Business glossary

Angel Investor

Definition by the book

An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. Angel investors usually give support to start-ups at the initial moments, where risks of the start-ups failing are relatively high, and when most investors are not prepared to back them.

What it really means

Angel investors are people of high-net-worth who are willing to invest in your company in exchange for equity. There are many variants of angel investors. Some are individuals investing out of their own pockets, often the entrepreneur's family and friends; others are aggregations of business angels – angel clubs – or syndicates.

Annual General Meeting (AGM)

Definition by the book

An annual general meeting (AGM) is a yearly gathering of a company's interested shareholders. At an AGM, the directors of the company present an annual report containing information for shareholders about the company's performance and strategy.

Shareholders with voting rights vote on current issues, such as appointments to the company's board of directors, executive compensation, dividend payments, and the selection of auditors.

What it really means

As the name implies, the annual general meeting (AGM) is the once-a-year gathering of a company’s shareholders.

They are the one occasion in the year when most shareholders get to see the directors of the company and generally they include: status of the company; presentation of the annual report; signing of the minutes of the previous AGM.

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https://bit.ly/3sw1tzx

Anti-Money Laundering (AML)

Definition by the book

Anti-Money Laundering (AML) refers to the laws, regulations and procedures intended to prevent criminals from disguising illegally obtained funds as legitimate income. Though anti-money laundering laws cover a limited range of transactions and criminal behaviour, their implications are far-reaching. For example, AML regulations require banks and other financial institutions that issue credit or accept customer deposits to follow rules that ensure they are not aiding money-laundering.

What it really means

AML refers to measures used by financial institutions and governments to prevent and combat financial crimes. These include money laundering, drug trafficking financing, human trafficking financing, and terrorist financing.

AML is a worldwide term. There are both global and local regulators established and each country has a different AML policy. Companies have to follow these AML regulations and complying with these regulations can be a complicated process for companies.

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Article of Association (AoA)

Definition by the book

Articles of association form a document that specifies the regulations for a company's operations and defines the company's purpose. The document lays out how tasks are to be accomplished within the organization, including the process for appointing directors and the handling of financial records.

What it really means

The Articles of Association or AOA are the legal documents that along with the memorandum of association serves as the constitution of the company.

The articles of association can be considered as the user manual or the playbook for the company that comprises the methodology that can be used to accomplish the day to day operations. This document is a binding on the shareholders and the organization and has nothing to do with the outsiders.

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Cap Table

Definition by the book

A capitalisation table, also known as a cap table, is a spreadsheet or table that shows the equity capitalisation for a company. In general, the capitalisation table is an intricate breakdown of a company’s shareholders’ equity. It lists how much investors paid for them, and each investor's percentage of ownership in the company.

What it really means

A capitalisation (cap) table lists who owns what in a company. It lists the company’s co-owners and what percentage of the company they own.

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Co-investment

Definition by the book

An equity co-investment is a minority investment in a company made by investors alongside a private equity fund manager or venture capital firm. Equity co-investment enables investors to participate in potentially highly profitable investments without paying the usual fees charged by a private equity fund. They offer benefits to LPs in the form of increased capital for their funds and reduced risk while investors benefit by diversifying their portfolio and establishing relationships with senior private equity professionals.

What it really means

Co-investment typically means there is a main investor leading the round (investing around 20-30% of the round) and a few smaller private investors or other VC funds that join with a smaller percentage but with the same right and bringing different expertise, skills etc. As a simple analogy, you can think about it as hosting a dinner at your place and preparing the main dishes (lead investor) and invite the other guests to bring a side dish, dessert and wine (co-investors).

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Convertible Notes and Safe

Definition by the book

A convertible note is a form of short-term debt that converts into equity, typically in conjunction with a future financing round; in effect, the investor would be loaning money to a company and instead of a return in the form of principal plus interest, the investor would receive equity in the company.

What it really means

Essentially, it’s a loan to a business in exchange for the promise of converting the value of that loan into shares at a discounted price, once the business takes off.

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Crowdfunding

Definition by the book

Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. Crowdfunding makes use of the easy accessibility to vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together, with the potential to increase entrepreneurship by expanding the pool of investors beyond the traditional circle of owners, relatives and venture capitalists.

What it really means

Investment crowdfunding is a way to source money for a company by asking a large number of backers to each invest a relatively small amount in it. In return, backers receive equity shares of the company, rewards or repayment of a loan over time with interests.

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Data Room

Definition by the book

A virtual data room is a digital compilation of all due diligence documents for a company sale. Due diligence documents are required by a buyer after a letter of intent (LOI) has been signed but, prior to closing the transaction. Typically, buyers will send out a due diligence information request to the seller. The seller is then expected to compile the information over the next few weeks in a reviewable format. This information can all be compiled electronically and stored virtually, so the buyer's due diligence team can access from anywhere without having to physically review the documents.

What it really means

A data room is a digital folder containing important documents about a company. It’s usually made for investors or potential buyers, providing detailed company information and research on the potential investment opportunity. What’s typically found in a data room:

Pitch Deck
Term Sheet
Shareholder Agreement
Financial Projections (18-24 months)
Cap table (current and Pro-forma for the current funding round, if applicable)
Memorandum and articles of association or equivalent corporate charter documents
Historical consolidated financial statements (where relevant)

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Deal Flow

Definition by the book

Deal flow refers to the rate at which business proposals and investment pitches are being received by venture capitalists, angel investors and private equity investors.

Rather than a rigid quantitative measure, the rate of deal flow is somewhat qualitative. Deal flow often follows a cyclical pattern as trends unfold in social and economic environments.

What it really means

The number of investment opportunities available at a given time to a particular company or investor or within a particular region or market sector.

In brief, deal flow can be summed up as the funnel of investment opportunities that a company has.

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Dividend

Definition by the book

A dividend is the distribution of a portion of the company's earnings, decided and managed by the company’s board of directors, and paid to a class of its shareholders. Dividends can be issued as cash payments, shares of stock, or other property. A company’s net profits can be distributed to shareholders as dividends or kept within the company as retained earnings.

What it really means

Dividends are payments made by a company to owners of the company’s stock (investors/shareholders).They are a way for companies to distribute revenue back to investors, and one of the ways investors earn a return from investing in stock.

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Doughnut Economy

Definition by the book

The Doughnut, or Doughnut economics, is a visual framework for sustainable development – shaped like a doughnut or lifebelt – combining the concept of planetary boundaries with the complementary concept of social boundaries.

The diagram was developed by University of Oxford economist Kate Raworth in her 2012 Oxfam paper “A Safe and Just Space for Humanity” and elaborated upon in her 2017 book “Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist”.

The framework was proposed to assess the performance of an economy by the extent to which the needs of people are met without overshooting Earth's ecological ceiling. The main goal of the new model is to reframe economic problems and set new goals. In this model, an economy is considered prosperous when all twelve social foundations are met without overshooting any of the nine ecological ceilings. This situation is represented by the area between the two rings, considered by its creator as the safe and just space for humanity

What it really means

It's an economic theory which frames humanity’s primary challenge within the 21st-century as ensuring that every person has the resources they need to meet their human rights, while we collectively live within the ecological means of this one planet.

The Doughnut is a new way of thinking about sustainable economics, proposing that 21st-century economies can both be more sustainable and help regenerate the environment. Growth isn’t an infinite upward curve – we have to start asking ourselves what comes next.

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Due Diligence

Definition by the book

An investigation or audit of a potential investment to confirm all facts, such as reviewing all financial records, plus anything else deemed material. Due diligence refers to the care a reasonable person should take before entering into an agreement or a financial transaction with another party. When sellers perform a due diligence analysis on buyers, items that may be considered are the buyer’s ability to purchase, as well as other elements that would affect the acquired entity or the seller after the sale has been completed.

What it really means

Due diligence is detailed research made by the potential investor(s) or buyer to better understand a company they’d like to invest in. This in-depth analysis typically covers the technical, legal and financial grounds of a company.

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Equity

Definition by the book

Equity represents one’s percentage of ownership interest in a given company. For investors, this means the percentage of the company’s shares that an early-stage company is willing to sell to for a specific amount of money. As a company makes business progress, new investors are typically willing to pay a larger price per share in subsequent rounds of funding, as the company has already demonstrated its potential for success.

When a VC Fund or an investor(s) invests in a company, they are putting down capital in exchange for a portion of ownership in the company and rights to its potential future profits. By doing so, investors are forming a partnership with the company they choose to invest in – if the company turns a profit, investors make returns proportionate to their amount of equity in the start-up; if the company fails, the investors lose the money they’ve invested.

The formula to calculate equity is the value of Assets (i.e., the things it owns—whether land, machinery, cash, or intellectual property) less the amount of Liabilities (i.e., its debts).

What it really means

Equity is a fancy word for ownership. You can have equity in a home, equity in a company, or equity in anything else that has value. Stocks are called “equities” because a stock represents a portion of ownership in a company.

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Exit Strategy

Definition by the book

An exit strategy is a contingency plan that is executed by an investor, trader, venture capitalist, or business owner. It's done to liquidate a position in a financial asset or dispose of tangible business assets once predetermined criteria for either has been met or exceeded.

In the case of start-up businesses, entrepreneurs plan for a comprehensive exit strategy in case business operations don't meet predetermined milestones or if it's successful at making a substantial profit.

If cash flow draws down to a point where business operations are no longer sustainable and an external capital infusion is no longer feasible to maintain operations, a planned termination of operations and a liquidation of all assets are sometimes the best options to limit any further losses. If the company is succeeding or exceeding KPI, desirable ways to exit a business include initial public offerings (IPO), strategic acquisitions, and management buy-outs (MBO).

What it really means

A business exit strategy is a plan for what will happen when you (as a founder) leave your business. Just like you’ve written a business plan to guide your business throughout its life, you should have one that guides it to a conclusion.

Successful investment paybacks normally require an exit event. The exit is what gives them a return. The exit strategy in relation to start-up funding is what happens when investors, who had previously put money in a start-up, get money back, usually years later, for a lot more money than they initially spent.

Two popular and possible exit ways are:

The business gets acquired by a bigger company for enough money to give profit to the founders and a return to the investors (e.g. Nest acquired by Google in 2014 or Skype acquired by Microsoft in 2008)
The business grows and prospers enough to eventually register for selling shares of stock to the buying public over a public stock market, as it happened with Beyond Meat in 2019.

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General Partner (GP)

Definition by the book

A general partner is a member or partner in a general or limited partnership with unlimited personal liability for the profits and losses of the business. A general partner actively manages and exercises control over the company.

A general partner is one of two or more investors who jointly own a business and assume a day-to-day role in managing it, including shares in all assets, profits, and financial and legal liabilities of a jointly-owned business. In a general partnership, partners agree to unlimited liability, meaning liabilities are not capped and can be paid through the seizure of an owner's assets (confiscation of belongings).

What it really means

A general partner is the person/people who are personally responsible for the company. This person acts as managing director and representative of the company internally and externally, and therefore takes over the running of the company. The general partner shares the expenses and responsibilities of operating the business and shares in the profits if it's successful and loss if it's not successful. As a simple analogy, you can think about a general partner as the parent in the room responsible for his/her kid, while the limited partner can be an assisting caretaker or teacher.

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Impact Investment

Definition by the book

Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investing is a subgroup of socially responsible investing (SRI), but while the definition of socially responsible investing includes avoidance of harm, impact investing actively seeks to make a positive impact by investing.

The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.

What it really means

Making investments not solely with the intention to make more money, but to create a positive impact on people’s lives and/or the environment. Impact investments provide capital to companies aiming to solve social and/or environmental challenges.

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Initial Public Offering (IPO)

Definition by the book

An IPO refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors. Transitioning from a private to a public company can be an important time for private investors to fully realise gains from their investment as it typically includes share premiums for current private investors. Meanwhile, it also allows public investors to participate in the offering.

What it really means

An Initial Public Offering (IPO) is when shares of a company are first sold to the public, also referred to as “Going Public”.

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https://napkinfinance.com/napkin/ipo/

Intellectual Property (IP)

Definition by the book

Intellectual property (IP) refers to creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce. IP is protected in law by, for example, patents, copyright and trademarks, which enable people to earn recognition or financial benefit from what they invent or create. By striking the right balance between the interests of innovators and the wider public interest, the IP system aims to foster an environment in which creativity and innovation can flourish.

What it really means

Intellectual property is something that you create, such as a story, an invention, an artistic work, a product or a service. Intellectual property rights are the rights given to individual/s over these creations. They usually give the creator an exclusive right over the use of their creation for a certain period of time. Applying for IP rights to protect your idea can be critical if you want to build a business and establish your presence in a market.

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https://www.wipo.int/edocs/pubdocs/en/intproperty/450/wipo_pub_450.pdf

Liability

Definition by the book

A liability is something a person or company owes, usually a sum of money. Liabilities are settled over time through the transfer of economic benefits including money, goods, or services. In general, a liability is an obligation between one party and another not yet completed or paid for. Liabilities are legally binding obligations that are payable to another person or entity.

A liability is increased in the accounting records with a credit and decreased with a debit. A liability can be considered a source of funds since an amount owed to a third party is essentially borrowed cash that can then be used to support the asset base of a business.

Liabilities are incurred in order to fund the ongoing activities of a business. Examples of liabilities are accounts payable, accrued expenses, wages payable, and taxes payable. These obligations are eventually settled through the transfer of cash or other assets to the other party. Liabilities expected to be settled within one year are classified as current liabilities on the balance sheet. All other liabilities are classified as long-term liabilities.

What it really means

Liabilities are responsibilities you owe and obligations you have to pay to another party. For examples, personal liabilities can be a house's mortgage or car loans. Business liabilities are money that a company owes its creditors. Liabilities are a crucial part of every business because they are used to grow the business and help pay for expansion.

They can also make transactions between businesses more efficient. For example, in most cases, if a wine supplier sells a case of wine to a restaurant, it does not demand payment when it delivers the goods. Rather, it invoices the restaurant for the purchase to streamline the dropoff and make paying easier for the restaurant. The outstanding money that the restaurant owes to its wine supplier is considered a liability. In contrast, the wine supplier considers the money it is owed to be an asset.

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Limited Partners (LP)

Definition by the book

A limited partner is a part-owner of a company whose liability for the firm's debts cannot exceed the amount that an individual invested in the company. The limited partner invests money in exchange for shares in the partnership but, has restricted voting power on company business and no day-to-day involvement in the business.

Limited partnership by definition has at least one general partner and one limited partner.

What it really means

It's essentially the investor's investor. Usually, LPs will be angel investors, family offices, high net-worth individuals for the small funds as well as pension funds, larger corporates, or investment firms for larger funds. The LP invests money but, usually doesn't have any day to day operational tasks in running a VC firm.

Limited partners aren’t personally liable (responsible) for the business and their involvement is strictly monetary and limited to the money they decided to invest.

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Limited Partnership Agreement (LPA)

Definition by the book

The Limited Partnership Agreement is the key legal document used for private equity funds formed as limited partnerships.

The structure of private equity funds historically follows a similar framework that includes classes of fund partners, management fees, investment horizons, and other key factors laid out in a limited partnership agreement (LPA).

What it really means

When a fund raises money, institutional and individual investors agree to specific investment terms presented in a limited partnership agreement.

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https://www.investopedia.com/articles/investing/093015/understanding-private-equity-funds-structure.asp

https://www.bvca.co.uk/Policy/Tax-Legal-and-Regulatory/Industry-guidance-standardised-documents/Other/Limited-Partner-agreement

https://learn.marsdd.com/article/limited-partnership-agreement-sample-template/

Management Fee

Definition by the book

A management fee is a charge levied by an investment manager for managing an investment fund. The management fee is intended to compensate the managers for their time and expertise for selecting stocks and managing the portfolio. It can also include other items such as investor relations (IR) expenses and the administration costs of the fund.

The management fee is the cost of having your assets professionally managed. The fee compensates professional money managers to select securities for a fund’s portfolio and manage it based on the fund’s investment objective. Management fee structures vary from fund to fund, but they are typically based on a percentage of assets under management (AUM).

What it really means

It’s a fee that investors or other types of customers pay in percentage to one or more investment managers for selecting and handling their investments.

Management fees are the cost of having an investment fund professionally managed by an investment manager.

Most VC firms will charge a management fee ranging from 2% to 2.5% per year.

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https://www.investopedia.com/terms/m/managementfee.asp

https://smartasset.com/financial-advisor/management-fee

https://crowdmatrix.co/management-fees-and-carry-explained

Minimum Viable Product (MVP)

Definition by the book

An MVP is a version of a product with just enough features to satisfy early customers and provide feedback for future product development. Gathering insights from an MVP is often less expensive than developing a product with more features, which increases costs and risk if the product fails, for example, due to incorrect assumptions.

What it really means

An MVP is a prototype of a product/service that has the minimum functionalities to be able to present it to potential users/customers and receive feedback.

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https://thepathforward.io/dos-and-donts-of-building-your-mvp/

Non-Disclosure Agreement (NDA)

Definition by the book

A non-disclosure agreement is a legally binding contract that establishes a confidential relationship between two or more parties and protects the information they share from disclosure to outsiders. The party or parties signing the agreement agree that sensitive information they may obtain will not be made available to any others. Non-disclosure agreements are common for businesses entering into negotiations with other businesses.

What it really means

Also known as a confidentiality agreement, an NDA is a document between two or more parties to keep certain information private -- this can be for a period of time or permanently.

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https://www.rocketlawyer.com/article/nda-101:-what-is-a-non-disclosure-agreement.rl

Pitch Deck

Definition by the book

A pitch deck, pitch book or confidential information memorandum is a marketing presentation of the business used to raise capital. It's presented to investors and potential investors with the intent of providing them the information necessary for them to make a decision to move forward in the process of buying or investing in the business.

What it really means

A pitch deck is a brief presentation used to provide your audience and/or investors with an overview of your business. A pitch deck presentation usually consists of several slides that help you tell a compelling story about your business.

Here's a fun fact! Elevator pitch is a slang term used to describe a brief speech that outlines an idea for a product, service or project. The name comes from the notion that the speech should be delivered in the short time period it takes to ride an elevator, just a few minutes.

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Round

Definition by the book

The large majority of successful start-ups have engaged in many efforts to raise capital through rounds of external funding. These funding rounds provide outside investors the opportunity to invest cash in a growing company in exchange for equity, or partial ownership of that company. When you hear discussions of Series A, Series B, and Series C funding rounds, these terms are referring to this process of growing a business through outside investment.

What it really means

Any new company or venture raises money as they grow, this is typically done in stages such as pre-seed, seed and series (A, B, C, D and so forth), depending on the progress they’ve made in developing their product or service. Below you can find some information about each round and if you’re looking for specific funding opportunities, you can check our list here.

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Seed round: https://blog.ycombinator.com/how-to-raise-a-seed-round/
Series A: https://www.ycombinator.com/resources/series-a-guide

Runway

Definition by the book

A "cash runway" refers to the length of time in which a company will remain solvent, assuming that they are unable to raise further capital. You can calculate the runway by taking your beginning cash balance and dividing that value by your net burn rate (total operating expenses).

What it really means

A runway refers to how many months a company can keep the business running before it runs out of money. Usually, investors require a minimum of a 12-month runway.

Seed Round

Definition by the book

Seed funding is the first official equity funding stage. It typically represents the first formal capital that a business venture or enterprise raises.

Seed rounds are among the first rounds of funding a company receives, generally while the company is in an early stage and working to gain traction. Round sizes range between €50K–€2M, though larger seed rounds have become more common in recent years. A seed round typically comes after an angel round (if applicable) and before a company’s Series A round.

What it really means

Early-stage companies need to purchase equipment, rent offices, and hire staff. More importantly, they need to grow. In almost every case they will require outside capital to do these things.

The initial capital raised by a company is typically called “seed” capital. You can think of the "seed" funding as part of an analogy for planting a tree. This early financial support is ideally the "seed" which will help to grow the business into a "tree."

There are many potential investors in a seed funding situation: founders, friends, family, incubators, venture capital companies, crowdfunding or crowd equity campaigns and so-called "angel investors." You can have a look at our investors' list here.

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Shareholder

Definition by the book

A shareholder, also referred to as a stockholder, is a person, company, or institution that owns at least one share of a company’s stock, which is known as equity. Because shareholders are essentially owners in a company, they reap the benefits of a business’ success. These rewards come in the form of increased stock valuations, or as financial profits distributed as dividends. Conversely, when a company loses money, the share price invariably drops, which can cause shareholders to lose money, or suffer declines in their portfolios’ values.

What it really means

A person or a company who owns portions (shares) in a company and therefore gets part of the company's profits and/or losses.

Stock

Definition by the book

A stock (also known as equity) is a security that represents the ownership of a portion of a company. This entitles the owner of the stock to a proportion of the company's assets and profits equal to how much stock they own. Units of stock are called "shares." Companies typically sell stocks to raise funds to operate their businesses. There are two main types of stock: common and preferred.

Common stock, also known as ordinary stock, gives owners voting rights within a company. They also give their owners an economic interest in the company’s assets and profits, but in the case of the company being liquidated, common stockholders are only paid out after all creditors have been paid.

Preferred stock does not carry voting rights, but preferred stocks pay a fixed dividend, and in the case of a liquidation, holders are paid out before common stockholders.

What it really means

A stock represents partial ownership, or equity, in a company. Stocks are also known as equities and shares. When you buy stock, you are buying partial ownership of a company, including its material belongings, immaterial goods (assets) and profits. After the purchase, you become a “shareholder.” If the company is profitable and successful, the stock price usually goes up. On the other hand, if the company is struggling, the stock price usually goes down.

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Term Sheet

Definition by the book

A term sheet is a non-binding agreement setting forth the basic terms and conditions under which an investment will be made. It serves as a template to develop more detailed legally binding documents. Once the parties involved reach an agreement on the details laid out in the term sheet, a binding agreement or contract that conforms to the term sheet details is then drawn up.

What it really means

A term sheet is a document containing a list of conditions for a potential investment in a company. It typically includes the price the investor(s) will have to pay per share in the company; proposed timing, process and conditions to closing the deal with a subsequent shareholder agreement.

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Valuation

Definition by the book

Valuation refers to the process of determining the present value of a company or an asset. Analysts that want to place value on a company normally look at the management of the business, the prospective future earnings, the market value of the company’s assets, and its capital structure composition.

What it really means

A valuation is an estimate of how much a business, property or any asset is worth. Like the value of anything, a company’s value represents what someone is willing to pay for it or for a part of it. Sometimes a company’s valuation rests on elaborate number crunching, while in other cases it may rest on a negotiation between the company itself and an investor(s) taking on an ownership stake. There are many different ways to value a company, it entirely depends on the context. Here are a few methods:

Looking at profits or cash flow: You might estimate what your company’s profits will be for the next one, three or five years—and decide what those future profits are worth today.
Looking at assets and debts: Calculating everything the company owns and subtracting what it owes can give a rough estimate for a company’s value.
Benchmarking: Comparing with similar companies that have recently been acquired/went public/raised money can be a starting point for a particular company’s valuation.

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Venture Capital (VC)

Definition by the book

Venture capital is an investment firm that uses funds to invest in a new and/or growing business with a lot of potential. Since most new businesses fail, there’s a high risk of losing money. With venture capital, the venture capital firm gives funding to the start-up company in exchange for equity in the start-up. Venture capital is a form of private equity and a type of financing that investors provide to start-up companies and small businesses that are believed to have long-term growth potential. Though it can be risky for investors who put up funds, the potential for above-average returns is an attractive payoff.

What it really means

Venture capital provides money to businesses with strong growth potential. Venture capital invests in companies in exchange for ownership of the company, in other words, they use money to buy portions/shares of the company.

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