Professional Standards

Glossary of Terms

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Angel
A wealthy individual or professionally organised firm or group who invest in entrepreneurial firms. Although angels perform many of the same functions as venture capitalists, they usually 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 or private equity firm.

Co-investment
See syndication.

Committed capital
Pledges of capital to a VC or PE 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.

Early Stage/Start-up
The business is in the process of being set up or may have been in business for a short time. Such firms have not yet sold their product commercially and have little or no track record. Funding is required to initiate commercial manufacturing and/or sales.
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.
Expansion/Development capital
The business is now established and requires capital for further growth and expansion. The company may require several rounds of capital to achieve the milestones set out in the business plan.

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 or private equity 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 NZX or the ASX.

Fund
A pool of capital raised periodically by a venture capital or private equity firm. 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.

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
here 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.

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 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.

Management buy-in (MBI)
Funds are provided to enable a manager or a group of managers from outside the company to buy into the company.

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.

MBO
Leveraged buyout, the acquisition of a firm or business unit, typically in a mature industry, using debt to leverage the financial structure.

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.

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.

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.

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.

Seed stage
A business is at the idea stage or it might be in the process of being organised and needs finance for R&D. This is usually funded by the entrepreneur’s own resources.

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.

Trade sale
The sale of your company’s shares to another company, perhaps in the same industry sector

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 firm.
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.

Codes and Guidelines
International Private Equity and Venture Capital Investor Reporting Guidelines

These Guidelines set out recommendations on the reporting of detailed fund and investment information by Fund Managers. The term “private equity” is used in these Guidelines in a broad sense to include investments in early stage ventures, management buyouts, management buyins, infrastructure, mezzanine debt and similar transactions and growth or development capital.

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International Private Equity and Venture Capital Valuation Guidelines Edition December 2012

The International Private Equity and Venture Capital Valuation (IPEV) Guidelines (‘Valuation Guidelines’) set out recommendations, intended to represent current best practice, on the valuation of private equity investments. The term “private equity” is used in these Valuation Guidelines in a broad sense to include investments in early stage ventures, management buyouts, management buyins, infrastructure, mezzanine debt and similar transactions and growth or development capital.

The objective of these Valuation Guidelines is to set out best practice where private equity Investments are reported at ‘Fair Value’ and hence helping investors in Private Equity Funds make better economic decisions.

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This Code of Conduct was developed after benchmarking several similar sets of standards put in place by other industry associations throughout the world. It has been ratified by the NZVCA Council and establishes the guiding principles and standards.

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Term Sheet Templates for Early-Stage Investment
Guide to Angel Investment Term Sheets

The aim of this Guide is to provide those who are not familiar with the venture capital investment process with an outline of how investments can be structured, the terms and terminology typically used in a Term Sheet and the broader investment process.

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