- Learn the Investor Lingo - www.PitchStreet.com
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
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
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
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
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
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
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
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
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
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.