The act of one company taking over controlling interest in another company. Investors often look for companies that are likely acquisition candidates, because the acquiring firms are often willing to pay a premium to the market price for the shares.
A computation used to help determine an
individual's federal taxes. Basically, AGI is the amount of money a person
makes (such as wages, dividends, social Security, etc.) minus certain
deductions (such as IRA, Keogh and SEP contributions, etc.)
The amount of securities assigned to an investor, broker, or underwriter in an offering. An allocation can be equal to or less than the amount indicated by the investor during the subscription process depending on market demand for the securities.
A means of finding creative ways to support a start-up business until it turns profitable. This method may include negotiating delayed payment to suppliers and advances from potential partners and customers.
A figure equal to a company's stock price
multiplied by the number of shares owned by the public (that is,
outstanding shares). For example, if a company is selling for $20 per
share and has 1,000,000 shares outstanding, then the capitalization is
$20,000,000 ($20 multiplied by 1,000,000).
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.
A state or local authority that assembles
funds from various public and private sources into financial packages for
capital improvements to existing businesses. The Small Business
Administration backs CDCs under its 504 program. The Virginia Small
Business Financing Authority is a CDC.
A type of fund that has a fixed number of shares outstanding, which are offered during an initial subscription period, similar to an initial public offering. After the subscription period is closed, the shares are traded on an exchange between investors, like a regular stock. The market price of a closed-end fund fluctuates in response to investor demand as well as changes in the values of its holdings or its Net Asset Value. Unlike open-end mutual funds, closed-end funds do not stand ready to issue and redeem shares on a continuous basis.
These are securities that represent equity
ownership in a company. Common shares let an investor vote on such matters
as the election of directors. They also give the holder a share in a
company's profits via dividend payments or the capital appreciation of the
A unit of ownership of a corporation. In the case of a public company, the stock is traded between investors on various exchanges. Owners of common stock are typically entitled to vote on the selection of directors and other important events and in some cases receive dividends on their holdings. Investors who purchase common stock hope that the stock price will increase so the value of their investment will appreciate. Common stock offers no performance guarantees. Additionally, in the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock.
A financial security (usually preferred stock or bonds) that is exchangeable for another type of security (usually common stock) at a prestated price. Convertibles are appropriate for investors who want higher income, or liquidation preference protection, than is available from common stock, together with greater appreciation potential than regular bonds offer
Money that business owners must pay back
with interest. There are myriad types of debt financing, from simple
commercial loans to bridge/swing loans in which a lender makes a
short-term loan in anticipation of equity financing at a later stage in
the development of a business.
When a company files to go public with the
Securities and Exchange Commission and state authorities, these agencies
will issue a deficiency letter, which makes suggestions on what to do with
the offering. Although these are "suggestions," your company
should follow them.
The process of investigating a company's
market, competitors, management track record, and accounts, etc. Investors
will usually do substantial due-diligence on a company before investing
and Underwriters will make a reasonable investigation of a company before
committing to an underwriting.
A fund investment strategy involving investments in companies to enable product development and initial marketing, manufacturing and sales activities. Early stage investors can be influential in building a company’s management team and direction. While early stage venture capital investing involves more risk at the individual deal level than later stage venture investing, investors are able to buy company stock at very low prices and these investments may have the ability to produce high returns.
This is when the registration statement has
become effective with the Securities and Exchange Commission and state
agencies. Then the company can distribute a prospectus to potential
customers of the new issue of stock.
A fund's intended method for liquidating its holdings while achieving the maximum possible return. These strategies depend on the exit climates including market conditions and industry trends. Exit strategies can include selling or distributing the portfolio company’s shares after an initial public offering (IPO), a sale of the portfolio company or a recapitalization.
Capital to fund the development of an
established business. A typical investment will be between $600,000-$2m,
with fewer risks and a lower potential return than a start-up investment.
The investor may exit in 2-5 years.
The act of buying shares in an IPO and selling them immediately for a profit. Brokerage firms underwriting new stock issues tend to discourage flipping, and will often try to allocate shares to investors who intend to hold on to the shares for some time. However, the temptation to flip a new issue once it has risen in price sharply is too irresistible for many investors who have been allocated shares in a hot issue.
A fund investment strategy involving financing for the expansion of a company that is producing, shipping and increasing its sales volume. Later stage funds often provide the financing to help a company achieve critical mass in order to position itself for an IPO. Later stage investing can have less risk than early stage financing because these companies have already established themselves in their market and generally have a management team in place. Later stage and Mezzanine level financing are often used interchangeably.
A takeover of a company, using a combination of equity and borrowed funds (or loans). Generally, the target company’s assets act as the collateral for the loans taken out by the acquiring group. The acquiring group then repays the loan from the cash flow of the acquired company. For example, a group of investors may borrow funds, using the assets of the company as collateral, in order to take over a company. Or the management of the company may use this vehicle as a means to regain control of the company by converting a company from public to private. In most LBOs, public shareholders receive a premium to the market price of the shares.
LBO funds are important players in the U.S. private equity markets. Leveraged buyout funds have generated returns by acquiring profitable, stable businesses in more mature sectors of the economy, or businesses characterized by high cash flows. Leveraged buyout firms also play an important role as consolidators of large, highly fragmented industries. Although traditionally LBO funds invested exclusively in mature economic sectors, recently several prominent LBO firms have extended their focus to more dynamic industries such as health care services and telecommunications.
An organization comprised of a general partner, who manages a fund, and limited partners, who invest money but have limited liability and are not involved with the day-to-day management of the fund. In the typical venture capital fund, the general partner receives a management fee and a percentage of the profits (or carried interest). The limited partners receive income, capital gains, and tax benefits.
Liquidation has two meanings in finance. The first is converting securities into cash. The second is the sale of the assets of a company to one or more acquirors in order to pay off debts. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock.
The period of time that certain stockholders have agreed to waive their right to sell their shares of a public company. Investment banks that underwrite initial public offerings generally insist upon lockups of at least 180 days from large shareholders (1% ownership or more) in order to allow an orderly market to develop in the shares. The shareholders that are subject to lockup usually include the management and directors of the company, strategic partners and such large investors. These shareholders have typically invested prior to the IPO at a significantly lower price to that offered to the public and therefore stand to gain considerable profits. If a shareholder attempts to sell shares that are subject to lockup during the lockup period, the transfer agent will not permit the sale to be completed.
Refers to the stage of venture financing for a company immediately prior to its IPO. Investors entering in this round have lower risk of loss than those investors who have invested in an earlier round. Mezzanine level financing can take the structure of preferred stock, convertible bonds or subordinated debt (the level of financing senior to equity and below senior debt).
A mutual fund, or an open-end fund, sells as many shares as investor demand requires. As money flows in, the fund grows. If money flows out of the fund the number of the fund’s outstanding shares drops. Open-end funds are sometimes closed to new investors, but existing investors can still continue to invest money in the fund. In order to sell shares an investor usually sells the shares back to the fund. If an investor wishes to buy additional shares in a mutual fund, the investor must buy newly issued shares directly from the fund.
NAV is calculated by adding the value of all of the investments in the fund and dividing by the number of shares of the fund that are outstanding. NAV calculations are required for all mutual funds (or open-end funds) and closed-end funds. The price per share of a closed-end fund will trade at either a premium or a discount to the NAV of that fund, based on market demand. Closed-end funds generally trade at a discount to NAV.
A stock or bond offered to the public for the first time. New issues may be initial public offerings by previously private companies or additional stock or bond issues by companies already public. New public offerings are registered with the Securities and Exchange Commission.
An open-end fund, or a mutual fund, generally sells as many shares as investor demand requires. As money flows in, the fund grows. If money flows out of the fund the number of the fund’s outstanding shares drops. Open-end funds are sometimes closed to new investors, but existing investors can still continue to invest money in the fund. In order to sell shares an investor generally sells the shares back to the fund. If an investor wishes to buy additional shares in a mutual fund, the investor generally buys newly issued shares directly from the fund.
The valuation of a company immediately after the most recent round of financing. This value is calculated by multiplying the company's total number of shares by the share price of the latest financing.
A class of capital stock that may pay dividends at a specified rate and that has priority over common stock in the payment of dividends and the liquidation of assets. Many venture capital investments use preferred stock as their investment vehicle. This preferred stock is convertible into common stock at the time of an IPO.
PE ratio is calculated by dividing the stock
price by the earnings per share. For example, if a company is selling for
$50 and has earnings per share of $5, then the PE ratio is 10 ($50 divided
by $5). Many analysts use the PE ratio to indicate if a stock is
undervalued (e.g., if the PE ratio is over 5 or 10) or overvalued (50 to
Private equities are equity securities of companies that have not “gone public” (in other words, companies that have not listed their stock on a public exchange). Private equities are generally illiquid and thought of as a long-term investment. As they are not listed on an exchange, any investor wishing to sell securities in private companies must find a buyer in the absence of a marketplace. In addition, there are many transfer restrictions on private securities. Investors in private securities generally receive their return through one of three ways: an initial public offering, a sale or merger, or a recapitalization.
A formal written offer to sell securities that provides an investor with the necessary information to make an informed decision. A prospectus explains a proposed or existing business enterprise and must disclose any material risks and information according to the securities laws. A prospectus must be filed with the SEC and be given to all potential investors. Companies offering securities, mutual funds, and offerings of other investment companies including Business Development Companies are required to issue prospectuses describing their history, investment philosophy or objectives, risk factors and financial statements. Investors should carefully read them prior to investing.
The reorganization of a company’s capital structure. A company may seek to save on taxes by replacing preferred stock with bonds in order to gain interest deductibility. Recapitalization can be an alternative exit strategy for venture capitalists and leveraged buyout sponsors.
The SEC’s review process of all securities intended to be sold to the public. The SEC requires that a registration statement be filed in conjunction with any public securities offering. This document includes operational and financial information about the company, the management and the purpose of the offering. The registration statement and the prospectus are often referred to interchangeably. Technically, the SEC does not "approve" the disclosures in prospectuses.
The SEC is an independent, nonpartisan, quasi-judicial regulatory agency that is responsible for administering the federal securities laws. These laws protect investors in securities markets and ensure that investors have access to all material information concerning publicly traded securities. Additionally, the SEC regulates firms that trade securities, people who provide investment advice, and investment companies.
Small Corporate Offering Registration is a
do - it - yourself securities registration document designed so that
knowledgeable business people can create the documents needed to sell
state-registered securities to the general public - a direct public
Capital provided at an early, often
pre-incorporation stage. Funding to build a prototype, conduct a market
feasibility study, write a business plan, and build a management team. A
typical seed investment will be between $10,000-$200,000. It carries the
highest risk and highest potential returns of alt investment capital,
which may not be seen for 5-8 years.
The first round of stock offered during the seed or early stage round by a portfolio company to the venture investor or fund. This stock is convertible into common stock in certain cases such as an IPO or the sale of the company. Later rounds of preferred stock in a private company are called Series B, Series C and so on.
Capital to fund a start-up is usually used
for renting offices, hiring personnel and initiating sales. The business
plan with market research should be completed, products or services
developed, and a management team in place. Atypical start-up investment
will be between $200,00-$1 m. The risk is high and the investor may not
see a return for 4-6 years.
There are two definitions of stock options.
1. The right to purchase or sell a stock at a specified price within a stated period. Options are a popular investment medium, offering an opportunity to hedge positions in other securities, to speculate on stocks with relatively little investment, and to capitalize on changes in the market value of options contracts themselves through a variety of options strategies.
2. A widely used form of employee incentive and compensation. The employee is given an option to purchase its shares at a certain price (at or below the market price at the time the option is granted) for a specified period of years.
Credit advanced to a business owner by
suppliers and other vendors. They provide services or inventory in
advance, and then wait for the business owner to pay them in 30, 60 or 90
days after delivery. Businesses use trade credit to maintain cash flow as
they collect on invoices from clients and customers, and then pay their
Money used to purchase equity-based interest
in a new or existing company. A venture capitalist's return usually comes
from preferred stock, a share of profits, royalties or capital
appreciation of common stock. Most venture capitalists look for companies
with high growth potential.
An upward or downward adjustment of the value of an asset for accounting and reporting purposes. These adjustments are estimates and tend to be subjective; although they are usually based on events affecting the investee company or its securities beneficially or detrimentally.
XBRL is a type of XML (extensible markup language), which is a specification that is used for organizing and defining data. XBRL uses tags to identify each piece of financial data, which then allows it to be used programmatically by an XBRL-compatible program,making it easier to compile and share this data.