VC Terms Flashcards
Dilution
Generally speaking, as subsequent financing rounds occur, existing investors will own proportionally less of the company than they did previously since additional equity is generally issued as part of a new financing round. Dilution is not necessarily a bad thing _ since new stock can be issued at a higher price, you may own a smaller piece of a larger company, which means the value of your investment is actually higher than it was previously.
Down Round
A fundraising round in which the company is valued at a lower value per share than previous rounds.
Drag-Along Rights
The right of the owners of a specified percentage of the shares of the company to require other shareholders to sell their shares or to vote their shares to approve sale of the company. This prevents one group of shareholders from blocking sale of the company to someone who is only interested in purchasing 100% ownership of the company.
Due diligence
The process performed by prospective investors to assess the viability of an investment and confirm that the information provided by the company is accurate.
Exit Velocity
A term from baseball originally referring to the speed of the baseball as it comes off the bat, immediately after a batter makes contact. In venture it refers to the speed between investment and exit, immediately when the investment is made to the liquidity event that allows the investor to cash out. Example — capital invested for growth funds has a higher exit velocity than capital invested by accelerators in startups because the ventures are less mature and have a longer time to exit.
Earnings before interest and taxes (EBIT)
A measurement of the operating profit of the company. A possible valuation methodology is based on a comparison of private and public companies’ value as a multiple of EBIT.
Elevator pitch
A concise presentation given from an entrepreneur to a potential investor about an investment opportunity. The presentation should be concise enough to be shared during an elevator ride.
Employee Stock Ownership Program (ESOP)
A pool of options that is reserved for future employee compensation packages.
Exercise Price (also known as Strike Price)
The amount that must be paid to execute your options. Generally, the exercise price is pegged to the “Fair Market Value” on the date of issuance, rather than the vesting date.
Exit Event or Liquidity Event
When an issuer engages in a transaction that allows investors to sell their shares, which generally happens through a tender offer (sale) or an IPO.
