or founder earns shares over time.
Vesting provisions/leaver provisions
The requirement for shares held by founders and/or key management to be subject to vesting over a set period of time, or (in some circumstances) according to certain performance metrics, to ensure that they remain incentivised to continue to provide value to the business. Therefore, founders/key management will ‘vest’ their shares over an agreed vesting period – typically between two and four years.
The exact outcome for a departing founder or key manager will depend on the time at which they depart, and the circumstances of their departure.
Leaving founders/key managers will typically be designated as either a ‘good leaver’ or a ‘bad leaver’. A founder/key manager who is determined to be a bad leaver during the relevant agreed vesting period will typically lose the value of all their shares. A founder/key manager who is determined to be a good leaver during the relevant agreed vesting period will have a portion of their shares as ‘vested’ shares and a further portion as ‘unvested’ shares. Their unvested shares will typically lose their value, and their vested shares may either be kept by the founder/key manager (perhaps converted into non-voting shares of the same class) so they continue to retain their economic upside in the company, or these shares may be required to be sold back to the company at the then fair market value. This is often a sensitive point of discussion between founders and investors and the permutations can vary from deal to deal.
In a private equity setting, a fund’s ‘vintage’ is the year in which funds are committed. It can also be the year in which the first influx of investment capital is delivered to a company. Analysts often perform vintage analysis so that different funds can be compared in the context of similar market conditions.
A security that entitles the holder to buy the underlying stock of the issuing company at a fixed price up until the expiry date.
Warrant instrument/equity warrant instrument
A right given to the investor to acquire a certain number or a fixed percentage of shares of the company at a set price at a future date or on the satisfaction of certain conditions.
Used to flush out information on the company by creating a cause of action if there is a hidden liability. The persons giving warranties will ‘disclose’ against them to the extent they are not correct.
In the UK, warranties are usually given by the company and the founders to outside investors, and it is usual for liability to be capped at the amount of the investment (in the case of the company) and as a salary multiple in the case of the founders.
Can also be known as a ‘recoupment waterfall’, this describes the stages of when and how much different investors get paid out at the end of an investment.
The capital of a business which is used in its day-to-day trading operations, calculated as current assets minus current liabilities.
A reduction in the recognised value of an asset.