Ollie Flowers

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That Light Bulb Moment: Glossary

That Light Bulb Moment / 14 January 2021

 

To boost your start-up journey, build your confidence and equip you with some of the tools you need to work with your professional advisors, we have prepared a comprehensive Start-Up Jargon Buster Glossary and a list of commonly used acronyms.

Accelerator A programme which speeds up the learning cycle, helping founders learn from others’ successes and failures.
Accredited Investor Individual or business entity that can trade securities that may not be registered with financial authorities. They are entitled to this privileged access by satisfying at least one requirement regarding their income, net worth and asset size.
Advance Assurance You can ask HMRC if they agree that an investment would meet the S/EIS criteria. This is called advanced assurance. You can use this to show your potential investors that your proposed investment may qualify for S/EIS.
Advance Subscription Agreement An equity agreement whereby an investor pays subscription funds to the company for the issuance of shares to that investor at a later date and based on a company valuation determined on the date of issuance.
Angel Investors Usually, high net worth individuals who provide capital for start-ups, usually in exchange for convertible debt or ownership equity. Angel investors may form networks, such as the Cambridge Angels or Angels Den, for example.
Anti-dilution provisions Mechanisms by which shareholders’ economic ownership in the company is protected from dilution (upon the issuance of additional shares in the company) without the shareholders’ having to make a material new investment to maintain the same level of economic ownership.
Articles of Association The constitutional document of every company which governs the company’s internal arrangements, in particular with regards to internal management of the company, the division of power and control between shareholders and directors, and ownership of the company. A company can be incorporated with Model Articles of Association.
Bootstrapping Relying on your own funds without external investment.
Bridge Funding / Bridge Financing Short-term and temporary finance to bridge a period of time between needing funds and raising future funds.
Burn Rate The rate at which a start-up company uses up its venture capital to finance overheads before generating positive cashflow
Cap Table A table or spreadsheet showing the equity capitalisation for a company, including details of the founders, investors and employees’ equity holdings at each funding round.
Closed-end Private equity funds are closed-end funds, which means that the Private Equity fund has a defined lifespan. Private Equity firms have IRR targets and they can only achieve these by selling their shares, usually within 2 to 7 years following the investment.
Companies House UK’s registrar of companies. Limited Liability Partnerships (LLPs), private companies limited share shares and private companies limited by guarantee are incorporated and registered at Companies House and have various ongoing obligations to make specific filings at Companies House.
Convertible Loan Notes An instrument by which investors provide loans to companies which provide the option upon certain agreed terms or events to ‘convert’ the outstanding loan into shares in the company. CLNs are not compatible with SEIS and EIS tax reliefs.
Crowdfunding There are 4 main models of crowdfunding: equity crowdfunding (raising funds in return for equity/shares); debt crowdfunding (loans); reward crowdfunding (raising funds in return for a non-monetary reward); and donation crowdfunding (when people donate money to a specific cause). Crowdfunding is becoming an ever more popular platform enabling start-ups to raise capital fast via hundreds or thousands of investors.
Dilution The reduction in percentage ownership of the company that shareholders suffer due to the issuance of additional shares, such as in future funding rounds.
Elevator Pitch A pitch specifically designed to promote your business idea to an investor in about 60 seconds.
Equity Ownership interest in a company, usually in the form of shares or share options.
Exit Strategy A strategy for shareholders to exit from the company and see a return on the shares they have purchased. This will normally take the form of floatation or a sale of the company.
Family Office A privately held company that handles investment management for a wealthy family. Family offices do not, therefore, raise capital from outside investors, in the form of LPs or GPs, for example.  A Family Office many be a single-family office (SFO) or a multiple family office (MFO). It may also be an institutional office, or a small office investing only in funds, with no direct investing.
Fully diluted equity Fully diluted equity includes any outstanding convertible preferred stock, warrants and options, for example.
GP General Partners, which are private equity fund partners.
Incubator Collaborative programmes which are designed to offer a range of useful services and mentoring opportunities to start-ups. They typically provide office space and an entrepreneurial community for start-ups to grow.
Information Rights Rights granted by Founders to Investors to enable them to access and review or otherwise be provided with specified financial or other information.
Investor Director A director appointed by the investor to the board of directors of the start-up business.
Issued Share Capital The number of shares issued by a company and that is held by the company’s shareholders.
LP Limited Partnerships, being partnerships formed by two or more persons to carry on a business in common with a view of profit. An LP must have at least one general partner (who often has responsibility for managing the business of an LP) and a limited partner (who is required to contribute capital to the LP).
Liquidation preferences On the liquidation of a company, it is usual for there to be arrangements whereby certain investors or preferred shareholders/investors get their money back first, ahead of other shareholders or creditors. Such rights will be attached to preference shares, for example, and will be detailed in a company’s articles of association.
Member Another term for a Shareholder.
Nominal Value The nominal value of a share is an arbitrary price assigned to a share for balance sheet purposes when issuing shares. It can be seen on the company’s records at Companies House. The Nominal Value of a share will usually be 1p or £1.00. The nominal value of a share is not its market value.
Observer Someone who is entitled to attend and observe board meetings but who does not count towards the quorum or have a right to vote. This is a helpful way for small investors to stay up-to-date with board activities.
Option Pool A pool of reserved shares to be issued to employees in the future as a reward for their work, or otherwise to act as an incentive to stay in the business.
Par Value The Par Value of a share has the same meaning as the Nominal Value of a share.
Pitch Deck A brief presentation that provides investors with an overview of the business when seeking a round of financing.
Pivot A significant business change usually intended to help a business recover from a difficult period which rendered the original business model unsustainable.
Pre-money Valuation The value of the company prior to the funding round
Post-money Valuation The value of the company following completion of the funding round, including the money raised
Redemption Rights Rights to oblige the company to purchase specific shares (a “put”) and more infrequently the company’s right to force an investor to sell their shares to the company (a “call”).
Runway Amount of time that a start-up can operate before it runs out of cash and needs a further financing round.
Seed Funding This is the first official equity funding stage. It represents the initial capital that a business venture or enterprise raises, typically from the founder’s personal assets, family and friends. Seed Funding usually consists of series e.g. Series A funding round, Series B funding round and Series C funding round.
Series A/B/C/D These terms are referring to this process of growing a business through rounds of external private equity investment.
Share Option Grants the right to the option holder to purchase securities (usually ordinary shares) at an agreed exercise price over a specified future time period.
Sophisticated Investor An investor with the background and investment experience to make reasonable investment decisions about the company asking for investment. In the context of start-up financing, for legal purposes, whether someone qualifies as a “sophisticated investor” will be determined by reference to certain statutory tests.
Start-up Financing Provided to companies completing product development and for early marketing. Companies may be in the process of organising or may already be in business, but usually have not sold their product commercially.
Statutory Books / Statutory Registers Registers that must be held and maintained by a limited company, at the company’s registered office unless stated otherwise. They provide details relating to the company’s members, directors and share capital.
Subscribe/Subscription Investors make applications to subscribe for the shares in the company. These are referred to as Subscription Letters or Subscription Agreements.
Subscription Price The aggregate price paid to purchase new shares in a company.
Subordinated Debt A debt instrument that is subordinated to other amounts that have been lent by banks, or other institutions.
Sweat Equity Shares issued by a start-up to its employees or directors at a discount or for non-monetary consideration.
Term Sheet A preliminary document that details key terms of a proposed investment in a company key financial and legal terms.
Unicorn A Unicorn is a start-up which achieves a $/£1 billion valuation.
Unissued Share Capital Share in the company’s share capital that has been allotted (in other words, created) but not yet issued to any particular shareholder.
Valuation Cap A maximum cap on the value of the company, used in Advanced Subscription Agreements when developing a discount mechanism for investors.
Venture Capital Similar to Private Equity, but involving individuals.
Venture Capitalist A financial institution which specialises in providing equity and long-term capital to early-stage enterprises which have the potential to grow. In addition to providing funding, Venture Capitalists offer early-stage companies varying degrees of managerial and technical expertise, often with a seat on the board of directors.
Vesting Process of earning an asset (i.e. shares) over a specified period, or on the achievement of defined milestones. Start-ups often use vesting arrangements to encourage founders and employees to stay or perform well. It protects founders from each other and aligns incentives, so everybody focuses towards building a successful company.
Warrants Securities that give warrant holders the right (but not the obligation) to purchase shares in the company at a price for a specified period of time. Similar to share options (for non-employees) and often offered to investors as a bonus for cash investment or to service providers in exchange for fees.
Warranties Contractual statements were given by a ‘warrantor’. Investors will, to protect their investment, require founders to provide various Warranties in relation to the status of the company in which the investor is investing. To the extent that a Warranty is untrue or misleading, an investor can sue the warrantor for losses suffered as a result of the untrue or misleading warranty.

 

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This update is for general purposes and guidance only and does not constitute legal or professional advice. You should seek legal advice before relying on its content. For advice, get in touch with your usual Greenwoods GRM contact or scroll down to complete our enquiry form.

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