13/01/2010

By Michelle Williams, AngelNews

We’re not even half-way through the alphabet yet, so lots of investment industry terms and phrases still to brush up on:

Golden Parachute

Senior management employment contract that provides significant compensation upon the occurrence of certain events such as a change of control in the company, that might lead to the individual losing the long term benefits of their contract.

Gross Margin

(Sales price-cost of materials and direct labour)/Sales price. See Mark-up (qv).

Hands-on/Hand-off

An investor who does/does not play an active part in the investee company. See Strategic Investor (qv).

High-tech

Innovative technological development especially in life sciences, biotechnology and mechanical engineering.

Hockey stick projections

The general shape and form of a chart showing the financial and associated projections that increase dramatically at some point in the future. Frequently used as a derogative term to describe the over-optimistic projections prepared by entrepreneurs.

Holding Company

A company which holds (ie owns) a number of subsidiary, usually trading, companies. Quoted PLCs are usually holding companies.

Hostile Takeover

The takeover of a company against the wishes of the incumbent management or board. Usually referred in the context of quoted companies. Note: All UK Plcs regardless of whether or not they are quoted are subject to the Take-Over Code (qv). Limited companies are not subject to the Take-over Code. Note, it is almost impossible to takeover an unquoted company on a hostile basis.

Hunting Licence

The permission of a senior executive within a venture capital firm for greater, in-depth investigation of a potential investment once a cursory, preliminary investigation has shown it to be promising.

Hurdle Rate

This is the internal rate of return that a fund must achieve before its general partners or managers may receive an increased interest in the proceeds of the fund. If an investment is not going to reach this internal rate of return it is unlikely that the general partners will be in favour of it.

Incubator

An incubator assists the entrepreneur through every stage of their development claiming a similar equity stake to that of a vc. Incubators often provide the entrepreneur with funding, personnel, office space and equipment so they are able to survive once they have left the incubator. However, if the entrepreneur fails to obtain second round funding they can be left by the incubator to survive on their own.

Indemnities

The promise that if warranties (qv) made by a warrantor are proved to be false then compensation will be paid to the people to whom the warranty has been addressed.

Industry Sectors

Classification of investments according to the nature of business that a company is involved in.

Intellectual Property

A company's intangible assets like patents, brand names, etc.

Internal Rate of Return/IRR

A measure of financial performance - the rate at which the present value of one or more investments is equal to the present value of the returns on those investments.

Invoice Discounting

A variation of factoring (qv).

IPO/Initial Public Offering

See Flotation (qv).

J-Curve Effect

This the curve realized by plotting the returns generated by a private equity fund against time (from inception to termination). In the early years of a fund start-up costs and management fees reduce the value of the fund and positive returns are only generated when the investments start yielding an income or are sold at a profit. In the early years therefore the fund shows a negative return, but when exits are achieved the returns rise significantly. It is not usually possible to estimate the likely returns from a fund from three to five years and the return will not be known for certain until the fund is wound-up.

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