Angel
A wealthy individual who invests
in entrepreneurial firms. Although angels
perform many of the same functions as venture
capitalists, they invest their own capital
rather than that of institutional or other
individual investors.
Burn rate
The rate at which a company
requires additional cash to keep going. Carried
interest The substantial share, often around
20%, of profits that are allocated to the
general partners of a venture capital
partnership.
Co-investment
See syndication.
Committed capital
Pledges of capital to a venture
capital fund. This capital is drawn down over
the life of the fund.
Common stock
The equity typically held by
management and founders. Typically, at the time
of an initial public offering, all equity is
converted into common stock.
Consolidation
A private equity investment
strategy that involves merging several small
firms together and exploiting economies of scale
or scope.
Convertible equity or debt
A security that can be converted
under certain conditions into another security
(often into ordinary shares). The convertible
shares often have special rights that the
ordinary shares do not have.
Corporate venture capital
An initiative by a corporation to
invest either in young firms outside the
corporation or units formerly part of the
corporation. These are often organised as
corporate subsidiaries, not as limited
partnerships.
Distressed debt
A private equity investment
strategy that involves purchasing discounted
bonds of a financially distressed firm.
Distressed debt investors frequently convert
their holdings into equity and become actively
involved with the management of the distressed
firm.
DPI
See realisation ratios.
Earn out
Part of the price of a
transaction, which is conditional on the
performance of the company following the deal.
Exercise price
The price at which an option or
warrant can be exercised.
Firm
The partnership which manages a
venture capital fund. One firm might manage more
than one fund.
First closing
The initial closing of a fund.
First fund
An initial fund raised by a
venture capital organisation.
Follow-on fund
A fund that is subsequent to a
venture capital organisation's first fund.
Follow-on offering
See seasoned equity offering.
Float
In a public market context, the
percentage of the company's shares that is in
the hands of outside investors, as opposed to
being held by corporate insiders.
Flotation
To obtain a quotation or IPO on a
stock exchange, such as the Australian Stock
Exchange or the NASDAQ.
Fund
A pool of capital raised
periodically by a venture capital organisation.
Usually in the form of limited partnerships,
venture capital funds typically have a ten-year
life, though extensions of several years are
often possible.
Fund of funds
A fund that invests primarily in
other venture capital funds rather than
portfolio firms, often organised by an
investment adviser or investment bank.
Gatekeeper
See investment adviser.
Gearing, debt/equity ratio or
leverage
The total borrowings of a company
expressed as a percentage of shareholders'
funds.
In the money
Any option or warrant that would
have a positive value if it was immediately
exercised.
Investment adviser
A financial intermediary who
assists investors, particularly institutions,
with investments in venture capital and other
financial assets. Advisers assess potential new
venture funds for their clients and monitor the
progress of existing investments. In some cases,
they pool their investors' capital in funds of
funds.
Involuntary exit
Where the company goes into
receivership or liquidation.
IPO
"Initial Public Offering",
"flotation", "float", "going public", "listing"
are just some of the terms used when a company
obtains a quotation on a stockmarket.
IRR: Internal Rate of Return
There are three versions of the
internal rate of return used in the AVCAL
Yearbook - the arithmetic average, the capital
weighted average, and the pooled average.The
arithmetic average IRR for a sample would be the
sum of the IRRs for the individual funds in the
sample divided by the number of funds in the
sample.The capital weighted average IRR is
calculated in a similar manner, except the
individual IRRs are weighted by fund size and
affect the average in proportion to their size.
Therefore, this average for the sample is skewed
towards the larger funds. A pooled average IRR
isn't actually an average, but one average
calculated for the entire sample. In other
words, instead of using the cash flows of the
funds to calculate IRRs for each fund, the
sample (and all of the accompanying cash flows)
is treated as one fund and one IRR is calculated
for it.
LBO
Leveraged buyout, the acquisition
of a firm or business unit, typically in a
mature industry, with a considerable amount of
debt.
Leveraged buyout fund
A fund, typically organised in a
similar manner to a venture capital fund,
specialising in leveraged buyout investments.
Some of these funds also make venture capital
investments.
Loan capital
Loan capital ranks ahead of share
capital for income and capital. Loans typically
are entitled to interest and are usually, though
not necessarily, repayable. Loans may be secured
on the company's assets or may be unsecured. A
secured loan will rank ahead of unsecured loans
and certain other creditors of the company. A
loan may be convertible into equity shares.
Alternatively, it may have a warrant attached
which gives the loan holder the option to
subscribe for new equity shares on terms fixed
in the warrant. They typically carry a higher
rate of interest than bank term loans and rank
behind the bank for payment of interest and
repayment of capital.
Lock-up
A provision in the underwriting
agreement between an investment bank and
existing shareholders that prohibits corporate
insiders and private equity investors from
selling at the time of the offering.
Management fee
The fee, typically a percentage
of committed capital or net asset value, that is
paid by a venture capital fund to the general
partners to cover salaries and expenses.
Mezzanine
Either (1) a venture capital
financing round shortly before an initial public
offering or (2) an investment that employs
subordinated debt that has fewer privileges than
bank debt but more privileges than equity and
often has attached warrants.
Option:
The right, but not the
obligation, to buy or sell a security at a set
price (or range of prices) in a given period.
Ordinary shares
These are equity shares that are
entitled to all income and capital after the
rights of all other classes of capital and
creditors have been satisfied. Ordinary shares
have votes. In a venture capital deal these are
the shares typically held by the management and
family shareholders rather than the venture
capital firm.
Placement agent
A financial intermediary hired by
venture organisations to facilitate the raising
of new venture capital funds.
Post-money valuation
The product of the price paid per
share in a financing round and the shares
outstanding after the financing round.
Pre-money valuation
The product of the price paid per
share in a financing round and the shares
outstanding before the financing round.
Preference shares
These are non-equity shares. They
rank ahead of all classes of ordinary shares for
income and capital. Their income rights are
defined and they are usually entitled to a fixed
dividend (e.g. 10 per cent fixed). The shares
may be redeemable on fixed dates or they may be
irredeemable. Sometimes they may be redeemable
at a fixed premium (e.g. at 120 per cent of
cost). They may be convertible into a class of
ordinary shares.
Preferred ordinary shares
These may also be known as 'A'
ordinary shares, cumulative convertible
participating preferred ordinary shares or
cumulative preferred ordinary shares. These are
equity shares with preferred rights. Typically
they will rank ahead of the ordinary shares for
income and capital. Once the preferred ordinary
share capital has been repaid, the two classes
would then rank pari passu in sharing any
surplus capital. Their income rights may be
defined; they may be entitled to a fixed
dividend (a percentage linked to the
subscription price, e.g. 8 per cent fixed)
and/or they may have a right to a defined share
of the company's profits - known as a
participating dividend (e.g. 5 per cent of
profits before tax). Preferred ordinary shares
have votes.
Preferred stock
Stock that has preference over
common stock with respect to any dividends or
payments in association with the liquidation of
the firm. Preferred stockholders may also have
additional rights, such as the ability to block
mergers or displace management.
Private equity
Private equity includes
organisations devoted to venture capital,
leveraged buyouts, consolidations, mezzanine and
distressed debt investments, and a variety of
hybrids such as venture leasing and venture
factoring.
Prospectus
A condensed, widely disseminated
version of the registration statement that is
also filed with the US Securities and Exchange
Commission. The prospectus provides a wide
variety of summary data about the firm.
Ratchets
A structure whereby the eventual
equity allocations between the groups of
shareholders depend on either the future
performance of the company or the rate of return
achieved by the venture capital firm. This
allows management shareholders to increase their
stake if the company performs particularly well.
Refinancing
The purchase of the venture
capital investors' or others' shareholdings by
another investment institution.
Realisation ratios: DPI,
RVPI, TVPI
DPI: Distribution to Paid-In
ratio (a realization ratio). The DPI measures
the ratio of distributions to the limited
partners compared to the amount of capital
contributed by the limited partners.RVPI:
Residual Value to Paid-In ratio (a realization
ratio). The RVPI measures the net asset value of
the funds (unrealized gains), compared to the
amount of capital contributed by the limited
partners.TVPI: Total Value to Paid-In ratio (a
realization ratio). The TVPI is simply the DPI
and RVPI added together.A drawback of these
ratios is that they do not take into account the
time value of money, but are simply based on
actual capital figures. For this reason, we
recommend that they be used in conjunction with
the IRRs.
Repurchase
The repurchase of the venture
capital investors' shares by the company and/or
its management.
Road show
The marketing of a venture
capital fund or public offering to potential
investors.
Roll-up
See consolidation.
RVPI
See realisation ratios.
Seasoned equity offering
An offering by a firm that has
already competed an initial public offering and
whose shares are already publicly traded.
Secondary offering
An offering of shares that are
not being issued by the firm, but rather are
sold by existing shareholders. The firm
consequently does not receive the proceeds from
the sales of these shares.
Share capital
The structure of share capital
that will be developed involves the
establishment of certain rights. The venture
capital firm will try to balance the risks it is
taking with the rewards it is seeking. It will
also be aiming to put together a package that
best suits your company for future growth. These
structures require the assistance of an
experienced qualified legal adviser.
Shares outstanding
The number of shares that the
company has issued.
Staging
The provision of capital to
entrepreneurs in multiple installments, with
each financing conditional on meeting particular
business targets. This helps ensure that the
money is not squandered on unprofitable
projects.
Syndication
The joint purchase of shares by
two or more venture capital organisations or the
joint underwriting of an offering by two or more
investment banks.
Tombstone
An advertisement, typically in a
major business publication, by an underwriter to
publicise an offering that it has underwritten.
Trade sale
The sale of your company's shares
to another company, perhaps in the same industry
sector.
TVPI
See realisation ratios.
Underwriting
The purchase of a securities
issue from a company by an investment bank and
its (typically almost immediate) resale to
investors.
Venture capital
Independently managed, dedicated
pools of capital that focus on equity or
equity-linked investments in privately held,
high-growth companies. Many venture capital
funds, however, occasionally make other types of
private equity investments. Outside the United
Sates, this phrase is often used as a synonym
for private equity.
Venture capitalist
A general partner or associate at
a venture capital organisation.
Vintage year
The groups of funds whose first
closing was in a certain year.
Yield
Calculated by dividing the gross
dividend by the share price and expressed as
percentage. It shows the annual return on an
investment from interest and dividends,
excluding any capital gain element. |