chapter 23 (1) Flashcards
Agnel investors
people who will provide the initial capital to start their business.
Angel group
Group of angel investors who pool their money and decide as a group which investment to fund
venture capital firm
A limited partnership that specializes in raising money to invest in the private equity of young firms
Venture capitalists
The general partners that run the venture capital firm
private equity firm
Organized very much like a venture capital firm, but it invests in the equity of existing privately held firms rather than start-up companies.
Leverage buyout (LBO)
Often private equity firms initiate their investment by finding a publicly traded firm and purchasing the outstanding equity, thereyb taking the company private in a transaction called a leverage buyout
corporate investors
many established corporations purchase equity in younger private companies. A corporation that invests in private copanies is called many different names, including corporate investor, corporate partner, strategic parter and strategic investor
preferred stock
issued by mature companies usually has preferential dividend, liquidation or voting rights relative to common shareholders
convertible preferred stock
while the preferred stock issued by young companies typically does not pay regular cash dividends, it usually gives the owner the option to convert it into common stock, and so is called convertible preferred stock
funding round
each time the firm raises money. Each round will have its own set of securities with special terms and provisions.
pre money valuation
The value of the prior shares outstanding at the price in the funding round
Post money valuation
The value of the whole firm at the funding round price
Post money valuation formula
Pre money valluation + amount invested
Percentage ownership formula
Amount invested/post-money aluation
liquidation preference
The liquidation preference specifies a minimum amount that must be paid to these security holders before any payment to common stockholders – in the event of a liquidation, sale, or mergere of the company. Typically between 1 and 3
Seniority
it is not uncommon for investors in later rounds to demand seniority over investors in earlier rounds, to ensure that they are repaid first. When later round investors accept securities with equal priority, they are said to be pari passu
participation rights
Holders of convertible shares without participation rights must choose between demanding their liquidation preference or converting their shares to common stock and forfeiting their liquidation preference and other rights
Anti-dilution protection
if things are not goin gwell and the firm raises new funding at a lower price than in a prior round, it is referred to as a down round. ANti dilution protection lowers the price at which investors in earlier rounds can convert their shares to common, effectively increasing their ownership percentage in a down round at the expense of founders and employees
BOard membership
new investors may also negotiate the right to appoint one or more members to the board of directors of the firm as a way of securing control rights
exit strategy
how will investors eventually realize their returns from investing.
two exit strategies
Through an acquisition or through a public offering. Often large corporations purchase successful start-up companies. In such a case, the acquiring company purchases the outstanding stock of the private company, allowing all investors to cash out
