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!
An accredited individual who makes personal investments (invests their own money) in startups. Angel checks may start as low as $1k! (Great to have helpful operators or founders as part of earlier rounds for support!)
ARR is the amount of predictable revenue that a company can expect to receive on an annual basis.
This Application is used 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.
Money (in millions or billions) that an investment firm is actively managing. Closed funds are not included in AUM.
Junior members of a VC firm who aid in sourcing & diligence.
A document (usually a spreadsheet) that states who owns what % and type of shares in the company.
Ownership of potential future profit in the fund- i.e. you hold a certain percent of the potential upside that may happen when assets/investments liquidate.
The Certificate of Formation is filed with the Delaware Secretary of State and forms the General Partner of a Fund.
The Certificate of Limited Partnership is filed with the Delaware Secretary of State and forms the Fund.
Is an investor's legally binding obligation to make contributions of capital to a fund.
Compound annual growth rate (CAGR) is the annual 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.
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 to potential Limited Partners.
The satisfaction of a commitment. Contributions are the actual dollar 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.)
A legal instrument that converts into equity during a priced round. SAFE and KISS are two examples.
A venture capital fund started within a larger corporation with the intention of investing into startups.
Private shares (equity) are worth 20-30% than their paper value ‘worth’ because they can’t be readily sold.
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. More here.
A clause that accelerates vesting when an employee is let go (without due cause) in an exit scenario. More here.
Looking up relevant financial, legal, logistical, and social claims made by a company before investing.
A short-term role offered by a VC Firm to a founder who is considering starting a company in the next 6-18 months. This person is 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.
Managing and investing the interests and wealth of a household of a high net worth individual. Family offices are common as investors in VC Funds.
An estimation of the market value of something (e.g. a private company's valuation).
Form D is a short notice, detailing basic information about the company for investors in the new issuance. Form D must be filed with the SEC and each in state in which the Fund’s limited partners reside.
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.
Uniform Consent to Service of Process. Form U-2 must be filed with each state in which the Fund’s limited partners reside.
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.
Between VC and Private Equity (PE) – $100M-1b valuations.
1st Half of the year and 2nd Half of the year.
A person (or sometimes a household) with significant wealth. These folks are courted by GPs to be LPs, particularly in sub $100M AUM funds.
The Investment Management Agreement is the agreement pursuant to which the Fund pays the management fee to the Management Company.
The shares that are publicly traded in an IPO. This is a subset of total shares. More here.
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%
500 Startups’ standard convertible note document. Similar to the SAFE. More here.
A set of numbers/ ratios displaying the performance of a company.
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.
The Limited Partnership Agreement provides the rights and obligations of the limited partners and the general partner of the Fund.
Merger, Acquisition, IPO, or other Exit. Privately held equity and convertible debt is now liquid (cash).
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.
An amount of time after an event (usually referring to an IPO) before one can sell their shares.
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.
A fixed % of the AUM through which VCs finance the fixed costs of running a VC fund.
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.
A meme that went too far.
MRR is the amount of predictable revenue that a company can expect to receive on a monthly basis.
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.
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 operating agreement is a key document used by limited liability companies to outline the business' financial and functional decisions including rules, regulations and provisions. The Operating Agreement is signed by each member of the General Partner.
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,
Refers to how much the company is worth after receiving investments.
Refers to the value of the company excluding funding. It represents how much a startup is worth before receiving investments.
A member of a VC firm who sometimes writes checks, but generally needs approvals from GPs and MDs.
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).
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!
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!
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 cos
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.
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.
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.
Where Silicon Valley VCs were based historically in Menlo Park (near Palo Alto (South Bay Area, CA)).
YC’s standard convertible note document (Click this link to learn more. This is effective the default financing instrument before a priced equity round.)
The contract defining the relationship amongst the company and the shareholders and amongst the shareholders.
The Subscription Agreement provides the representations, warranties and covenants of limited partners investing in the Fund.
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).
An investor (VC / angel / CVC) that adds non-monetary value (in addition to money) (e.g. customer intros, domain expertise, promotion). Somewhat subjective.
A sheet summarizing the commercials of an investment agreement contract.
Total paper value of a VC fund’s equity holdings (includes liquidated assets). Median TVPI for 2007 vintage VC: 1.77x net. More here.
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).
Company Valuation Now / Company Valuation At Time of Initial Investment
A (more junior) member of a VC firm. Generally, Venture Partners write checks and sometimes sit on companies' boards. Role varies per fund.
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.
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 something that we should change, please let us know!
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
