Continuing our quest for busting VC jargon for founders, we bring part 3. VC jargon is the defacto manner in which investors talk all the time. It makes them look and feel cool, however, it's usually the first time founders, or interns, or doe-eyed analysts who may not understand all the terms fully, and get super confused.
Today, we are adding to a list of jargons (in alphabetical order) to help you understand some of the VC slang in plain English!
In case you have a better or simpler explanation or would like to add some to the list, ping me at email@example.com
A cap table (or capitalization table) is a document (usually an excel spreadsheet) that shows who the shareholders in a company are, how many shares each shareholder holds, and what each shareholder paid to attain that ownership. In addition to the total number of shares issued by the company, the cap table also shows for each financing round the class of the shares issued (e.g. series A preferred shares), any options granted, e.g. under an ESOP, and other equity instruments e.g. convertible loans, as well as the amount of investment, received in each case.
When a venture capital fund has decided that it would like to invest in a startup, it will approach its own investors in order to draw down the money to be invested. The investors in the venture capital fund have promised to make a certain contribution to the fund but the capital call (also referred to as capital drawdown, drawdown, or takedown) is the actual act of transferring the money so that it reaches the startup
Every investor in a venture capital fund commits to investing a specified sum of money in the fund partnership over a specified period of time. The fund records this as the limited partnership's capital commitment. The sum of capital commitments is equal to the size of the fund. The actual transfer of the money is made in a capital call.
When an asset is sold for more than the initial purchase cost, the profit is known as the capital gain. This is the opposite of capital loss, which occurs when an asset is sold for less than the initial purchase price. Capital gain refers strictly to the gain achieved once an asset has been sold – an unrealized capital gain refers to an asset that could potentially produce a gain if it was sold (sometimes also referred to as hidden reserves - because they are not shown on the company's balance sheet and are, therefore "hidden"). An investor will not necessarily receive the full value of the capital gain – capital gains are often taxed; the exact amount will depend on the specific tax regime.
A captive firm is a private equity firm that is tied to a larger organization, typically a bank, insurance company, or corporate group
Carried interest (also simply referred to as carry) is the share of profits that the manager of venture capital or private equity fund receives once the fund has returned the cost of investment to the fund investors. Carried interest is normally expressed as a percentage of the total profits of the fund. The industry norm is 20 %. The manager of a venture capital fund will normally, therefore, receive 20 % of the profits generated by the fund and distribute the remaining 80 % of the profits to investors of the fund.
A change of control occurs when (a) a majority stake is acquired by a party that held no or a minority interest before the acquisition, (b) a company is merged into another entity, or (c) a majority of the voting power of a company changes hands
The churn rate (a.k.a. rate of attrition), is the percentage of customers or subscribers to a service who cut ties with the service or company during a given time period. These customers have “churned.”
In the context of a financing round, the term closing usually describes the final event to complete the investment, at which time all the legal documents are signed, the closing conditions are fulfilled and the funds are transferred. In the context of setting up a venture capital fund, the term closing can have a different meaning. E.g. when a venture capital fund announces it has reached its first or second closing, that does not mean that it is not seeking further investment but that it is ready to make a capital call for the money raised so far so that it can start investing. A venture capital fund may have many closings, but the usual number is around three. Only when a fund announces a final closing is it no longer open to new investors.
As the term suggests, closing conditions are conditions that must be satisfied (or waived) before the closing of a financing can occur (e.g. before the investors transfer their investments to a startup). The closing conditions can vary depending on the individual situation of the startup and the financing round; common examples of closing conditions include legal opinions, the completion of certain milestones by the startup, or passing shareholders' resolutions (e.g. for changing the articles of association).
Closing date is the date when a transaction is brought to completion, i.e. the date on which the closing happens
The term is sometimes used to describe any two parties that invest alongside each other in the same startup, however, when referring to limited partners in a venture capital fund, this term has a special meaning: If a limited partner in a fund has co-investment rights, it can invest directly in a startup that is also backed by the venture capital fund. The investor, therefore, ends up with two separate stakes in the venture - one indirectly through the fund and one directly in the startup.
Common shares are shares that represent ownership rights in a company. Usually, founders, members of the management, and employees or a startup own common stock while investors own preferred shares. In the event of a liquidation of the company, the claims of secured and unsecured creditors, bondholders, and holders of preferred shares take precedence over common shareholders.
A company buy-back is a process by which a company buys back the stake held by a financial investor, such as a private equity firm. A company buy-back is one possible exit route for private equity funds, it extremely rare in the venture capital environment.
Rights on an investor or shareholder relating to control over the company's affairs. Control rights typically relate to voting or designation of board seats, voting, certain actions like debt, promoter salaries, which require consent
Conditions precedent are tasks that must be completed before an investment occurs, an acquisition is closed, an option can be exercised, and so on
Conditions subsequent are tasks that must be completed within a certain period of time after completion of an investment or acquisition. Failure to fulfill the conditions subsequent will usually trigger contractual rights or an automatic mechanism (in the worst case the recission of the transaction).
Convertible loans (sometimes also referred to as convertible notes) are often used by business angels who provide financing to a startup without an explicit valuation of the business. Convertible notes are structured like a loan when the financing is granted but can convert into equity (meaning shares in the startup) when certain events occur, e.g. an equity financing in which a venture capital firm invests in the startup
The rate at which the loan amount is converted into equity (the conversion rate) usually matches the conditions of the equity financing less a discount (usually in the range of 10 to 25%).
Corporate venture capital or corporate venturing refers to large corporations making venture capital investments. Usually, this is done for strategic reasons (so-called strategic investments). However, there are also corporate venture capital funds that stress their independence from their parent company. Corporate venture capitalists sometimes provide access to the existing customer base and know-how of their parent which can be of benefit for startups.
A covenant is a legal promise to do or not do a certain thing. For example, in a financing arrangement, company management may agree to a negative covenant, whereby it promises not to incur additional debt. The penalties for violation of a covenant may vary from repairing the mistake to losing control of the company.
Also known as Break Even Point
CRM is short for Customer Relationship Management. CRM is a strategic approach in which internal procedures are focused on the interaction with a customer (rather than merely the product) with the goal to establish a lasting customer relationship.
Where a private equity/venture capital firm invests in the same company at different times from different funds, i.e. uses its current fund towards a financing round in a company which forms part of the portfolio of one of its earlier funds.