VC Terms Flashcards
OA
GP Operation Agreement — governance document for the GP that is based on the term sheet and includes specifics related to the economics of the deal among the fund managers, management and operations, transfers and substitutions, termination and dissolution, and vesting.
Option Pool
A number of shares of Common Stock specified in the corporate charter that can be sold to employees, officers and directors at low prices without triggering the Price Antidilution Protection of the Preferred Stock. 15% of the fully diluted shares is fairly typical, although the size of the Option Pool usually depends on the number of shares estimated to be necessary to grant to employees to attract a team capable of achieving the goals of the company’s business plan. This varies from one company to another. Option Pool shares are usually considered to be outstanding shares when calculating the company’s valuation.
Over allotment Option
The right of investors to exercise the First Refusal Rights and Come Along Rights of other investors who don’t exercise their own rights.
Participating Preferred Stock
A class of stock with a Liquidation Preference, whereby on liquidation, sale or merger of the company, the owner has the right to share on an equal basis with holders of Common Stock any money or other assets that remain for distribution after payment of the Liquidation Preference of the Preferred Stock. With Nonparticipating Preferred Stock, the holders of Preferred Stock must choose either to receive their Liquidation Preference or to receive the same distribution holders of Common Stock receive. A holder of Participating Preferred Stock doesn’t have to choose and receives both.
Pay to Play
In venture capital, investors can raise the ante with co-investors by means of a “pay-to-play” provision, requiring that all investors in a portfolio company continue their pro rata financial commitment to the company, or else lose certain rights with respect to their original investment. The rights can often be anti-dilution rights. In some cases there is a provision of a portion of pro rata (e.g. 50%) or investors convert to common equity.
Piggyback Registration Rights
The right of investors to have shares included in a public offering the company plans to conduct for itself or another shareholder. Usually, this applies to an unlimited number of offerings until the registration rights terminate.
Post-Money Valuation
Calculated by adding the dollar amount invested in the transaction to the Pre-Money Valuation.
Preemptive Rights
Similar to rights of first refusal. The term preemptive rights refers to the right to purchase a company’s new shares before they are offered to anyone else. In term sheets the preemptive rights provision may be titled “Right to Participate Pro Rata in Future Rounds”. This is standard in term sheets.
Preferred Stock
Aclass of stock with a Liquidation Preference; that is, the right to receive distributions of money or assets prior to one or more other classes of stock if the company is sold, merged or liquidated. This protects investors by ensuring the investors get their money back (and sometimes a fixed return on the investment) before holders of Common Stock receive any money or assets.
Pre-Money Valuation
The theoretical value of the company before the investment agreed upon by the company and the investors. Pre- Money Valuation is calculated by multiplying the number of Fully Diluted shares of the company before the investment transaction by the purchase price per share in the investment transaction.
