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Most Commonly Used Terms For Investors

A
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 the corporate tactic whereby a large enterprise
“acquires” or obtains control of another company. This term is often
used synonymously with the word “takeover” since a larger corporation
takes control by purchasing all of the shares or assets of the smaller company.
Takeovers can be either friendly or hostile, depending upon the corporate negotiations.
An example of an acquisition occurred in 1989 when Exxon acquired Mobil for $81
billion and formed ExxonMobil.

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– This group of people comprise of wealthy, accredited
individuals (as defined by the SEC- see “accredited investor”) who provide
necessary funding to business owners. While they are known to finance companies
in its “seed” stage, many angel investors are now investing in later-stage
enterprises. They are not related to nor are friends with their invested company’s
founders. Angel investors usually invest in businesses that need anywhere from a
few thousand dollars to up to $1 million or more, depending on the investor.

Assets- This word refers to 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.

B
Business plan-
This is a legal document that business owner’s
use in detailing their business idea(s) as well as their company’s overall
financial objectives. Many investors heavily rely on an entrepreneur’s business
plan when deciding to invest in a company; therefore, many prospective business
owners work diligently to refine their business plan in order to raise their desired
capital.

C
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.”

D
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. For example, when an individual has
a credit card limit of $5,000, the lender, usually a bank, is willing to lend the
credit card holder $5,000 of credit. If the lender uses $500 of that total amount,
they are now considered to be in $500 debt until the total amount is paid. Partial
payment of an owed amount always encompasses interest.

Depreciation- This term refers to the gradual loss in value of
currency, stocks, and material goods. For example, biotechnology can “depreciate”
over the course of 4 years.

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.

E
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. 

F
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.

G
H


I
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.

M
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.  

N
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.

O
P
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 term can also be referred to as a “note”
or debenture. It is a legal document that details the principal amount owed, interest
rates, and maturity dates. With this contract, the borrower promises to pay back
the lender according to the terms of agreement.

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.

Q
R
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. For example, angel investors tend to invest in startups
and early stage companies. Because such investment is considered to be risky, they
expect a large ROI to compensate for such risk.

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.

S
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.

T
U

V
Venture capitalist-
This word refers to a group of high-net worth investors
who invest in later stage companies. Unlike angel investors who use their own personal
money, 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.

W
X
Y
Z

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