ACTIVIST VC BLOG
This is the Spring 2019 edition of our popular Activist VC glossary. It has all the goodies from the previous editions, a bunch of new terms, and more examples and links to blog posts and other resources that give practical examples of the terms.
As always, should you come across any terms you think are important but you cannot find in this list, let us know and we’ll be happy to add them.
Acqui-hire (or acqui-hiring)
Acqui-hire is a talent acquisition in which a company is acquired primarily to recruit its employees, rather than its products or services. Acqui-hires are common in hot industries (such as AI or autonomous vehicles) in which large companies may have a hard time otherwise finding enough talent or complete teams for their own development efforts. While acqui-hires may not often make the headlines, they can be very important for large players to build critical technical competences.
The terms merger and acquisition mean slightly different things but often used interchangeably. When one company takes over another company and clearly establishes itself as the new owner, the transaction is called an acquisition. A merger happens when two firms, often of about the same size, agree to go forward as a single new company. M&A means Mergers and Acquisitions.
An Activist VC (a term created by Nexit Ventures) is a highly selective VC that makes relatively few investments, works closely with the management team to increase company value, and turns this mode of operation into good returns for Limited Partners. See our post “The Activist VC Manifesto” for a more detailed description of how an Activist VC operates.
Protection from the dilution created by future funding rounds, especially the extra dilution created by a down round. Anti-dilution typically protects investors either by issuing them additional shares in future funding rounds or by lowering the conversion price for their preferred shares.
Assets Under Management, sometime Funds Under Management: the total amount of money a VC team is managing. Includes all the funds they are still working with, also the full original size of some very old funds that are no more making new investments, just waiting to liquidate the last few remaining portfolio companies. A more relevant figure is often Dry Powder: the amount of money left for new investments in current funds. Dry Powder can be further divided into money available for totally new investments and money reserved for follow on investment to existing portfolio companies.
Bridge Loans are short term loans to fund the operations until a more comprehensive longer-term financing is available. In Venture Capital, the need for a bridge loan typically arises when a company runs out of cash before it has enough new track record to close a new funding round with reasonable terms; bridge loan creates more runway for negotiating the next funding round.
Individuals that provide funding to seed or early-stage companies. Business angels can usually add value through their contacts and expertise.
Leveraged buyout funds typically acquire controlling stakes of mature, cash flow stable companies. To finance these transactions, they will use a combination of debt (bank and term loans and subordinated or mezzanine debt) and equity. That means these Private Equity (PE) firms buy companies using a little of their own money and a lot of borrowed money.
A document that shows the capital structure of a company. Generally used to view the ownership of each shareholder and option-holder. After several funding rounds, a company might have a fairly complex cap table with multiple share classes having very distinct rights regarding liquidation preference, etc.
Capital Under Management
Also Assets Under Management (AUM), sometime Funds Under Management: the total amount of money a VC team is managing. Includes all the funds they are still working with, also the full original size of some very old funds that are no more making new investments, just waiting to liquidate the last few remaining portfolio companies. A more relevant figure is often Dry Powder: the amount of money left for new investments in current funds. Dry Powder can be further divided into money available for totally new investments and money reserved for follow on investment to existing portfolio companies.
Carried Interest (Carry)
Most VC firms have a business model that consists of three elements:
- Management fee – An annual fee (typically 2+% of the fund size) covering the daily operations of portfolio management but does not generate any substantial profit for the VC firm.
- Carried Interest – Profit of a VC fund (i.e. returns in excess of the original investments and other costs) is typically divided between the Limited Partners and the VC firm in an 80/20 split. Additionally, most funds have a hurdle rate, a minimum rate of return delivered to LPs before starting to receive any profit.
- Investment to the fund – Investors typically insist the VC firm co-invests a substantial amount capital into the fund. By having some real skin in the game and sharing also the risk element in the business, the VC team has more aligned incentives with the investors.
This model tries to balance the need to generate good returns for the investors of the VC fund (often called “Limited Partners” or “LPs”) and the necessity for the VC firm to cover its operational expenses. See the blog entry “Why VC’s Seek 10x Returns“for more on the VC firm business model and how it relates to the investment strategy.
Employee stock agreements have often a cliff, usually one year before the employee stock options start vesting. Option holders may only exercise an option after it has vested but before the specified expiry date. Other possible vesting requirements typically give the employee an incentive to perform well and remain with the company for a longer period.
The final event to complete a transaction (investment, merger, acquisition) at which time all the legal documents are signed and the funds are transferred. In very complex transactions the signing and closing can be two totally separate phases. After signing there might be still several steps (such as board approvals, money transfers, etc.) to be completed by all parties before the transaction truly closes.
Common stock or common shares: typically issued to founders, management, and employees. Preferred stock or preferred shares: typically offered for the investors of a company. Preferred stock is usually convertible into common stock in certain cases such as an IPO or the sale of the company. In a liquidation event, preferred shares generally take priority over common shares. Later rounds of preferred stock are called Series B, Series C and so on.
Corporate Venture Capital
Corporate venture capital (CVC) is a subset of venture capital. CVC entails a corporation making systematic investments into startup companies by taking an equity stake in an innovative startup somehow related to the company’s own industry and potential future roadmap. The CVC may also offer synergies, networks, and other support that a regular VC may not bring to the table. See the blog entry “The Lure of Corporate Venture Capital” for more on this subject.
A decacorn is a privately held startup company valued at over $10 billion. There are currently fewer than 20 decacorns globally, practically all of which come from the US and China (the sole exception in April 2019 was India’s Flipkart, valued at roughly $12 billion).
Supercell, a Finnish decacorn was created in June 2016: Chinese Tencent acquired 84,3% of Supercell shares for $8.6 billion – so Supercell was valued above $10 billion.
The suggested name for a $100 billion privately held startup is predictably hectocorn (or hectacorn). This creature, however, is still mythical. See also “unicorn”.
A Delaware Flip (or just a US Flip) is the process of creating an American holding company for an international company. The end result is that the international company will be owned entirely by the new American company. The reasons behind this are often either being able to operate better in the US market or being able to attract US funding. For some detailed ponderings on Delaware Flips, see our blog entries “Should I flip my startup to the US?“, “The anatomy of a US flip“, and “Crossing the Delaware: Legal Differences“.
Generally speaking, as new financing rounds occur, existing investors will own proportionally less of the company than they did previously: their ownership is diluted. Dilution is not necessarily a bad thing: since the new stock can be issued at a higher price, you may own a smaller piece of a larger company, which means the value of your investment is actually higher than it was previously.
Direct listings (or Direct Public Offerings or DPOs) are an alternative to Initial Public Offerings (IPOs) in which a company does not work with an investment bank to underwrite the issuing of stock. While forgoing the safety net of an underwriter provides a company with a quicker, less expensive way to raise capital, the opening stock price will be completely subject to market demand and potential market swings.
In a direct listing, instead of raising new outside capital like an IPO, a company’s employees and investors convert their ownership into stock that is then listed on a stock exchange. Once the stock is listed shares can be purchased by the general public and existing investors can cash out at any time without the ‘lock up’ period of traditional IPOs.
Spotify and Slack are examples of companies that have opted to skip a traditional IPO process and instead list their shares directly on an exchange.
A funding round in which the company is valued at a lower value per share compared to the previous round. A down round creates naturally more dilution than up rounds, i.e. funding rounds where the value per share is higher than in the previous round. In a flat round, the valuation is the same as in the previous round.
Drag-Along Right is a common demand of venture capitalists: when certain shareholders (or shareholders representing a defined minimum percentage of the total number of shares) agree to sell their shares, the rest of the shareholders are forced to go along and sell their shares as well. Compare to Tag-Along Right: the right of a minority shareholder to sell the shares with the same terms as a majority shareholder, also known as co-sale right.
The amount of money a VC fund has available for new investments. It can be further divided to a) money available for totally new investments and b) money reserved for follow on investment to existing portfolio companies.
The business equivalent of a full-body search. The company hands over a business plan, financials, team information, and more to the VC team considering an investment.
Earnings before interest and taxes (EBIT)
A measurement of the operating profit of the company. (An alternative measurement is EBIDA = Earnings Before Interest, Depreciation, and Amortization)
A valuation methodology based on a comparison of private and public companies’ value as a multiple of Earnings Before Interest and Taxes (EBIT). Revenue multiple is usually used for valuing a company when it’s not profitable yet.
Employee Stock Ownership Program (ESOP or SOP)
Also called Employee Stock Option Pool. A pool of options reserved for employee compensation. The path from start-up to real success is typically long and a lot of talent is needed. The option pool is used to both attract new talent and keep the existing stars on board and motivated.
Entrepreneur in residence (EIR)
A seasoned entrepreneur who is employed by a Venture Capital Firm to help the firm vet potential investments and mentor the firm’s portfolio companies. Sometimes the term “serial entrepreneur in residence is used”. It is not unusual for an entrepreneur in residence to at some point jump in as a team member in a portfolio company.
ESG (Environmental, social, and governance)
ESG criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments.
Exercise Price (also Strike Price)
The amount that must be paid to execute options i.e. convert options to shares. Generally, in the US the exercise price is based on “Fair Market Value” when issued, rather than the vesting date. The differences in taxation and regulation are remarkable between countries and have a great impact on the proper and efficient use options. See our blog post “Avoid expensive mistakes: foreign options and US tax” for more information on this topic.
The sale or exchange of a significant amount of company ownership for cash, debt, or equity of another company. VC funds typically invest in companies with a clear fairly short term exit target in mind. If you are not ready to sell your company within a few years you should not consider VC funding either…
A round of financing including new independent investors with significant investments. Compare to Insider Round – a round of financing entirely composed of existing investors.
Fair Market Value
The value of a company based on what investors are willing to pay for it. For private companies (not traded publicly), fair market value is generally derived from comparable companies, either public companies or private companies that have recently had a transaction associated with them. A recent funding round executed can also give good advice on the fair market value, especially if the round included new independent investors with significant investments.
A subsequent investment made by an investor who has made a previous investment in the company — generally a later stage investment in comparison to the initial investment.
Ownership of the company based on the total number of shares outstanding when all possible sources of new shares (convertible loans, options, warrants) are taken into account.
Fund of Funds (FoF)
An investment vehicle designed to invest in a group of investment funds. Some Fund of Funds are specializing in VC funds only, a more typical strategy is to distribute the investment to a fairly diversified group of VC and other PE funds.
General Partner (GP)
VC funds are typically structured as limited partnerships having one General Partner (a company run by the VC team and managing the investments) and several Limited Partners (LPs, the investors of the VC fund). The key team members of the VC team are also typically called General Partners.
An initial coin offering (ICO) is a crowdfunding project using cryptocurrency. In an ICO, a company (or other organization) releases some quantity of a new cryptocurrency (typically using Ethereum blockchain technology) to investors. ICOs can be used for a wide range of activities, ranging from corporate finance to charitable fundraising, to outright fraud. In a typical ICO, the new currency can be used within the ecosystem created by the company: buy services, products or even shares of the company. Some early ICO pioneers were Mastercoin (2013), Ethereum (2014) and Dao (2016, the first ICO over $100 million).
See the blog post “Is the ICO Fever Over?” for our latest post in a series of ICO-related coverage.
Impact investing refers to investments made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return.
A round of financing entirely composed of existing investors. Compare to External Round – a round of financing including new independent investors with significant investments.
It refers mainly to insurance companies, pension funds and investment companies collecting savings and supplying funds to markets, but also to other types of institutional wealth (e.g. endowment funds, foundations, etc.). The majority of assets of a typical VC fund are coming from various institutional investors. These investors of a fund are called Limited Partners, LPs.
IPO (Initial Public Offering)
Issue of shares of a company to the public by the company for the first time. You can find detailed information about the IPO activity of Nordic companies and other statistics here (site in Swedish).
IPR (Intellectual Property Rights)
Intellectual property (IP) includes copyrights, patents, trademarks, trade secrets, and other forms of intangible creations of the human intellect.
Compound Internal Rate of Return. A common measure of an investment fund’s performance.
This is the curve of value creation over time that is typical in a venture capital fund. The value of VC portfolio (consisting of several separate investments) goes first down but starts later climbing up despite some of the portfolio investments being totally unsuccessful – the few real home runs can return over 10x the investment made.
The investor who leads a group of investors into an investment. Usually, one venture capitalist will be the lead investor when a group of venture capitalists invests in a single business. Other investors are called co-investors.
Leveraged Buy-Out (LBO)
Leveraged buyout funds typically acquire controlling stakes of mature, cash flow stable companies. To finance these transactions, they will use a combination of debt (bank and term loans and subordinated or mezzanine debt) and equity. That means these PE firms buy companies using a bit of their own money, and a lot of borrowed money.
Limited Partner (LP)
The investors of a VC fund are called Limited Partners or LPs
The legal structure used by most venture capital funds. Usually one has a fixed lifetime, typically 10 + 2 years. The General Partners (= fund managers) manage the partnership using policy laid down in a Limited Partnership Agreement (LPA). The Agreement also covers terms, fees, structures, and other items agreed between the limited partners and the general partner.
The order in which investors, or debt holders, get paid in the event of company liquidation or bankruptcy. Different share classes can have also very distinct liquidation preference multiples. Typically, the last invested money has the highest priority in the liquidation preference stack and common shares are at the bottom of the stack. In a successful high-value exit, all share classes will get their full share of the exit proceeds. In a distressed fire sale exit typically only the share classes close to the top of the stack has any value. Liquidation preference is commonly used by venture capitalists to ensure they see at least some return on their investment in different liquidation scenarios.
The period an investor must wait before selling company shares subsequent to a transaction – usually in an initial public offering the lock-up period is determined by the underwriters.
Management Buy-In (MBI)
Purchase of a business by an outside team of managers who have found financial backers and plan to manage the business actively themselves.
Management Buy-Out (MBO)
Funds provided to enable operating management to acquire a product line or business, which may be at any stage of development, from either a public or private company.
Mergers and Acquisitions (M&A)
The terms merger and acquisition mean slightly different things but often used interchangeably. When one company takes over another company and clearly establishes itself as the new owner, the transaction is called an acquisition. A merger happens when two firms, often of about the same size, agree to go forward as a single new company.
NDA (Non-disclosure agreement or Confidentiality agreement)
A non-disclosure agreement (NDA) is a legal contract between two or more parties defining confidential material and information that the parties wish to share with one another, but should not be made available to others.
NSA (Non-solicit agreement)
Non-solicitation refers to an agreement, typically between an employer and employee, that prohibits an employee from utilizing the company’s clients, customers, and contact lists for personal gain upon leaving the company. Non-solicit clauses are also common in agreements between companies as they enable companies to engage in cooperation without the fear of the companies poaching each other’s employees.
A legal term that refers to equal treatment for two or more parties in an agreement.
Pay To Play
A term in a financing agreement where an investor who does not participate in a future financing round will lose certain rights of existing shares. The rights lost can be anti-dilution rights, liquidation preference, etc.
The act of a startup quickly changing direction with its business strategy. For example, an enterprise server startup pivoting to become an enterprise cloud company. You can see practical examples of what a pivot can entail in a recent blog entry called “The Ekahau story”.
The valuation of a company that includes the capital provided by the current round of financing. For example, if an individual invests $5 million in a company with a $10 million pre-money valuation, the post-money valuation is $15 million.
Valuation of a company excluding the capital from the current round of financing. For example, if an individual invests $5 million in a company with a $10 million pre-money valuation, the pre-money valuation is $10 million (and post-money valuation is $15 million).
Preferred stock or preferred shares: typically offered for the investors of a company. Common stock or common shares: typically issued to founders, management, and employees. Preferred stock is usually convertible into common stock in certain cases such as an IPO or the sale of the company. In a liquidation event, preferred shares generally take priority over common shares. Later rounds of preferred stock in a private company are called Series B, Series C and so on.
Private Equity (PE)
Private equity is a generic term used to identify a family of alternative investing methods; it can include leveraged buyout funds, growth equity funds, venture capital funds, real estate investment funds, special debt funds (mezzanine, distressed, etc.), and other types of special situations funds. The exact use of the terminology evolves between different markets; for example, Venture Capital is sometimes excluded from PE.
Pro rata is a Latin phrase meaning in proportion. In North American English this term has been vernacularized to prorated.
Right of First Refusal
In Venture Capital, the right of first refusal is a special exit right given sometimes to a strategic partner of the company. The partner is given the right to acquire the company on the same terms it is offered to a third-party. In many exit scenarios, this limits the third-party interest of even starting any serious M&A process and can have a strong negative impact on the exit potential of their company.
Recapitalization (also Recap)
The reorganization of a company’s capital structure. After several funding rounds the company cap table i.e. ownership structure might have grown to be too complex by having several very distinct share classes with strong liquidation preferences etc. In this kind of situation, a recap might be needed to convince new investors to join the party or existing investors invest additional funds. A recap might mean that all different share classes are converted to one or two more simple share classes.
Return On Investment (ROI)
The internal rate of return (IRR) of an investment.
A valuation methodology based on a comparison of private and public company values as a multiple of Revenue. Revenue multiple is usually used for valuing a company when it’s not profitable yet. For profitable companies, EBIT (Earnings before interest and taxes) multiple is an often-used valuation method.
Reverse Vesting (also known as Founder Vesting)
Reverse vesting occurs when a company’s co-founder receives (or has received) his or her shares and ownership interest upfront. This exchange is subject to vesting similar to employee stock options. If the co-founder leaves, the company may repurchase a set amount of those shares.
The founder already owns all the shares with reverse vesting and may be forced to sell a specific percentage of them for no profit if the complete vesting period hasn’t been finished. Reverse vesting is a term used to define a specific situation where an independent contractor or an employee gets stock that’s subject for the company to repurchase at-cost. The right to repurchase lapses the vesting period.
This is the opposite of a normal situation, where a provider for a service gets the right to buy stock or an option, but he or she can’t use that right until the provider vests. Many investors and employees must earn shares by staying with the company for a while through a vesting provision or from buying the equity. Founders have an advantage over them, as they get equity with the company from their first day of employment.
SAFE (simple agreement for future equity)
A SAFE (simple agreement for future equity) is an agreement between an investor and a company that provides rights to the investor for future equity in the company similar to a warrant, except without determining a specific price per share at the time of the initial investment. The SAFE investor receives the futures shares when a priced round of investment or liquidation event occurs. SAFEs are intended to provide a simpler mechanism for startups to seek initial funding than convertible notes.
The SAFE structure was introduced by Y Combinator in late 2013 and it has become very popular for seed/angel rounds especially in the US. The original SAFE was pre-money based but the “new” SAFE introduced in 2018 is post-money based. For more information on the various flavors of SAFE, see the detailed explanation on the Y Combinator site.
Secondary Public Offering
When a company offers up new stock for sale to the public after an IPO. Often occurs when founders step down or desire to move into a lesser role within the company. Not to be confused with Secondary Sale (see next entry).
A secondary sale is when a shareholder (typically one of the founders or an early employee or an early investor) of a private company sells his or her shares to another buyer, often prior to an IPO.
Secondary sales often happen in conjunction with pre-IPO funding rounds. The gaming company Zynga, for example, did a nearly half a billion dollar financing round before their IPO which included a certain amount set aside for the founder’s shares and early employees who wanted to cash out on their shares.
A contract that sets out how the company will be operated and the shareholders’ obligation and rights. It often provides protection to minority shareholders.
A right to purchase a share of stock at a specific price within a specified period of time. Stock options are often used as long-term incentive compensation for management and employees at high-growth companies.
The tax treatment of stock options varies (sometimes by a lot) in different countries. For some examples, see our blog entry “Avoid expensive mistakes: foreign options and US tax“.
Multiple venture capital funds (or other investors) investing jointly in a single company.
See blog entry “Large VC syndicates: “Risk or Resource?” for some of our thinking on syndication.
The right of a minority shareholder to sell the shares with the same terms as a majority shareholder, also known as co-sale right. Compare to Drag-Along Right, which is common demand of venture capitalists: when certain shareholders (representing a defined minimum percentage of the total number of shares) agree to sell their shares the rest of the shareholders are forced to go along.
A colloquial company that a venture capital firm exits with at least 10X return on its investment. To understand why the term is relevant and where the 10X return target comes, see the blog entry called “Why VC’s seek 10x returns“.
A non-binding agreement setting forth the basic terms and conditions under which an investment or other transaction will be made. The Term Sheet is a template that is used to develop more detailed legal documents. Read more from the Capshare term sheet guide.
This word is used to describe businesses that are in trouble and whose management will cause the business to become profitable so they are no longer in trouble.
A unicorn is a privately held startup company valued at over $1 billion. There are currently a bit more than 300 unicorns globally, most of which come from the US and China. See also “decacorn”.
Venture capital funds usually invest in minority stakes in startup companies, often in high-growth sectors like software, internet, and consumer technology. Some VC firms are focusing in very early stage (pre-revenue) companies and make a large number of fairly small investments. Later stage VC funds typically pick more mature companies with serious revenue and customer traction but that are still typically unprofitable. Some VC funds have very generic industry focus – some have a strategy to invest only in a very sharply defined area. You can learn more about Nexit’s strategy in the blog post “The Activist VC Manifesto“.
Nexit is a student of the VC Industry and we’ve written about it a fair amount. For some of our analysis of VC trends and news, take a look at our blog posts such as “The hottest VC trends of 2019“, “Venture Capital – Engine of Growth“, “VC in Europe: Finally Growing Up“, and “The Globalization of VC Activity“.
Venture Debt is debt financing provided by specialized banks or venture debt funds. Venture debt usually complements venture capital funding. Unlike traditional bank lending, venture debt is available to promising startups and growth companies that do not have positive cash flows or significant assets to use as collateral. Venture debt is dilutive – venture debt providers combine their loans with warrants (rights to purchase equity) to compensate for the higher risk.
A Venture Partner typically means a person whom a VC firm brings on board to help them do investments and manage them, but is not a full and permanent member of the partnership. The “full and permanent” members of the partnership are often called General Partners, Managing Members, or Partners.
Venture Partners are different from Entrepreneurs In Residence (EIRs) who typically assist the VC firm’s portfolio companies by leveraging their industry knowledge, expertise, and network. See “Entrepreneur in Residence”
After a stock option has vested the option can be converted to a share by paying the exercise price. This conversion must be done before the specified option expiry date. The vesting schedule set up by the option program determines the timing and other possible requirements typically giving the employee an incentive to perform well and remain with the company.
Warrants are a bit similar to options: Warrants give the right, but not the obligation, to buy a certain number of shares at a certain price before a certain time. In venture capital, Warrants are typically used as an additional incentive in Venture debt and bridge loans.
When reporting the state of the portfolio, a VC fund might need to make a partial wrote-off i.e. a decrease in the reported value of a poorly performing portfolio company. A total write-off means the portfolio company is worthless.
Credit where credit is due
In addition to Nexit’s in-house resources, we have used several excellent external sources to develop this glossary. Below is a list of some of the most important sources that we have used and would like to thank. You can find some additional terms and fresh insights from them if you wish: