VC Terms

Question 1

Term Sheet

Answer 1

A document that includes the basic terms of a company’s fundraising round (or any investment). Once signed, it indicates that the investor and the company intend to move forward to complete the transaction and stipulates the major economic or corporate governance terms related to the investment.

Question 2

Transfer Restrictions

Answer 2

Contractually defined limitations on an individual’s ability to sell or transfer their shares in the company.

Question 3

Unicorn

Answer 3

Team referring to a startup valued at $1B or more.

Question 4

Visitation Rights

Answer 4

Also called Observer Rights. The right of investors to have a nonvoting representative attend meetings of the Board of Directors of the company and committees of the Board.

Question 5

Vesting

Answer 5

Generally, when something that is promised is delivered and ownership is officially granted to the recipient. For employees, shares generally vest according a predetermined schedule. Vesting effectively means that employees only receive their equity compensation after a period of employment to ensure alignment of interest between the company and the employee. The current market standard for vesting schedules is 4 years with a one-year “cliff”. Typically, this means that 25% of the grant will vest after one year, and the balance will vest in equal monthly installments over the following 36 months.

Question 6

Warrant

Answer 6

The right to purchase stock at a later date at a fixed price. Similar to stock options, but usually given to investors, not employees.

Question 7

Warrant Coverage

Answer 7

Warrants issued to reward bridge loan lenders, guarantors or other lenders for incurring the risk of lending. The number of shares issuable upon exercise of the warrants is based on a percentage of the debt.

Question 8

Washout Round

Answer 8

A round of financing where previous investors, the founders, and management suffer significant dilution. The new investor in a washout round will typically gain majority ownership and control of the company.

Question 9

Weighted Average

Answer 9

A form of Antidilution Protection that adjusts the Conversion Ratio according to a formula that takes into account both the lower price and the number of shares issued at the lower price. This is more favorable to the company than a Full Ratchet. Narrow Based Weighted Average uses only the number of outstanding shares of Preferred Stock in the formula used to adjust the conversion price. This is more favorable to the investor than Broad Based Weighted Average, which includes all fully diluted shares in its formula.