VC Terms

Question 1

Gross Margin

Answer 1

The difference between revenue and cost of goods sold (COGS), divided by revenue.

Question 2

Growth Equity

Answer 2

Growth Equity refers to private investments in late-stage companies which aim to finance revenue growth through market expansion. Such investments typically target minority positions in proven market segment leaders

Question 3

K1

Answer 3

The Schedule K-1 is an Internal Revenue Service (IRS) tax form issued annually for an investment in partnership interests. The purpose of the Schedule K-1 is to report each partner’s share of the partnership’s earnings, losses, deductions, and credits. It serves a similar purpose for tax reporting as one of the various Forms 1099, which report dividend or interest from securities or income from the sale of securities. Document sent to LP investors by the fund that tells investors the percentage of the profits and losses of the fund that they are responsible for.

Question 4

Key man clause

Answer 4

Clause in the LPA that enables the LP to break the agreement if one of the major GPs in the fund leave.

Question 5

Key man risk

Answer 5

Referred to as the risk associated with depending on a single charismatic individual in a startup; key tactic is to build a strong capable team around the individual, usually the founder, to mitigate this risk.

Question 6

Key man insurance

Answer 6

Insurance on the life of key employees which investors require the company to obtain.

Question 7

Incubator

Answer 7

A program that provides the mentorship and capital necessary to accelerate the growth and success of young startups. Typically, the program will provide some capital and in exchange will take an equity stake in the startup.

Question 8

Information Rights

Answer 8

The right of investors to have the company provide financial information annually, quarterly or monthly and other information as requested by investors. Under Delaware (and most state) law, a stockholder has the right to inspect and make copies of the corporation’s information, including their stock ledger, a list of stockholders, and its books and records. However, such a demand must be for a “proper purpose”, which means a purpose reasonably related to the person’s interest as a stockholder.

Question 9

Initial Public Offering (IPO)

Answer 9

Process by which a formerly private company first issues stock to the public. New disclosures must be made, as the company must now adhere to SEC reporting requirements.

Question 10

Inside Round

Answer 10

A round of financing entirely composed of existing investors.