By Michelle Williams, AngelNews
Please enjoy our snapshot of terms used in the Venture Capital and Business Angel Industry.
In our first newsletter, we started with basic investment-related terms, we then progressed to random combinations and we’ve now found ourselves going through the alphabet.
This is a trust where the trustees have full discretion over the assets and the beneficiaries of the trust have no knowledge of its holdings and no ability to control what happens to those assets.
Capital received by a company to cover a short term requirement eg to build a new factory before the existing factory is sold.
Broad-Based Weighted Average Ratchet
A type of anti-dilution mechanism. A weighted average ratchet adjusts downward the price per share of the preferred stock of investor A due to the issuance of new preferred shares to new investor B at a price lower than the price investor A originally received. Investor A's preferred stock is repriced to a weighed average of investor A's price and investor B's price. A broadbased ratchet uses all common stock outstanding on a fully diluted basis (including all convertible securities, warrants and options) in the denominator of the formula for determining the new weighed average price. Compare Narrow-Based Weighted Average ratchet (qv).
When a market in any good becomes unrealistically and unsustainably overvalued. For an excellent history of bubbles in history refer to Great Bubbles, Reactions to the South Sea Bubble, the Mississippi Scheme and the Tulip Mania Affair, published by Pickering & Chatto (Publishers) Ltd, www.pickeringchatto.com
The rate at which a company is consuming cash each month. A high technology start-up will often have a high burn rate while people are employed to develop the technology and before any sales are achieved.
Burn Out/Cram Down/Wash Out
This is when an existing investor's shareholding suffers extraordinary dilution, from a later round of financing by a company.
Business Expansion Scheme/BES
A UK scheme started in the early 1980s and originally intended to encourage high tax payers to invest and take and interest in small businesses. In practice, the scheme became a tax avoidance measure, and was used more to turn a bad return on a safe investment into a good return on a safe investment. In the last years of the scheme, which ended in 1993, over 90% of funds went into property investment, which was originally specifically excluded. In 1994 BES was replaced by Enterprise Investment Scheme (qv).
The owner of a company who sells shares in his company may retain the right to buy-back some or all of the shares he sells, usually at a price which will show a good return to the investor. When used in reference to quoted companies this term frequently refers to the right of the company to buy-back shares in itself from its shareholders, sometimes at a fixed price and sometimes by way of a tender offer.
British Venture Capital Association, association of suppliers of venture capital and investment capital. www.bvca.co.uk
Compound Annual Growth Rate/CAGR
The year over year growth rate applied to an investment or other aspect of a firm using a base amount.
The right to buy a security at a given price (or range) within a specific time period.
The difference between the price paid for shares (or other capital assets) and the price at which they are sold.
Capital Call/Draw Down
The act of a venture capital firm's investors physically transferring the money that they have already pledged so it reaches the investee company. This takes place once the venture capitalist has made the decision to invest and approached its investors accordingly.
Capitalization Table/Cap Table
A table showing the total amount of the various securities issued by a firm, with the amount of investment obtained from each source and the securities distributed - different types of shares, options and warrants etc and respective capitalization ratios.
Venture capital funds which are owned by larger financial institutions.
The portion of any gains realized by the fund to which the fund managers are entitled, generally without having to contribute capital to the fund. Carried interest payments are customary in the venture capital industry, in order to create a significant economic incentive for venture capital fund managers to achieve capital gains.
Carry/Cost of carry/Net Financing Cost
Investors are concerned about carry which is the difference between how much it is costing them to finance an asset/investment (ie the loss of not putting the equivalent cash sum on deposit at the bank) and how much that asset/investment is yielding them since purchase. Positive carry is when the yield received is greater than the financing cost; negative carry is the opposite.
Read AngelNews’ digital magazine: Making Life Richer
Join us on