Understanding Venture Capital Terms - what you need to know now
January 14, 2015
By Alan Repech
While I was enjoying my early morning wakeup elixir (lemon juice, honey, apple cider vinegar and cinnamon) I was thinking about all the jargon and terms used by the venture capital and investment community. "Bridge loan" came to mind - not sure why. Anyway. As entrepreneurs and founders, we're told time and time againnot to use jargon in our pitches and presentations. If we do, usage should be infrequent and serve a specific purpose in the discussion. Jargon should not be there to try to impress or even confuse the audience.
Then we started to build a list of terms. We discovered there are many of them. Some obvious ("startup") and some not so obvious ("weighted average anit-dilution"). We put the list up on our blog, "The First Two Chapters," and you can read the article here: Venture Capital Terminology. Bookmark and share if you find it valuable. Here are a few excerpts:
Anti-dilution protection: Provisions in typical preferred stock purchase agreements that protect the investor from dilution in the event of stock splits, stock dividends or sales of stock at a price lower than that the investor paid. See full ratchet anti-dilution and weighted average anti-dilution.
Capped notes: Refers to a “cap” placed on investor notes in a round of financing. Entrepreneurs and investors agree to place a cap on the valuation of the company where notes turn to equity. This means investors will own a certain percentage of a company relative to that cap when the company raises another round of funding. Uncapped rounds are generally more favorable to an entrepreneur/startup but are rare and often part of “Friends and Family Round” investing.
Weighted average anti-dilution: A form of anti-dilution protection in which a preferred investor’s stake in a company is adjusted for stock issued at a lower price by weighting the adjustment based on the amount of stock issued at the lower price. Unlike full ratchet anti-dilution, under which the sale of a single share of stock at a lower price allows the preferred investor to convert its entire position at the lower price, weighted average anti-dilution adjusts the conversion price based on a formula that takes into account the amount of stock sold at the lower price, thereby reducing the impact on common stockholders.
There is a lot of jargon out there even if we're not "supposed" to be using it. It's simply the language of the industry. Just like when you're in a foreign country and you don't speak the language, succeeded as a founder/entrepreneur is next to impossible if don't speak the language of venture finance.
About the author: Alan is a marketing strategist and investor based in San Francisco, California. You can follow him on LinkedIn here
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