VC Terms Flashcards
Fair Market Value
The value of a company based on what investors are willing to pay for it. For private companies or illiquid assets, “fair market value” is generally derived from comparable companies or assets that have recently had a transaction associated with them.
Fiduciary
Someone who owes special duties to another person and who has liability for not performing that duty.
First Refusal Rights
The right to purchase stock in future offerings by the company on the same terms as other investors. Usually the right is designed to enable investors to maintain their percentage ownership of the company by purchasing a pro rata share of all new stock sold by the company. Investors also often require company founders to grant first refusal rights on shares the founders own. Also sometimes called Preemptive Rights.
Friends and Family Round
Capital provided by the friends and family of founders of an early stage startup. This is typically its first outside capital. The startup is generally too early (often still at ideation) to raise capital from professional angel or seed investors, but needs capital to get started.
Full Ratchet
The method of total protection from dilution is called a and ensures that should a fundraising round cause a previous investor’s ownership percentage to decrease as a result of newly issued shares, they will be given the opportunity to maintain their ownership level. In more technical terms, it is a type of Antidilution Protection that adjusts the Conversion Ratio so that each share of Preferred Stock will be convertible into a number of shares of Common Stock equal to the number of shares the investor would have received, if the investor had purchased the shares at the lowest subsequent price at which the company later sells its stock. The number of shares sold at the lower price doesn’t matter. Only the lower price matters. For example, if the company sells Preferred Stock with a one-for-one Conversion Ratio for $10 per share and later sells Common Stock for $1 per share, each share of Preferred Stock would become convertible into ten shares of Common Stock, even if only one share is sold at the lower price.
Fully Diluted
Fully diluted means the total number of shares of Common Stock the company has issued, plus all shares of Common Stock issuable if all outstanding options, warrants, convertible preferred stock and convertible debt were to be exercised or converted. Fully diluted calculations are used to compare the percentage ownership of a company of different classes of securities by reducing each class to its Common Stock equivalent.
Fund of funds
A fund created to invest in private equity or venture capital funds. This entity is often referred to as a Limited Partner to the venture capital funds.
Grandfather Rights
A grandfather clause (or grandfather policy) is a provision in which an old rule continues to apply to some existing situations while a new rule will apply to all future cases. Those exempt from the new rule are said to have grandfather rights or acquired rights, or to have been grandfathered in.
GP
General Partner of a fund.
General Solicitation
The act of publicly soliciting investors, usually through advertising or any other non-controlled method of a public offering. If a company or issuer engages in public solicitation, it may eliminate certain safe harbors that were previously afforded to them under current securities regulation.
