Sunday, December 9, 2012

- Learn the Investor Lingo -

If you want an investor for your startup, you're going to want to learn their lingo. Here I have listed a few terms that is important to know, expecially when you're looking for investors on PitchStreet. 

Accredited investor- According to the Securities and Exchange Commission, Rule 501 of Regulation D, an accredited investor can be a bank, insurance company, charitable establishment, or person who has an individual or joint net worth that exceeds $1 million at the time in which an investment has been made. Individuals who are considered to be accredited investors should have a personal income of at least $200K in each of the two most recent years of investment or have a combined account with a spouse in excess of $300K in each of those years. They should also have the same expected income level in the current year. An accredited investor can also be an employee benefit plan or a trust that has assets exceeding $5 million.

Acquisition-  This is a corporate action whereby a company buys or "acquires" most, if not all, of another company to obtain control. This can also be called a "takeover" since a larger corporporation takes control by buying all of the assets or shares of a smaller company. They can be friendly, when there is an agreement between the two firms, or hostile, when there is not an agreement and the acquiring company needs to activly purchase larger stakes to have more control of the company.

Angel financing- This term refers to the amount of capital that independent, wealthy angel investors are able to “raise” or provide for a particular business investment. Angel investors who provide such financing are often not family members or friends of the business’ founders.

Angel investors- Investors that provide financial backing to startups and entrepreneurs. They are usually investing in the person, rather than the company. Their focus is to help the business succeed, rather than a large financial gain. Quite the opposite of Venture Capitalists. 

Assets- All financial resources that a corporation owns. Current assets can be any form of currency, including traded inventory, investments, and checks. Fixed assets (capital assets) consist of material goods and equipment of a company, such as the land by which the company sits on, the company building, and technological machinery. Intangible assets mainly comprise of intellectual property protection, copyrights, patents, etc.

Business plan- This is a legal document that includes a description of the company, its services and products, and how it plans to succeed its goals. Sometimes one is written for an established business that plans on moving into a new direction.

Capital (financial vs. real) - Financial capital is a term that can refer to the money exchanged between entrepreneurs and investors during a business deal. Entrepreneurs need to raise capital for their startups while investors can provide them with the needed capital (or funding). Financial capital usually comes with interest, and new business owners can use their financial capital in purchasing real capital (or machinery or equipment) for their new business.

Closing- This is the transaction that occurs after entrepreneurs and investors legally exchange all required legal documentation and capital that is needed in their business deal. When an investor “closes in on a deal,” they have already negotiated with the entrepreneur the details encompassing corporate ownership and monetary obligation.

Collateral- This word is used in the financial transaction between the lender and borrower. Often times, when entrepreneurs seek capital from a financial institution, they use their assets (personal belongings and material goods) as a “collateral” or security for their loan. Should the borrower default on payments, the lending institution has the legal authority confiscate those assets.

Common stock- This term represents a constituent in corporate ownership. People who own shares of common stock (common stockholders) often have voting rights in their company’s decision-making matters and executive board of elections. Through company dividends and capital appreciation of corporate assets, common stockholders can also share in their company’s financial success.

Convertible note (convertible debt or bond)- This term refers to a type of legal exchangeable security issued by many corporations. These notes or bonds can be given to investors in exchange for reduced interest rates. Investors, on the other hand, can choose to convert this bond into common preferred stock for a reduced amount of equity.

Corporation- This word can be used synonymously with “company,” “enterprise,” or “business establishment.”

Debenture (promissory note)- This designation is a legal document detailing the terms of repayment and interest that a borrower is responsible for. It also details the principal amount owed and the maturity date. For example, financial institutions can approve qualified applicants for loans. They send out debenture or promissory statements to borrowers as a reminder of their legal contract.

Debt- This is an amount of money that a borrower owes to an individual, investor, or lending institution. In the finance world, the word “debt” is often associated with interest payments.

Depreciation- A decrease in an asset's value, caused by unfavorable market conditions. Currency and real estate are two examples of asset's that can lose value.

Due diligence- This is the process whereby individuals or groups of people conduct independent investigations regarding a particular matter. In the business world, investors conduct timely due diligence when inquiring about prospective investment endeavors. This may entail a background search of the company’s founders, review of the entrepreneur’s credit scores, and routine follow-up with references and associates, etc. New business owners, on the other hand, are encouraged to also conduct due diligence when finding a potential investor. Through due diligence, both the investor and entrepreneur has the opportunity to diligently analyze and assess each other for the potential of an investment opportunity and partnership.

Early-stage company- This term generally refers to a young enterprise that is three years old or younger. During this phase, a company is still in its novel stages of development. They could be in the process of experimenting with new products or services that they intend to market in the near future and/or may have viable products that are already available to the public.

Elevator pitch- This term refers to an entrepreneur’s brief verbal summary of their business proposal. The name “elevator pitch” was designated because the entrepreneur’s oral presentation is often the duration of a quick elevator ride. During an elevator pitch, the entrepreneur concisely outlines their business proposal, marketing strategy, and competitive tactic to potential investors. Prospective business owners are strongly encouraged to polish this pitch, since it can mean the difference between raising desired capital and completely leaving their business ideas behind.

Equity- This designation is given to a stockholder’s ownership in a company. The amount of ownership is obtained when an individual or corporation purchases one or more shares of stock (equity shares). The more equity purchased, the greater the ownership.

Executive summary- This outline is a very important component of a company’s business plan. It concisely summarizes the proposed business idea(s) and the fundamental objectives of the company. Upon review, the investor(s) should have a precise understanding of the prospective company’s mission. The executive summary is the most informative part of a business plan for the investor(s) and plays an influential role in determining if the company is viable enough for investment.

Exit strategy- This is a company’s negotiated approach whereby investors are given an event or time within the development of their company to receive their return on investment (ROI). This can be achieved through a liquidity event, where their equity is converted into cash.

Expansion stage company- This term generally refers to a company that is three years old or more. During this period of development, a company may already have been successful commercializing many of their products and services but may not generate desired profit. An enterprise that is in its expansion stage may resort to seeking additional sources of capital to minimize the risk of failure. Many venture capitalists invest during this stage of a company’s development.

Follow-on investing (follow-up investing)- This word refers to the event whereby investors reinvest in a company sometime during its development. Often times, follow-on investments occur when a company is not performing successfully as planned. Angel capitalists tend to avoid follow-on investments within the same company because of the high risk of additional monetary loss.

Funding- This term is used synonymously with the words “financing” and “capital.” It refers to the amount of money that is needed for a business endeavor. For example, a new business owner may seek a certain amount of funding for their startup company. This “raised” capital can be used to launch their endeavor as well as to sustain their company until monetary profit can be generated.


Initial public offering (IPO)-This is a private corporation’s first-time sale or allocation of a stock that is made available to the public. IPOs can be distributed to both young and established companies who seek to expand or warrant public trading.

Later-stage company- This is a company that is considered to be in its mature stages of development. Unlike early and expansion-stage companies, later-stage companies already have successful commercialized products and services that are publically available as well as a significant generated cash flow. Many venture capitalists tend to invest in mature companies since they are less risky, are already established, have proven to be a financial success.

Leveraged buyout (LBO)- This is a type of aggressive business practice whereby investors or a larger corporation utilizes borrowed funds (junk bonds, traditional bank loans, etc.) or debt to finance its acquisition. The high debt-to-equity ratio enables the investors to “buyout” a smaller company with very little cash. Leveraged buy-outs can be either friendly or hostile, depending on the negotiations made.

Liquidation- This is an event that represents the complete or partial closing of a company. In a liquidation event, a company’s assets and material goods (securities) are converted into cash and/or distributed for sale to pay off existing corporate debt.

Liquidity event- This occasion represents the common exit strategy of most entrepreneurs and investors. When a corporation is purchased (through a merger or acquisition) or when an IPO is made, equity is converted to cash.

Market- Based on supply and demand, this term refers to the societal arrangement whereby consumers purchase goods and services from businesses and individual sellers in exchange for currency. In economic relevance, the “market” can be divided into different industries, such as biotechnology, food, etc. The exchange between the consumer and seller contribute to a society’s market economy which greatly depends on these transactions for economic viability.

Merger- This is a type of corporate approach whereby one company combines or “merges” with another to increase their overall operations and profitability. An example of this type of corporate strategy occurred in 2000 when America Online, Inc. merged with Time Warner to create AOL Time Warner.

Net income- This is the adjusted calculation of money that a company generates after deducting the necessary expenses from the total profit made. Essential costs, such as taxes and interest, are added together and then subtracted from the total revenue.


Portfolio company- This refers to the company(ies) that an investor has invested in.

Preferred stock- This is a type of corporate share where the holders can exercise more rights, preferences, and privileges than those with common stocks. It is often issued by private corporations or enterprises that have not gone public yet. Both angel investors and venture capitalists prefer to invest with preferred stock because of the superior rights and protective provisions associated with these shares.

Promissory note- This is a written, and dated document, signed by two parties containing an unconditional promise by the maker to pay a sum of money to the payee on demand or at a specified future date. The maker of the note pays the payee personally, rather than ordering a their party to do so.

Public company- Under SEC rules, a company that decides to go “public” offers their securities (stock, bonds, liabilities) to be sold in a registered public offering. Through the sale of such assets, a corporation can raise capital for their company, employees, or executive staff. These public offerings are often traded on a stock exchange.


Return on investment (ROI)-This term is also referred to as the rate on return (ROR) or rate of profit. It is the amount of money that is gained in a past or existing investment.

Risk- This word refers to the probability of loss on an investment. For example, venture capitalists tend to invest in later-staged companies because of its stability and established generated cash flow. Their investment is considered to be “less risky” than that of angel investors, who enjoy investing in early- stage enterprises with no proven establishment of success.

Seed money/seed capital- This is the initial set of capital for newly-formed or start-up companies. Angel investors are usually the primary source of seed capital for new businesses.

Seed stage/start-up stage- This is the initial phase of a company’s development whereby a prospective business is currently developing new products and services which have not been fully tested and introduced to the public. This company phase usually lasts an average of 18 -24 months before entering into its early stage of development.

Venture Capitalist- This is a a group of high-net worth investors who invest in later stage companies. Venture capitalists pool money from different sources for their investments.

Venture capital financing- This type of capital is obtained when a venture capitalist firm invests in a company. Based on the amount needed, venture capital financing can be anywhere from $500,000 to $5 million, must be in its later stages of development, and show excellent financial potential.

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