A Round

A financing event whereby venture capitalists invest in a company that was previously financed by founders and/or angels. The "A" is from Series "A" Preferred stock. See "B" round.

Absolute return

The return an asset achieves over time, without comparison to the overall market, other assets or benchmarks


The process of gaining control, possession or ownership of a private portfolio company by an operating company or conglomerate.

Added value

A private equity management team’s exceptional experience, know-how or valuable business contacts which constitute a vital input for the growth of investee companies.

Advisory Board

A group of external advisors to a private equity group or portfolio company. Advice provided varies from overall strategy to portfolio valuation. Less formal than a Board of Directors.

Alternative Assets

This term describes non-traditional asset classes. They include private equity, venture capital, hedge funds and real estate. Alternative assets are generally more risky than traditional assets, but they should, in theory, generate higher returns for investors.


An Accounting procedure that gradually reduces the book value of an intangible asset through periodic charges to income.

Angel Financing

Capital raised for a private company from independently wealthy investors. This capital is generally used as seed financing.

Angel Investor

A person who provides backing to very early-stage businesses or business concepts. Angel investors are typically entrepreneurs who have become wealthy, often in technology-related industries.


Usually an outsider hired by a syndicate of angel investors to perform due diligence on investment opportunities and coordinate allotment of investment duties among members. Archangels typically have no financial commitment to the syndicate.

Asset allocation

A fund manager’s allocation of his investment portfolio into various asset classes (eg stocks, bonds, private equity).

Asset cover

One of the indicators used by banks to calculate debt ceiling. It is the extent to which debt is secured against the company’s assets. Banks apply different weighting factors to various classes of asset, depending on their liquidity and the typical reliability of the valuation.

Asset deal

A sale of assets not essential for the vendor’s core business.

Asset stripping

Dismantling an acquired business by selling off operational and/or financial assets.

Asset-backed loan

Loan, typically from a commercial bank, that is backed by asset collateral, often belonging to the entrepreneurial firm or the entrepreneur.


A process in which an investment bank invites several private equity houses to look at a particular company that is for sale and to offer a bid to buy it..

Average IRR

The arithmetic mean of the internal rate of return.


B Round

A financing event whereby professional investors such as venture capitalists are sufficiently interested in a company to provide additional funds after the "A" round of financing. Subsequent rounds are called "C", "D", and so on.


Buyin-management-buyout. A combination of a management buyin (MBI) and a management buyout (MBO). In a BIMBO, an entrepreneurial manager or group of external managers financed by venture capitalists buys into a company and teams up with members of the target management team to run it as an independent business.

Back office

The office or unit within a financial institution or private equity fund, which carries out support and administrative functions for the institution or fund. For private equity funds, back office activities cover amongst others the fund and management accounting, auditing, tax administration, reporting, and handling of capital calls and distributions.

Balance Sheet

A condensed financial statement showing the nature and amount of a company's assets, liabilities, and capital on a given date.

Balanced fund

Venture capital funds focused on both early stage and development with no particular concentration on either.


An inability to pay debts. Chapter 11 of the bankruptcy code deals with reorganization, which allows the debtor to remain in business and negotiate for a restructuring of debt.

Bear Hug

An offer made directly to the Board of Directors of a target company. Usually made to increase the pressure on the target with the threat that a tender offer may follow.

Beauty parade

An accepted mechanism for an investee company to select a provider of financial and professional services. The investee normally draws up a short list of potential providers, who are then invited to pitch for the business.


A previously agreed upon point of reference or milestone at which venture capital investors will determine whether or not to contribute additional funds to an investee company.


Comparing returns of a portfolio to the returns of its peers; in private equity, fund performance is benchmarked against a sample of funds formed in the same vintage year with the same investment focus.

Board of directors

Group of individuals elected by the shareholders of a company to promote and safeguard all aspects of the shareholders’ best interests.

Board rights

Allowing an investor to take a seat on a firm's board of directors.

Break fee

A break fee (also referred to as an inducement fee) is a sum agreed between the offeror and the target company to be paid to the offeror by the target only if specified events occur which prevent the offer from proceeding or if the offer fails.

Break-even point

A point reached when a company’s revenue equals its expenses.

Bridge Financing

A limited amount of equity or short-term debt financing typically raised within 6-18 months of an anticipated public offering or private placement meant to "bridge" a company to the next round of financing.

Bridge vehicle

A fund raised by a GP on an interim basis, before launching a new fund. Bridge vehicles are often of a smaller size, compare to the normal fund.


Unused credit facility or cash reserves.

Burn Rate

The rate at which a company expends net cash over a certain period, usually a month.

Business Plan

A document that describes the entrepreneur's idea, the market problem, proposed solution, business and revenue models, marketing strategy, technology, company profile, competitive landscape, as well as financial data for coming years. The business plan opens with a brief executive summary, most probably the most important element of the document due to the time constraints of venture capital funds and angels.

Business angel

A private investor who provides both finance and business expertise to an investee company.

Business model

The underlying model of a company's business operation.

Buy-and-build strategy

Active, organic growth of portfolio companies through add-on acquisitions.


A buyout is a transaction financed by a mix of debt and equity, in which a business, a business unit or a company is acquired with the help of a financial investor from the current shareholders (the vendor).

Buyout Fund

Funds whose strategy is to acquire other businesses; this may also include mezzanine debt funds which provide (generally subordinated) debt to facilitate financing buyouts, frequently alongside a right to some of the equity upside.



Compound Annual Growth Rate. The year over year growth rate applied to an investment or other aspect of a firm using a base amount.

Capital (or Assets) Under Management

The amount of capital available to a fund management team for venture investments.

Capital Asset Pricing Model (CAPM)

Capital Asset Pricing Model determines the cost of equity of a quoted company. This cost depends on the risk free interest rate, the return of a market index and the security’s volatility, compared to the overall market.

Capital Gains

The difference between an asset's purchase price and selling price, when the selling price is greater. Long-term capital gains (on assets held for a year or longer) are taxed at a lower rate than ordinary income.

Capital weighted average IRR

The average IRR weighted by fund size.

Captive fund

A fund in which the main shareholder of the management company contributes most of the capital, ie where parent organisation allocates money to a captive fund from its own internal sources and reinvests realised capital gains into the fund.

Carried Interest

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.

Cash Flows to Equity Valuation

A variant of the DCF model, where future cash flows to the equity owners of the company are discounted at the cost of the equity, thus directly calculating the equity value.

Cash flow

Net earnings after tax plus depreciation, plus non-cash items.

Clawback option

A clawback option requires the general partners in an investment fund to return capital to the limited partners to the extent that the general partner has received more than its agreed profit split. A general partner clawback option ensures that, if an investment fund exits from strong performers early in its life and weaker performers are left at the end, the limited partners get back their capital contributions, expenses and any preferred return promised in the partnership agreement.

Closed-end Fund

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.


An investment event occurring after the required legal documents are implemented between the investor and a company and after the capital is transferred in exchange for company ownership or debt obligation.

Club deal

A deal where several buyout houses pool their resources together when buying a company of significant size, which would be otherwise inaccessible for them alone, either due to the purchase price or fund investment restrictions.


The syndication of a private equity financing round or an investment by an individuals (usually general partners) alongside a private equity fund in a financing round.

Co-lead investor

Investor who has contributed a similar share with the lead investor in a private equity joint venture or syndicated deal.


Assets pledged to a lender until a loan is repaid. If the borrower does not pay back the money owed, the lender has the legal right to seize the collateral and sell it to pay off the loan.

Comfort factor

An indication of the extent to which a investor can seek to reduce his risk by checking up on aspects of the business such as the state of relationships with its customers or whether its products are highly rated by reputable authorities. Comfort factors can often by provided by due diligence.


A limited partner’s obligation to provide a certain amount of capital to a private equity fund when the general partner asks for capital.

Committed Capital

The total dollar amount of capital pledged to a private equity fund.

Company buy-back

The redemption of private of restricted holdings by the portfolio company itself. In essence the company is buying out the VC's interest.

Competing offer

Another contemporaneous offer for the target company by a third party.


The moment when legal documents are signed. Normally, also the moment at which funds are advanced by investors.

Conditions precedent

Certain conditions that a venture capitalist may insist are satisfied before a deal is completed.


Also called a leveraged rollup, this is an investment strategy in which a leveraged buyout (LBO) firm acquires a series of companies in the same or complementary fields, with the goal of becoming a dominant regional or nationwide player in that industry. In some cases, a holding company will be created to acquire the new companies. In other cases, an initial acquisition may serve as the platform through which the other acquisitions will be made.

Contributed capital

Contributed capital represents the portion of capital that was initially raised (committed by investors) which has been drawn down in a private equity fund.

Conversion Ratio

The number of shares of stock into which a convertible security may be converted. The conversion ration equals the par value of the convertible security divided by the conversion price.

Corporate Charter

The document prepared when a corporation is formed. The Charter sets forth the objectives and goals of the corporation, as well as a complete statement of what the corporation can and cannot do while pursuing these goals.

Corporate Resolution

A document stating that the corporation's board of directors has authorized a particular individual to act on behalf of the corporation.

Corporate Venturing

Venture capital provided by [in-house investment funds of] large corporations to further their own strategic interests.

Covenant lite loan

A loan with lighter or no covenants, providing the borrower more operational flexibility while limiting the lenders protection against strong changes in his/her financial performance.


An agreement by a company to perform or to abstain from certain activities during a certain time period. Covenants usually remain in force for the full duration of the time a private equity investor holds a stated amount of securities and may terminate on the occurrence of a certain event such as a public offering. (Affirmative covenants define acts which a company must perform and may include payment of taxes, insurance, maintenance of corporate existence, etc. Negative covenants define acts which the company must not perform and can include the prohibition of mergers, sale or purchase of assets, issuing of securities, etc.)

Cumulative Voting Rights

When shareholders have the right to pool their votes to concentrate them on an election of one or more directors rather than apply their votes to the election of all directors. For example, if the company has 12 openings to the Board of Directors, in statutory voting, a shareholder with 10 shares casts 10 votes for each opening (10x12= 120 votes). Under the cumulative voting method however, the shareholder may opt to cast all 120 votes for one nominee (or any other distribution he might choose).


DPI - Distribution to Paid-In

The DPI measures the cumulative distributions returned to investors (Limited Partners) as a proportion of the cumulative paid-in capital.

Deal Flow

The measure of the number of potential investments that a fund reviews in any given period.

Deal flow

The number of investment opportunities available to a private equity house.

Debt ratio

Debt capital divided by total capital.

Debt service

Cash required in a given period to pay interest and matured principal on outstanding debt.


An expense recorded to reduce the value of a long-term tangible asset. Since it is a non-cash expense, it increases free cash flow while decreasing the amount of a company's reported earnings.

Development Fund

Venture capital funds focused on investing in later stage companies in need of expansion capital.


A reduction in the percentage ownership of a given shareholder in a company caused by the issuance of new shares.

Dilution Protection

Mainly applies to convertible securities. Standard provision whereby the conversion ratio is changed accordingly in the case of a stock dividend or extraordinary distribution to avoid dilution of a convertible bondholder's potential equity position. Adjustment usually requires a split or stock dividend in excess of 5% or issuance of stock below book value. Share Purchase Agreements also typically contain anti-dilution provisions to protect investors in the event that a future round of financing occurs at a valuation that is below the valuation of the current round.

Direct public offering

A public offering in which shares are sold directly to investors, rather than through an underwriter.


Person elected by shareholders to serve on the board of directors. The directors appoint the president, vice president and all other operating officers, and decide when dividends should be paid (among other matters).


The investments by funds into their portfolio companies.


Disclosure in general refers to the communication of information between two different parties. In the private equity and venture capital world, there are two different sides of disclosure. There is on the one hand the disclosure between the general partners and the limited partners, which is governed by the limited partners agreement. On the other hand, there is the disclosure of information by the limited partners on the general partners activities to the public at large.

Disclosure Document

A booklet outlining the risk factors associated with an investment.

Discounted cash flow (DCF)

A method of assessing the value of an investment based on predicted cash flows discounted to take account of the fact that a euro tomorrow is worth less than a euro today.

Discretionary client

A client who gives an investment manager total authority to manage his assets.

Distressed debt

Corporate bonds of companies that have either filed for bankruptcy or appear likely to do so in the near future. The strategy of distressed debt firms involves first becoming a major creditor of the target company by snapping up the company's bonds at pennies on the dollar. This gives them the leverage they need to call most of the shots during either the reorganization, or the liquidation, of the company. In the event of a liquidation, distressed debt firms, by standing ahead of the equity holders in the line to be repaid, often recover all of their money, if not a healthy return on their investment. Usually, however, the more desirable outcome a reorganization that allows the company to emerge from bankruptcy protection. As part of these reorganizations, distressed debt firms often forgive the debt obligations of the company, in return for enough equity in the company to compensate them. (This strategy explains why distressed debt firms are considered to be private equity firms.)


Disbursement of realized cash or stock to a venture capital fund's limited partners upon termination of the fund.

Distributions to paid-in capital (D/PI)

A measure of the cumulative distributions returned to the limited partners as a proportion of the cumulative paid-in capital. DPI is net of fees and carried interest.


The process of spreading investments among various different types of securities and various companies in different fields.


The payments designated by the Board of Directors to be distributed pro-rata among the shares outstanding. On preferred shares, it is generally a fixed amount. On common shares, the dividend varies with the fortune of the company and the amount of cash on hand and may be omitted if business is poor or if the Directors determine to withhold earnings to invest in capital expenditures or research and development.

Down Round

Equity financing in a company which values the company at a lower amount/price than in previous financing rounds.

Drag-Along Rights

A majority shareholders' right, obligating shareholders whose shares are bound into the shareholders' agreement to sell their shares into an offer the majority wishes to execute.

Due Diligence

A process undertaken by potential investors -- individuals or institutions -- to analyze and assess the desirability, value, and potential of an investment opportunity.



Earnings before interest and taxes – a financial measurement often used in valuing a company (price paid expressed as a multiple of EBIT).


"Earnings Before Interest, Taxes, Depreciation and Amortization": A measure of cash flow calculated as: Revenue - Expenses (excluding tax, interest, depreciation and amortization). EBITDA looks at the cash flow of a company. By not including interest, taxes, depreciation and amortization, we can clearly see the amount of money a company brings in. This is especially useful when one company is considering a takeover of another because the EBITDA would cover any loan payments needed to finance the takeover.

Early Stage

A state of a company that typically has completed its seed stage and has a founding or core senior management team, has proven its concept or completed its beta test, has minimal revenues, and no positive earnings or cash flows.

Early-Stage Fund

Venture capital funds focused on investing in companies in the early part of their lives.


An arrangement whereby the sellers of a business may receive additional future payments for the business, conditional to the performance of the business following the deal.

Economies of Scale

Economic principle that as the volume of production increases, the cost of producing each unit decreases.

Elevator Pitch

An extremely concise presentation of an entrepreneur's idea, business model, company solution, marketing strategy, and competition delivered to potential investors. Should not last more than a few minutes, or the duration of an elevator ride.

Employee Stock Ownership Plan

A trust fund established by a company to purchase stock on behalf of employees.

Entrepreneur in residence (EIR)

An entrepreneur that has experience in creating a business and who would like to work in a venture capital fund using the funds’ network, deal flow and resources to develop new or existing portfolio companies.


Ownership interest in a company, represented by the shares issued to investors.

Equity Kicker

Option for private equity investors to purchase shares at a discount. Typically associated with mezzanine financings where a small number of shares or warrants are added to what is primarily a debt financing.

Equity ratio

One of the indicators used by banks to calculate debt ceiling. It consists of net equity divided by the company’s total assets. Banks apply yardstick ratios for different industry sectors to arrive at a minimum level of funding that shareholders are required to contribute.

Evergreen Promise

This occurs when the company agrees to pay an employee's salary for a number of years, regardless of when termination occurs, the day after he or she is employed or 10 years after.

Exercise price

The price at which an option or warrant can be exercised.


Liquidation of holdings by a private equity fund. Among the various methods of exiting an investment are: trade sale; sale by public offering (including IPO); write-offs; repayment of preference shares/loans; sale to another venture capitalist; sale to a financial institution.

Exit Strategy

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.

Exiting climates

The conditions that influence the viability and attractiveness of various exit strategies.

Exits (AKA divestments or realizations)

The means by which a private equity firm realizes a return on its investment. Private equity investors generally receive their principal returns via a capital gain on the sale or flotation of investments. Exit methods include a trade sale (most common), flotation on a stock exchange (common), a share repurchase by the company or its management or a refinancing of the business (least common). A Secondary purchase of the LP interest by another private equity firm are becoming an increasingly common phenomenon.

Expansion capital

Also called development capital. Financing provided for the growth and expansion of a company, which may or may not break even or trade profitably. Capital may be used to: finance increased production capacity; market or product development; provide additional working capital.



A procedure in which a firm can sell its accounts receivable invoices to a factoring firm, which pays a percentage of the invoices immediately, and the remainder (minus a service fee) when the accounts receivable are actually paid off by the firm's customers.


A person who helps to arrange a transaction.

First stage/round

The first round of financing following a company's startup phase that involves an institutional venture capital fund.

Follow-on funding

Companies often require several rounds of funding. If a private equity firm has invested in a particular company in the past, and then provides additional funding at a later stage, this is known as 'follow-on funding'.

Follow-on investment

An additional investment in a portfolio company which has already received funding from a private equity firm.

Founder economies

An agreement, whereby the founding partners of a private equity/venture capital fund receive a larger share of the capital gains, especially the carried interest, achieved by the fund. Often, a founder may also receive those gains after leaving the fund, as an acknowledgment of his or her role in building the fund.

Founders' Shares

Shares owned by a company's founders upon its establishment.

Free cash flow

The cash flow of a company available to service the capital structure of the firm. Typically measured as operating cash flow less capital expenditures and tax obligations.

Front office

The office or unit within a financial institution or private equity fund, which carries out the investment activity and deals with the customers of the business. For private equity funds, front office activities cover amongst others the fundraising and investor relations, deal making and sourcing, research and market analysis and the operational management of investments.

Fund Capitalisation

The total amount of capital committed to a fund by investors

Fund Focus

The indicated area of specialization of a venture capital fund usually expressed as Balanced, Seed and Early Stage, Later Stage, Mezzanine or Leveraged Buyout (LBO).

Fund Size

The total amount of capital committed by the investors of a venture capital fund.

Fund age

The age of a fund (in years) from its first drawdown to the time an IRR is calculated.

Fund of funds

A fund set up to distribute investments among a selection of private equity fund managers, who in turn invest the capital directly. Fund of funds are specialist private equity investors and have existing relationships with firms. They may be able to provide investors with a route to investing in particular funds that would otherwise be closed to them. Investing in fund of funds can also help spread the risk of investing in private equity because they invest the capital in a variety of funds.


The process in which venture capitalists themselves raise money to create an investment fund.



Global Depositary Receipt (GDR's). Receipts for shares in a foreign based corporation traded in capital markets around the world. While ADR's permit foreign corporations to offer shares to American citizens, GDR's allow companies in Europe, Asia and the US to offer shares in many markets around the world.


Specialist advisers who assist institutional investors in their private equity allocation decisions. Institutional investors with little experience of the asset class or those with limited resources often use them to help manage their private equity allocation. Gatekeepers usually offer tailored services according to their clients' needs, including private equity fund sourcing and due diligence through to complete discretionary mandates.

General Partner (GP)

The partner in a limited partnership responsible for all management decisions of the partnership. The GP has a fiduciary responsibility to act for the benefit of the limited partners (LPs), and is fully liable for its actions.

General partner’s commitment

Fund managers typically invest their personal capital right alongside their investors capital, which often works to instil a higher level of confidence in the fund. The limited partners look for a meaningful general partner investment of 1% to 3% of the fund.

Generalist fund

Funds with either a stated focus of investing in all stages of private equity investment, or funds with a broad area of investment activity.

Golden Handcuffs

This occurs when an employee is required to relinquish unvested stock when terminating his employment contract early.

Golden Parachute

Employment contract of upper management that provides a large payout upon the occurrence of certain control transactions, such as a certain percentage share purchase by an outside entity or when there is a tender offer for a certain percentage of a company's shares. Discussed in more detail at The Executive Employment Agreement

Grandfather rights

Special rights given to a limited partner to access a follow-on fund, after having been invested in the previous fund.


When young, developing companies are rushed to an IPO by an inexperienced private equity organisation in order to demonstrate a successful exit record for the managment team.



A private equity investment in which the venture capitalist contributes only capital – and not business know-how or management involvement – to the investee company.


A private equity investment in which the venture capitalist adds value by contributing capital, management advice and involvement.

Hockey stick

A curve describing the evolution of the earnings of a company poised for rapid growth. This can also be described by the IRR of a private equity fund as it rises from negative to positive.

Holding Company

A corporation that owns the securities of another, in most cases with voting control.

Holding Period

The amount of time an investor has held an investment. The period begins on the date of purchase and ends on the date of sale, and determines whether a gain or loss is considered short-term or long-term, for capital gains tax purposes.

Horizon internal rate of return

An indication of performance trends within an industry sector. Horizon IRR uses the beginning net asset values as an initial cash outflow and net asset values at the period end as the terminal cash flow.

Hostile offer (or hostile bid)

An offer which is made for a target company but which isnot recommended for acceptance by shareholders by the board of the target company.

Hurdle Rate

The internal rate of return that a fund must achieve before its general partners or managers may receive an increased interest in the proceeds of the fund. Often, if the expected rate of return on an investment is below the hurdle rate, the project is not undertaken.



Internal Rate of Return. A typical measure of how VC Funds measure performance. IRR is a technically a discount rate: the rate at which the present value of a series of investments is equal to the present value of the returns on those investments.


The starting point at which IRR calculations for a fund are calculated; the vintage year or date of first capital drawdown.


An entity designed to nurture business concepts or new technologies to the point that they become attractive to venture capitalists. An incubator typically provides both physical space and some or all of the services-legal, managerial, and/or technical-needed for a business concept to be developed. Incubators often are backed by venture firms, which use them to generate early-stage investment opportunities.

Independent director

A member of the board of Directors of a company who is not affiliated with the company in any other capacity.

Independent fund

One in which the main source of fundraising is from third parties.

Information rights

A contractual right to obtain information about a company, including, for example, attending board meetings. Typically granted to venture capitalists investing in privately held companies.

Initial Public Offering (IPO)

The sale or distribution of a stock of a portfolio company to the public for the first time. IPOs are often an opportunity for the existing investors (often venture capitalists) to receive significant returns on their original investment. During periods of market downturns or corrections the opposite is true.

Initial investment

First private equity-backed investment made in an investee company.

Institutional Investors

Organizations that professionally invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds.

Institutional buyout (IBO)

Outside financial investors (eg private equity houses) buy the business from the vendor. The existing management may be involved from the start and purchase a small stake. Alternatively, the investor may install its own management.

Intellectual property

A venture's intangible assets, such as patents, copyrights, trademarks, and brand name.

Investment committee

A committee within a private equity/venture capital fund, fund of funds or limited partner that has the final decision on the individual investments made. Members of the committee are either part of the fund or sometimes outside experts.



The curve generated by plotting the returns generated by a private equity fund against time (from inception to termination). The common practice of paying the management fee and start-up costs out of the first drawdowns does not produce an equivalent book value. As a result, a private equity fund will initially show a negative return. When the first realisations are made, the fund returns start to rise quite steeply. After about three to five years the interim IRR will give a reasonable indication of the definitive IRR. This period is generally shorter for buyout funds than for early stage and expansion funds.

Joint Venture

is a business or project in which two or more companies or individuals have invested, with the intention of working together.


Key Employees

Professional management attracted by the founder to run the company. Key employees are typically retained with warrants and ownership of the company.

Key man clause

If a specified number of key named executives cease to devote a specified amount of time to the Partnership, which may also include time spent on other funds managed by the manager, during the commitment period, the "key man" clause provides that the manager of the fund is prohibited from making any further new investments (either automatically or if so determined by investors) until such a time that new replacement key executives are appointed. The manager will, however, usually be permitted to make any investments that had already been agreed to be made prior to such date.


Later Stage

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 its.

Lead Investor

Also known as a bell cow investor. Member of a syndicate of private equity investors holding the largest stake, in charge of arranging the financing and most actively involved in the overall project

Leavers and Joiners

The arrangements covering: what happens to the profit interest (through carried interest or ownership of shares) of executives who leave an investee company or a venture capital fund; the provision for making a profit-sharing interest available to rising stars (new or young executives who previously did not have such a profit-sharing interest) or new joiners.


An investment that has a poor or negative rate of return. An old venture capital adage claims that "lemons ripen before plums".

Letter of Intent

A letter from the venture capitalist to the investee company indicating a general willingness or intention to engage in some type of transaction. It often precedes negotiation of a complete agreement, and is typically structured so that it is not legally binding on either party.

Leveraged Buyout (LBO)

A takeover of a company, using a combination of equity and borrowed funds. 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.

Leveraged recapitalization

Transaction in which a company borrows a large sum of money and distributes it to its shareholders.

Lifestyle firms

Category comprising around 90 percent of all start-ups. These firms merely afford a reasonable living for their founders, rather than incurring the risks associated with high growth. These ventures typically have growth rates below 20 percent annually, have five-year revenue projections below $10 million, and are primarily funded internally-only very rarely with outside equity funds.

Limited Partner (LP)

An investor in a limited partnership who has no voice in the management of the partnership. LP's have limited liability and usually have priority over GP's upon liquidation of the partnership.

Limited Partnerships

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.


1) The process of converting securities into cash. 2) The sale of the assets of a company to one or more acquirers 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.

Liquidity Event

An event that allows a VC to realize a gain or loss on an investment. The ending of a private equity provider’s involvement in a business venture with a view to realizing an internal return on investment. Most common exit routes include Initial Public Offerings [IPOs], buy backs, trade sales and secondary buy outs. See also: Exit strategy


Managed secondaries

A secondary deal involving a portfolio of companies that are relatively young (two to four years old), where the underlying companies are starting to move up the J-curve and the further potential for value creation provide the main interest for the buyer.

Management Fee

Compensation for the management of a venture fund's activities, paid from the fund to the general partner or investment advisor. This compensation generally includes an annual management fee.

Management Team

The persons who oversee the activities of a venture capital fund.

Management buy-out (MBO)

A private equity firm will often provide financing to enable current operating management to acquire or to buy at least 50 per cent of the business they manage. In return, the private equity firm usually receives a stake in the business. This is one of the least risky types of private equity investment because the company is already established and the managers running it know the business - and the market it operates in - extremely well.

Management buyin (MBI)

A buyout in which external managers take over the company. Financing is provided to enable a manager or group of managers from outside the target company to buy into the company with the support of private equity investors.

Manager sponsorship

A limited partner taking a direct interest in the a general partner, in the formative stage of the fund.

Mandatory Redemption

is a right of an investor to require the company to repurchase some or all of an investor's shares at a stated price at a given time in the future. The purchase price is usually the Issue Price, increased by Cumulative Dividends, if any. Mandatory Redemption may be automatic or may require a vote of the series of Preferred Stock having the redemption right.

Market Capitalization

The total dollar value of all outstanding shares. Computed as shares multiplied by current price per share. Prior to an IPO, market capitalization is arrived at by estimating a company's future growth and by comparing a company with similar public or private corporations. (See also Pre-Money Valuation)

Mature funds

Funds that have been in existence for over two years.


Brochure presented by a general partner in the process of raising funds. This document is dedicated to potential investors (limited partners), and usually contains (amongst other information) a presentation of the management team’s track record, terms and conditions and investment strategies.

Merchant banking

An activity that includes corporate finance activities, such as advice on complex financings, merger and acquisition advice (international or domestic), and at times direct equity investments in corporations by the banks.


Combination of two or more corporations in which greater efficiency is supposed to be achieved by the elimination of duplicate plant, equipment, and staff, and the reallocation of capital assets to increase sales and profits in the enlarged company.

Mezzanine Financing

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.

Middle-market firms

Firms with growth prospects of more than 20 percent annually and five-year revenue projections between $10 million and $50 million. Less than 10 percent of all start-ups annually, these entrepreneurial firms are the backbone of the U.S. economy and attractive to business angel investors.

Multi-family office

A family office providing services to several families and its members, often integrated in a bank or financial institution.

Mutual Fund

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. (See Closed-end Funds)


NDA (Non-disclosure agreement)

An agreement issued by entrepreneurs to potential investors to protect the privacy of their ideas when disclosing those ideas to third parties.

Net Asset Value (NAV)

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.

Net Financing Cost

Also called the cost of carry or, simply, carry, the difference between the cost of financing the purchase of an asset and the asset's cash yield. Positive carry means that the yield earned is greater than the financing cost; negative carry means that the financing cost exceeds the yield earned.


IRR if a portfolio or fund taking into account the effect of management fees and carried interest.

Net Present Value

An approach used in capital budgeting where the present value of cash inflow is subtracted from the present value of cash outflows. NPV compares the value of a dollar today versus the value of that same dollar in the future after taking inflation and return into account.

Net debt

Net debt is calculated as short and long-term interest-bearing debt minus cash (and equivalents) The concept of net debt is the same under cash and accrual-based financial reporting. High levels of net debt impose a call on future revenue flows to service that debt. One shortcoming of the net debt concept is that it does not provide information on whether debt has been incurred to finance fixed asset accumulation or current expenditure.

Net income

The net earnings of a corporation after deducting all costs of selling, depreciation, interest expense and taxes.

Net present value (NPV)

A firm or project's net contribution to wealth. This is the present value of current and future income streams, minus initial investment.


The typical label for any newly organized company, particularly in the context of a leveraged buyout.

Non Executive Director (NED)

A member of the board of Directors of a company who has no management or executive function within the underlying company.

Non-Compete Clause

An agreement often signed by employees and management whereby they agree not to work for competitor companies or form a new competitor company within a certain time period after termination of employment. Governed by state law.

Non-discretionary client

Client who is involved in the decisions taken by the investment manager managing the clients assets.


Offer period

The period from announcement of an offer or potential offer until the closing date for the offer or the date when the offer becomes or is declared unconditional as to acceptances (that is, the acceptance condition, which requires a certain percentage of shareholders to accept, has been satisfied) or the offer lapses.

Open-end Fund

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.

Option Pool

The number of shares set aside for future issuance to employees of a private company.


Private equity funds still available for investment in the industry.


P/E ratio

Price/earnings ratio – the market price of a company’s ordinary share divided by earnings per share for the most recent year.


Generally referring to a private investment in public equity.


Pooled Investment Vehicle. A legal entity that pools various investor's capital and deploys it according to a specific investment strategy.

Paid-in Capital

The amount of committed capital a limited partner has actually tranferred to a venture fund. Also known as the cumulative takedown amount.

Pari Passu

At an equal rate or pace, without preference.


A nontaxable entity in which each partner shares in the profits, loses and liabilities of the partnership. Each partner is responsible for the taxes on its share of profits and loses.

Partnership agreement

The contract that specifies the compensation and conditions governing the relationship between investors (LP's) and the venture capitalists (GP's) for the duration of a private equity fund's life.

Pay to Play

A "Pay to Play" provision is a requirement for an existing investor to participate in a subsequent investment round, especially a Down Round. Where Pay to Play provisions exist, an investor's failure to purchase its rata portion of a subsequent investment round will result in conversion of that investor's Preferred Stock into Common Stock or another less valuable series of Preferred Stock.

Permanent establishment

A permanent establishment is, according to the OECD definition, a fixed place of business through which the business of an enterprise is wholly or partly carried on. Within private equity, permanent establishment refers to the possibility that a limited partner, either owning or having a stake in a private equity or venture capital fund, is considered as a resident of that country and hence liable for the national taxation.

Placement Agent

A company that specializes in finding institutional investors that are willing and able to invest in a private equity fund or company issuing securities. Sometimes the "issuer" will hire a placement agent so the fund partners can focus on management issues rather than on raising capital. In the U.S., these companies are regulated by the NASD and SEC.


An investment that has a very healthy rate of return. The inverse of an old venture capital adage (see Lemons) claims that "plums ripen later than lemons."

Poison Pill

A right issued by a corporation as a preventative antitakeover measure. It allows rightholders to purchase shares in either their company or in the combined target and bidder entity at a substantial discount, usually 50%. This discount may make the takeover prohibitively expensive.

Pooled IRR

A method of calculating an aggregate IRR by summing cash flows together to create a portfolio cash flow. The IRR is subsequently calculated on this portfolio cash flow.

Portfolio Companies

Companies in which a given fund has invested.

Portfolio at cost

The portfolio at cost is the sum of all private equity and venture capital investments (held at cost) that have been made until the end of the measurement period and that have not yet been exited.

Post-Money Valuation

The valuation of a company immediately after the most recent round of financing. For example, a venture capitalist may invest $3.5 million in a company valued at $2 million "pre-money" (before the investment was made). As a result, the startup will have a post-money valuation of $5.5 million.

Pre-Money Valuation

The valuation of a company prior to a round of investment. This amount is determined by using various calculation models, such as discounted P/E ratios multiplied by periodic earnings or a multiple times a future cash flow discounted to a present cash value and a comparative analysis to comparable public and private companies.

Pre-seed stage

The investment stage before a company is at the seed level. Pre-seed investments are mainly linked to universities and to the financing of research projects, with the aim of building a commercial company around it later on.

Preferred Dividend

A dividend ordinarily accruing on preferred shares payable where declared and superior in right of payment to common dividends.

Preferred return (AKA Hurdle Rate)

The minimum return to investors to be achieved before a carry is permitted. A hurdle rate of 10% means that the private equity fund needs to achieve a return of at least 10% per annum before the profits are shared according to the carried interest arrangement.

Private Equity

Equity securities of companies that have not "gone public" (are not listed 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.

Private equity fund

A private equity investment fund is a vehicle for enabling pooled investment by a number of investors in equity and equity-related securities of companies. These are generally private companies whose shares are not quoted on a stock exchange. The fund can take the form of either a company or an unincorporated arrangement such as a Limited Partnership.Private investment in public equities (PIPES): Investments by a private equity fund in a publicly traded company, usually at a discount.

Prudent person rule

A behaviourally-oriented standard of investment, rather than one based on quantitative criteria. The prudent person rule allows pension funds to include private equity and venture capital funds in their asset allocation according to their own needs, while respecting the risk profile of their clients.

Public offering

An offering of stock to the general investing public. The definition of a public offering varies from country to country, but typically implies that the offering is being made to more than a very restricted number of private investors; that road shows promoting the offering will be open to more than a very restricted audience; or that the offering is being publicised. For a public offering, registration of prospectus material with a national competent authority is generally compulsory.

Put option

The right to sell a security at a given price (or range) within a given time period.



Financing that combines the features of debt and equity. Those instruments are unsecured and convertible on exit. Examples are mezzanine finance or subordinated debt.



Residual Value to Paid-In - The RVPI measures the value of the investors’ (Limited Partner’s) interest held within the fund, relative to the cumulative paid-in capital. RVPI is net of fees and carried interest.

Ratchet/sliding scale

A bonus where capital can be reclaimed by managers of investee companies, depending on the achievement of corporate goals.

Realisation ratios

Benchmark measurements of investment performance which complement IRR. Realisation ratios are distributions to paid-in capital (D/PI), residual value to paid-in capital (RV/PI) and total value to paid-in (TV/PI). These are measures of returns to invested capital. These measures do not take the time value of money into account.

Realised multiple

The ratio of total gain(/loss) to cost of realised investments.


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. (See Exit Strategy and Leveraged Buyout)


The act a broker/dealer makes with an investor to confirm a transaction.

Red Herring

The common name for a preliminary prospectus, due to the red SEC required legend on the cover. (See Prospectus)

Redeemable Preferred Stock

Redeemable preferred stock, also known as exploding preferred, at the holder's option after (typically) five years, which in turn gives the holders (potentially converting to creditors) leverage to induce the company to arrange a liquidity event. The threat of creditor status can move the founders off the dime if a liquidity event is not occurring with sufficient rapidity.


Repurchase by a company of its securities from an investor. Often required for preferred stock in private equity financing.

Refinancing bank debt

Financing to reduce a company’s level of gearing.

Reorganization or Corporate Reorganization

Reorganizations are significant changes in the equity base of a company such as converting all outstanding shares to Common Stock, or combining outstanding shares into a smaller number of shares (a reverse split). A Reorganization is frequently done when a company has already had a few rounds of venture financing but has not been able to successfully increase the value of the company and therefore is doing a Down Round that is essentially a restart of the company.

Replacement capital (secondary purchase)

Purchase of existing shares in a company from another private equity investment organisation or from another shareholder or shareholders.

Repurchase agreement

An agreement in which a holder of shares agrees that the person from whom it purchased the securities may repurchase them in certain events. In private equity financing rounds, founders may be required to enter into repurchase agreements in which they agree to resell their shares to the company at a fixed price in the event that they leave the company before a given date.

Rescue (or turnaround)

Financing made available to an existing business which has experienced trading difficulties, with a view to re-establishing prosperity.

Residual Value

The estimated value of the assets of the fund, net of fees and carried interest.

Residual value to paid-in capital (RV/PI)

A realisation ratio which is a measure of how much of a limited partner’s capital is still tied up in the equity of the fund, relative to the cumulative paid-in capital. RV/PI is net of fees and carried interest.

Restrictive covenant

In the context of venture capital, an agreement in which the executive management of an investee company or a private equity fund undertakes not to carry on competing activities.

Reversed Merger

Selling your company to a quoted company, by taking a strong equity position in the quoted company.

Revlon Duties

The legal principle that actions, such as anti-takeover measures, that promote the value of an auction process are allowable, whereas those that thwart the value of an auction process are not allowed. The duty is triggered when a company is in play as a target acquisition.

Right of First Refusal

The right of first refusal gives the holder the right to meet any other offer before the proposed contract is accepted.


The chance of loss on an investment due to many factors including inflation, interest rates, default, politics, foreign exchange, call provisions, etc. In Private Equity, risks are outlined in the Risk Factors section of the Placement Memorandum.


Stages of financing of a company. A first round of financing is the initial raising of outside capital. Successive rounds may attract different types of investors as companies mature.


Search fund

A fund that is raised by entrepreneurs to find a business, acquire it and manage it until and exit can be achieved.

Second line loan

A loan is used in leverage buyouts, that is subordinated to a senior loan (first-lien loan), but has a preferential settlement over a mezzanine loan.

Second preferred stock

Preferred stock which has rights subordinate to those of other preferred stock on dividend and assets.

Secondary Market

The market for the sale of partnership interests in private equity funds. Sometimes limited partners chose to sell their interest in a partnership, typically to raise cash or because they cannot meet their obligation to invest more capital according to the takedown schedule. Certain investment companies specialize in buying these partnership interests at a discount.

Secondary Sale

The sale of private or restricted holdings in a portfolio company to other investors. See secondary market definition.

Secondary funds

Partnerships that specialize in purchasing the portfolios of investee company investments of an existing venture firm. This type of partnership provides some liquidity for the original investors. These secondary partnerships, expecting a large return, invest in what they consider to be undervalued companies. The big difference is that they are buying their interests in a fund after the fund has been at least partially deployed in underlying portfolio companies. Unlike fund of fund managers, which generally invest in blind pools, secondary buyers can evaluate the underlying companies that they are indirectly investing in.

Secondary investment

An investment where a fund buys either, a portfolio of direct investments of an existing private equity fund or limited partner's positions in these funds.

Seed Money

The first round of capital for a start-up business. Seed money usually takes the structure of a loan or an investment in preferred stock or convertible bonds, although sometimes it is common stock. Seed money provides startup companies with the capital required for their initial development and growth. Angel investors and early-stage venture capital funds often provide seed money.

Seed Stage Financing

An initial state of a company's growth characterized by a founding management team, business plan development, prototype development, and beta testing.

Semi-captive Fund

A fund in which, although the main shareholder contributes a large part of the capital, a significant share of the capital is raised from third parties.

Shell Corporation

A corporation with no assets and no business. Typically, shell corporations are designed for the purpose of going public and later acquiring existing businesses. Also known as Specified Purpose Acquisition Companies (SPACs).

Single-family office

A family office providing services to one family, but several generations of family members.

Special purpose vehicle

A special company, usually outside the United States, established by a company to meet a specific financial problem, often to pay lower taxes (e.g., a reinvoicing subsidiary or offshore insurance company).

Spin out

A division or subsidiary of a company that becomes an independent business. Typically, private equity investors will provide the necessary capital to allow the division to "spin out" on its own; the parent company may retain a minority stake.


Selling off a department, or a division, of a company to make it independent company.

Staggered Board

This is an antitakeover measure in which the election of the directors is split in separate periods so that only a percentage (e.g. one-third) of the total number of directors come up for election in a given year. It is designed to make taking control of the board of directors more difficult.

Staple financing

A pre-arranged financing package that a financial advisor or investment bank offers to the potential buyer in an auction process, when putting up a company for sale.

Stapled secondaries

A deal where a buyer purchases a secondary portfolio, agreeing at the same time to invest in the primary fund being raised by the selling general partners.


An investment which is so successful that it makes up for other loss-making investments by a fund.

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.

Strategic Investors

Corporate or individual investors that add value to investments they make through industry and personal ties that can assist companies in raising additional capital as well as provide assistance in the marketing and sales process.

Subscription Agreement

The application submitted by an investor wishing to join a limited partnership. All prospective investors must be approved by the General Partner prior to admission as a partner.

Sweat Equity

Ownership of shares in a company resulting from work rather than investment of capital--usually founders receive "sweat equity".


A group of venture capitalists jointly investing in an investee company.



Abbreviation for Technology, Media and Telecommunications sectors.

Tag-along Rights

If another shareholder sells his shareholding, the venture capitalist can insist that his shares are sold on the same terms to the same purchaser.

Takedown Schedule

A takedown schedule means the timing and size of the capital contributions from the limited partners of a venture fund.

Target company

The company that the offeror is considering investing in. In the context of a public-to-private dealthis company will be the listed company that an offeror is considering investing in with the objective of bringing the company back into private ownership.

Tax transparency

A fund structure or vehicle is tax transparent when the fund itself is not liable to taxation and the investment in an underlying company is treated as if it would be a direct investment for the initial investor (the LP), who is taxed only when the investment structure distributes its gains and revenues.


A short company presentation sent to potential investors before a sale or auction.

Term Sheet

A summary of the terms the investor is prepared to accept. A non-binding outline of the principal points which the Stock Purchase Agreement and related agreements will cover in detail.

The offer (or bid)

made for the target company by the Newco offeror established by the private equity provider and the participating directors of the target company (those directors who are part of the management buyout team).

Thin-capitalisation rules

Limitations on the deductibility of interest expenses for companies that have a debt to equity ratio in excess of a fixed threshold.

Third stage/round

Funds provided for the major expansion of a company whose sales volume is increasing and which is breaking even or profitable.

Time Value of Money

The basic principle that money can earn interest, therefore something that is worth $1 today will be worth more in the future if invested. This is also referred to as future value.

Total value to paid-in (TV/PI)

A realisation ratio which is the sum of distributions to paid-in capital (D/PI) and residual value to paid-in capital (RV/PI). TV/PI is net of fees and carried interest.

Trade sale

The sale of the equity share of a portfolio company to another company.


Unsecured debt

Loans not secured against a company’s assets.


Venture Capital Financing

An investment in a startup business that is perceived to have excellent growth prospects but does not have access to capital markets. Type of financing sought by early-stage companies seeking to grow rapidly.

Venture capital

Professional equity co-invested with the entrepreneur to fund an early-stage (seed and start-up) or expansion venture. Offsetting the high risk the investor takes is the expectation of higher than average return on the investment. Venture capital is a subset of private equity.

Venture capitalist

The manager of private equity fund who has responsibility for the management of the fund’s investment in a particular portfolio company. In the hands-on approach (the general model for private equity investment), the venture capitalist brings in not only moneys as equity capital (ie without security/charge on assets), but also extremely valuable domain knowledge, business contacts, brand-equity, strategic advice, etc.

Vintage Year

The year in which the venture firm began making investments. Often, those funds with "vintage years" at the top of the market will have lower than average returns because portfolio company valuations were high, e.g an Internet Fund started in vintage year 1998.

Voluntary Redemption

is the right of a company to repurchase some or all of an investors' outstanding shares at a stated price at a given time in the future. The purchase price is usually the Issue Price, increased by Cumulative Dividends.

Voting Right

The common stockholders' right to vote their stock in the affairs of the company. Preferred stock usually has the right to vote when preferred dividends are in default for a specified amount of time. The right to vote may be delegated by the stockholder to another person.

Vulture capitalist

Negative term for an investor who smells fast money and who is not serious about investing in companies with long-term potential.


Weighted average cost of capital

a discount rate used in valuation model reflecting the opportunity cost of all capital providers, weighted by their relative contribution to the company’s total capital.

White Knight

A company that makes a friendly takeover offer to a target company that is being faced with a hostile takeover from a separate party.


A negotiated agreement between the debtors and its creditors outside the bankruptcy process.


The act of changing the value of an asset to an expense or a loss. A write-off is used to reduce or eliminate the value an asset and reduce profits.


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.