Venture Vocab

There's a *lot* of jargon. Why? We don't know, but we've got you. We've put together a dictionary of sorts for you to help you navigate the world of venture capital & private equity as a whole. Hopefully this can be a useful resource for you whether you're a founder or a fund manager.

Accredited Investor

An accredited investor is a person or entity that is allowed to invest in securities that are not registered with the Securities and Exchange Commission (SEC). To be an accredited investor, an individual or entity must meet certain income and net worth guidelines.

There is a common misconception that a “process” exists for an individual to become an accredited investor. No government agency or independent body reviews an investor's credentials, and no certification exam or piece of paper exists that states a person has become an accredited investor. Instead, the companies that issue unregistered securities determine a potential investor’s status by conducting diligence prior to sale.

Rule 501 of Regulation D of the Securities Act of 1933 (Reg. D) provides the definition for an accredited investor. Simply put, the SEC defines an accredited investor through the confines of income and net worth in two ways:
1. A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
2. A natural person who has an individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person.

The SEC has actually broadened the definition of accreditation recently, and Investopedia does a phenomenal breakdown. Please check them out here if you're interested in more details!

Angel Investor

An accredited individual who makes personal investments in startups with their own money. Angel checks may start as low as $1k! (Great to have helpful operators or founders as part of earlier rounds for support!)

Annual Recurring Revenue (ARR)

ARR is the amount of revenue derived from contracted subscriptions that a company can expect to receive on an annual basis.

Application for EDGAR Codes

This Application for EDGAR Codes is used to obtain EDGAR Codes so the Venture Fund can file its Form D with the Securities and Exchange Commission (“SEC”) within 15 days of its initial closing. The EDGAR system performs automated collection, validation, indexing, acceptance, and forwarding of submissions by companies and others who are required by law to file forms with the SEC.

Assets Under Management (AUM)

Money (in millions or billions) that an investment firm has raised and has spent + has yet to spend.

Associate

Junior members of a VC firm who aid in sourcing & diligence.

Cap Table or Capitalization Table

A document (usually a spreadsheet) that states who owns what % of shares in the company.

Capital Expenditure (CAPEX)

Expenditures required by a company to improve operations, it can be for example the purchase of machinery and properties.

Carry

Ownership of potential future profit - i.e. you hold a certain percent of the potential upside that may happen when assets/investments liquidate.

Certificate of Formation

The Certificate of Formation is filed with the Delaware Secretary of State and forms the General Partner of a Fund.

Certificate of Limited Partnership

The Certificate of Limited Partnership is filed with the Delaware Secretary of State and forms the Fund.

Commitment

Is an investor's legally binding obligation to make contributions of capital to a fund.

Compound Annual Growth Rate (CAGR)

Compound annual growth rate (CAGR) is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s life span.

Confidential Private Placement Memorandum (the “PPM”)

The PPM includes a description of the Fund’s investment objective and investment process, a summary of terms, risk factors, U.S. federal income tax considerations, ERISA and other benefit plan considerations and other relevant disclosure.

Contribution

The satisfaction of that commitment. Contributions are the actual $ amounts transferred from an investor to a fund. Contributions normally happen over time as capital is called by a fund. (Some funds also call all capital at the outset.)

Convertible Notes

A legal instrument that converts into equity during a priced round. SAFE and KISS are two examples.

Corporate Venture Capital (CVC)

A branch of a company that invests (but doesn't acquire; that's the CorpDev team) startups. Most CVCs move slowly, but some are historically very strong (e.g. Comcast, Qualcomm, Stripe).

Cost Of Goods Sold (COGS)

COGS refers to the direct costs of producing the goods sold by a company.

Days to Term Sheet

Time from first contact to signing - average is 37 days More here.

Discount for Lack of Marketability (DLOM)

Private shares (equity) are worth 20-30% than their paper value ‘worth’ because they can’t be readily sold.

Distributions to Paid in Capital (DPI)

Total cash value a VC fund has sent back to their LPs divided by the amount of money the LP has paid into the fund. DPI is a closed fund’s multiple. Median DPI for 2007 vintage VC: 1.04x net. More here.

Double Trigger

A clause that accelerates vesting when an employee is let go (without due cause) in an excit scenario. Try to negotiate for this clause if you are being awarded significant equity in a company. More here.

Due Diligence (sometimes called DD)

Looking up relevant financial, legal, logistical, and social claims made by a company before investing.

Earnings Before Interests & Taxes (EBIT)

EBIT is an indicator of a company's profitability. EBIT can be calculated as revenue minus expenses excluding tax and interest.

Earnings Before Interests, Taxes, Depreciation, & Amortization (EBITDA)

EBITDA is a metric used to evaluate a company's operating performance. It can be seen as a proxy for cash flow. In finance, the term is used to describe the amount of cash (currency) that is generated or consumed in a given time period.

Entrepreneur in Residence (EIR)

A person typically hired by a VC firm to do a variety of things, from dealflow/diligence to help with portfolio management to incubating companies. This role varies drastically per firm.

Family Office

An organization representing the interests and wealth of a household of a HNWI. Family offices are somewhat common as LPs.

Fair Market Value (FMV)

An estimation of the market value of something (e.g. a private company's valuation).

Fiscal Year (FY)

A year as reckoned for taxing or accounting purposes.

Form D

Form D must be filed with the SEC and each in state in which the Fund’s limited partners reside.

Form SS-4

Form SS-4 is used to obtain an Employer Identification Number (“EIN”) from the Internal Revenue Service (“IRS”) for the Fund and the General Partner.

Form U-2

Form U-2 must be filed with each state in which the Fund’s limited partners reside.

General Partner (GP)

A member of a VC firm who writes checks, sits on company boards, and dictates the larger firm's strategy. They are commonly known as Partners and are the manager of the VC fund, deciding the allocation of the investments.

Gross Merchandise Value (GMV)

Total monetary value of transactions taking place on a marketplace.

Growth Equity

Between VC and Private Equity (PE) – $100M-1b valuations.

H1/H2

1st Half of the year and 2nd Half of the year.

High Net Worth Individuals (HNWI)

A person (or sometimes a household) with significant wealth. These folks are courted by GPs to be LPs, particularly in sub $100M AUM funds.

Investment Management Agreement

The Investment Management Agreement is the agreement pursuant to which the Fund pays the management fee to the Management Company.

IPO Float

The shares that are publicly traded in an IPO. This is a subset of total shares. More here.

Internal Rate of Return (IRR)

Annualized cash (i.e. liquid) return of an investment vehicle. Top quartile of VCs: 24.9%; median VC: 11.9%; comparative S&P: 12.7%

Keep It Simple Security (KISS)

500 Startups’ standard convertible note document. Similar to the SAFE. More here.

Key Performance Indicators (KPIs)

A set of numbers/ ratios displaying the performance of a company.

Limited Partner (LP)

An investor in an investment firm (e.g. a VC firm). A LP provides capital to GP(s) to manage. The types of LPs often include endowments, pension funds, corporate treasuries, foundations, sovereign wealth, family offices, and HNWI.

Limited Partnership Agreement (the "LPA")

The Limited Partnership Agreement provides the rights and obligations of the limited partners and the general partner of the Fund.

Liquidity Event

Merger, Acquisition, IPO, or other Exit. Privately held equity and convertible debt is now liquid (cash).

Liquidation Preference (aka "Pref Stack" or "Waterfall")

A right attached to a specific class of shares that regulates the order of priority in case of a liquidity event (simply put: who gets the $ first in case there is not enough to make everybody happy). Alternatively, the order and amount each investor gets when the company liquidates (i.e. sells). Can cause big acquisitions to generate very little returns for employees and founders. More here.

Lock Up

An amount of time after an event (usually referring to an IPO) before one can sell their shares.

Last Twelve Months (LTM)

Finance people gave this an acronym for some reason. Please don't ask us why.

Managing Director (MD)

A founding or most-senior member of a VC firm. These folks raise subsequent funds from LPs, write checks, sit on boards, and dictate strategy.

Management Fees

A fixed % of the AUM through which VCs finance the fixed costs of running a VC fund.

Mark to Market (MTM)

Updating the value of an asset based upon the current "fair value" of market price. VCs do this when a company they've invested in raises again at a higher value.

Miami

A meme that went too far.

Money Multiple

Shares Value Now / Total Investment

Month on Month (MoM)

Comparing data from one month to the previous month.

Monthly Recurring Revenue (MRR)

MRR is the amount of predictable revenue that a company can expect to receive on a monthly basis.

Multiple on Invested Capital (MOIC)

MOIC is an investment return metric that compares an investment's current value to the amount of money an investor initially put into it. More here.

Net Promoter Score (NPS)

NPS is typically an index ranging from -100 to 100 that measures the willingness of customers to recommend a company's products or services to others. It is used as a proxy for gauging the customer's overall satisfaction with a company's product or service and the customer's loyalty to the brand.

On Paper/Paper Gains

The Marked to Market value of an illiquid asset. On paper, it is worth $XXX, but if you can't readily sell it, it's not equivalent to $XXX in cash. A good accounting practice is to account for the DLOM (explained above).

An accredited individual who makes personal investments in startups but is not affiliated with a VC firm. Angel checks may start as low as $1k! (Great to have helpful operators or founders as part of earlier rounds for support!)

Operating Agreement

The Operating Agreement is signed by each member of the General Partner.

Option Pool

A percentage of equity of the company set aside for future employees. This is "refreshed" during (some) fundraising rounds, as it would otherwise be diluted by the new shareholders. More here,

Post-Money Valuation

Refers to how much the company is worth after receiving investments.

Pre-Money Valuation

Refers to the value of the company excluding funding. It represents how much a startup is worth before receiving investments.

Principal

A member of a VC firm who sometimes writes checks, but generally needs approvals from GPs and MDs.

Private Equity (PE)

Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity.

Right of first refusal given to investors (typically institutional ones) that allow them to buy an equivalent amount of equity that they would ‘lose’ due to dilution in the round(s) after the one they originally invested in).

Qualified Client

A qualified client is a category of investors that are exempt from the provision of the Investment Advisers Act of 1940 that prohibits private investment funds from charging performance-based fees. The requirement for a qualified client is a $2.1 million net worth, more than is required for accredited investors, or at least $1 million in assets with the advisor immediately after participating in the investment.

The Motley Fool has a great breakdown on the Qualified Purchaser. Please visit them here for more details!

Qualified Purchaser

Private funds are exempt from registering as investment companies if they are not making a public offering of securities and one of two criteria also applies. The fund must be owned by 100 individuals or less, or it must be owned exclusively by "qualified purchasers."

The SEC definition of a qualified purchaser is based on the value of an individual or entity's investments, not their net worth, which companies use to define accredited investors. Qualified purchasers can be individuals or family businesses with more than $5 million in investments, or other entities that meet certain requirements.

The Motley Fool has a great breakdown on the Qualified Purchaser. Please visit them here for more details!

Q1/Q2

Return on Investment (ROI)

Return on investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost.

Right of First Refusal (RoFR)

Allows a startup to have the option to buy their own illiquid shares first (e.g. an early employee trying to sell their vested shares to a third party before an IPO). In other words, in case existing shares of the company are sold, shareholders with a ROFR will have the option to buy those shares, ratably, before they are offered to new investors.

Rolling Fund

A series of consecutively-formed, privately-offered pooled investment vehicles (each, a “fund”) intended to allow fund managers to share their deal-flow with LPs on a quarterly, subscription basis while netting carried interest across a two-year period.

Runway

Refers to the amount of time a company can continue running without an additional infusion of capital. If a company has 18 months of runway, it means they have enough money to continue operating for 18 months, based on their current revenue/cost projections.

Sandhill Road

Where Silicon Valley VCs were based historically in Menlo Park (near Palo Alto (South Bay Area, CA)).

Simple Agreement for Future Equity (SAFE)

YC’s standard convertible note document (Click this link to learn more. This is effective the default financing instrument before a priced equity round.)

Shareholders Agreement

The contract defining the relationship amongst the company and the shareholders and amongst the shareholders.

Subscription Agreement

The Subscription Agreement provides the representations, warranties and covenants of limited partners investing in the Fund.

Super Angel

A person who makes many investments in startups, so much so that their total investments sum to effectively resemble a small VC firm (usually >$1m total).

Strategics / Smart Money

An investor (VC / angel / CVC) that adds non-monetary value (in addition to money) (e.g. customer intros, domain expertise, promotion). Somewhat subjective.

Term Sheet

A sheet summarizing the commercials of an investment agreement contract.

Total Value to Paid In Capital (TVPI)

Total paper value of a VC fund’s equity holdings (includes liquidated assets). Median TVPI for 2007 vintage VC: 1.77x net. More here.

Tranches

Periods of time when money is given (e.g. $3M raise tranched in six month increments means you get $1M each six months three times). These are somewhat rare and are generally founder-unfriendly).

Valuation Multiple

Company Valuation Now / Company Valuation At Time of Initial Investment

Venture Partner (VP)

A (more junior) member of a VC firm. Generally, Venture Partners write checks and sometimes sit on companies' boards. Role varies per fund.

Warrant

A contractual right to buy shares during a specified period at an agreed price. Warrants are one way an investor can convert a debt obligation to an equity stake. Beware of predatory warrants. More here.

Year on Year (YoY)

Comparing data from one year to the previous year.

Year To Date (YTD)

YTD refers to the period of time beginning the first day of the current calendar year or fiscal year up to the current date.

1st Quarter of the year & 2nd Quarter of the year.

For Investors:

We're probably missing quite a bit information here. We want Venture Vocab to be a living document to help onboard everyone into the world of venture capital. If there's something we're missing here or that you'd like to see, please let us know!

Drop a Note About Venture Vocab

Of course, we wouldn't have been able to put this together if it wasn't for all of the other amazing resources on venture capital out there. Please check them out below for much more information!

Alex.fyi, BreakInto.vc, Cooley, Fool, FundForm, Investopedia, & Paua

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