409A Valuation: An independent 3rd-party valuation of a company’s common stock. This is a mechanism used by startups to determine fair valuation. It may be used to set the exercise price for company stock options.
ACV: Annual contract value.
Accredited Investor: An individual or institutional investor that meets wealth, knowledge and sophistication criteria in order to invest in private companies. The specific definition and criteria is determined by regulators. In the US, this is referred to as the Securities Act of 1933 or Regulation D and may be found here.
Allocation: The size in dollar terms of investment in a company’s funding round that is set aside for a specific investor or entity.
Anchor investor: see Lead Investor.
Angel Investor: Accredited individual investors who invest their own capital into startups. Angels tend to be involved in the earliest stages of a company.
Anti-dilution: An investment provision- typically associated with preferred shares that allows investors to maintain their ownership percentage in the event that new shares are issued in subsequent funding rounds.
There are 2 types of anti-dilution clauses. See ‘weighted average (narrow-based or broad-based)‘anti-dilution’ and ‘full ratchet anti-dilution’.
AOV: Average Order Value.
ARPU: Average Revenue Per User.
ARR: Annual Recurring Revenue. This may be calculated by simply multiplying a company’s monthly recurring revenue by 12. Note that revenue is recurring only if it is earned each month, for example a monthly SaaS license. Investors should be diligent about this and remove one-off revenue from their evaluation.
Blended Preferences: This refers to when a company has multiple classes of preferred stock, all of which have equal liquidation preferences.
Bootstrapped: A bootstrapped company refers to one that has not yet raise significant external financing. This could be achieved through the Founders’ own efforts or own capital, or grants.
Bridge: An investment into a startup by investors that provides a company additional funding to reach its next round of financing. Also called a bridge loan. When companies fail despite a bridge, that may be called a ‘pier loan’
Burn: This is the amount of cash a company is consuming each month due to losses. It is typically based on monthly terms. Also called ‘burn rate’. Investors should carefully scrutinize the assumptions behind a company’s burn. Founders sometimes include growth assumptions which lower their burn rate.
Capital Call: An event whereby a fund or syndicate lead calls on investors to transfer capital which they have previously committed into an account for the purpose of making an investment into a company.
Cap Table: An official register showing the capital structure of a company. It details Founders, investors, advisors and employees ownership in the company. Note convertible notes and SAFE investments, and unvested shares do not appear on the cap table since they have not converted to equity. As such, be sure to review the fully diluted cap table which simulates shareholdings when all shares have been issued.
Carried Interest: Carried interest refers to the share of profits retained by a fund manager or syndicate lead as compensation. It can act as a performance incentive. This is typically 20% for VC funds. There is more variability in syndicates; some may take carry as low as 5 - 10% with 20% being the maximum. Also known as ‘carry’.
Clawback: A contractual clause sometimes included in employment contracts which requires certain monies already paid to be paid back under certain conditions. It may come into effect due to employee fraud or misconduct, a drop in company profits, or poor performance. It typically only applies to bonuses or performance incentives.
Cliff: Employee or advisor stock agreements often have a period over which shares vest over time. This may be accompanied by a ‘cliff’- a period in which none of the shares vest. It may be thought of as a probationary period. For example, an employee with 10,000 shares over 4 years with a monthly vesting schedule and a 1 year cliff would receive 2,500 share after their 1st year, then 208 shares a month for the next 3 years.
Co-sale Right: An investment clause giving minority shareholders the right to sell their shares alongside majority shareholders. This protects minority investors by giving them the ability to sell their stake. It also creates an incentive for majority investors to include minority shareholders in negotiations, ensuring co-sale rights are exercised. Also referred to as tag-along rights.
Come Along Right: An investment clause giving an investor the right to force other investors to sell their shares if certain investors (usually a majority) want to sell theirs. This clause serves to prevent a minority of investors from blocking a sale or transaction against the wishes of the majority. Also referred to as drag-along rights.
Conversion Rate: The number of shares that each preferred share is converted into common stock. Conversion of preferred shares into common shares typically occurs when a company is acquired. All shares would be converted into a single share class and afforded the same rights.
Common Stock: A type of equity which gives stockholders voting rights. It has a lower priority in terms of cash distributions behind preferred shares. This is most commonly issued to founders and employees.
Control Rights: Rights of an investor to dictate certain company actions. Venture investors which typically hold minority positions in companies and can be overruled by the board or majority rule. Control rights as a protective provision
Included within control rights are ‘negative control rights’ which may be used to block certain actions such as dissolution, sale or merger of the corporation, disposition of assets, amendments to a corporate charter, the creation or issuance of senior or pari passu securities, payment of dividends, and changing the number of directors.
Convertible Note: An investment vehicle that allows the lender to exchange the debt for stock at predetermined terms, instead of cash repayment. It may also be referred to as a convertible debenture or convertible debt.
Cutback Rights: Cutback rights refer to minimum proportions of shares that investors holding piggyback registration rights must be allowed to sell in a public offering. This clause exists to protect investors in cases where underwriters may deem there are too many shares to sell in the public offering which may adversely affect the price
Demand Rights: An investment clause giving investors the right to require a company to list its shares publicly enabling the investor to sell them. Once exercised, registration rights can force a private company to become a publicly-traded company. Also called ‘Demand Registration RIghts’.
Because a public listing is a lengthy and expensive process, demand rights come with certain restrictions. Investors are limited by the number of times they can exercise their demand rights. There is also a certain time after an investment event where demand rights may not be exercised.
Dilution: Dilution refers to reduced ownership in percentage terms of one’s shareholdings. Companies issue additional equity as they raise financing or set aside shares for employees and advisors. This increases the total number of shares, which in turn reduces the percentage ownership of each person already on the cap table. In general, the more capital a company raises, the greater the dilution effect and can have a substantial adverse impact on investors’ returns. This can be offset by valuation increases in subsequent financing rounds which increase the share price more than the dilution created.
Down Round: A fundraising round in which the company is valued at a lower per share price than previous rounds. This is a negative signal that the company is not performing as expected. Founders should be mindful of setting valuations that are too high at an early stage. Higher valuations affect returns and can deter future investors. Combined with insufficient growth, Founders may be forced to accept a down round to keep their company afloat.
Drag-Along Rights: An investment clause giving an investor the right to force other investors to sell their shares if certain investors (usually a majority) want to sell theirs. This clause serves to prevent a minority of investors from blocking a sale or transaction against the wishes of the majority. Also referred to as ‘come along rights’.
Due diligence (DD): The research process performed by prospective investors in order to arrive at an investment decision. There is a great deal of variability in the levels of DD performed by investors. In general, the earlier the company stage and the smaller the intended investment, the lower the diligence requirements.
Earnings before interest and taxes (EBIT): A measure of a company’s operating profits. EBIT may be used as a valuation metric for profitable companies.
Elevator pitch: A short form, often verbal explanation of a company. Typically this is made by a Founder to investors to engage them on on a longer discussion.
Employee Stock Ownership Program (ESOP): A pool of stock options set aside for current and future employees for incentive and retention reasons. ESOP is also used to compensate early employees for accepting lower salaries with a startup.
Exercise Price: This is the per share price paid for an employee or advisor to exercise options. In principle, exercise price should be set at fair market value at the date of issuance. Also called the ‘strike price’.
Exit Event: A transaction in which investors are able to sell all their shares, commonly through an acquisition or IPO. Also referred to as ‘Exit’ for short or a Liquidity Event.
Fair Market Value: The value of a company based on what investors are willing to pay. For private markets, this may be derived from comparables or recent transactions.
Friends and Family Round: Capital provided by the friends and family of an early-stage startup’s Founders. It is usually their first source of external capital. Sometimes abbreviated as ‘F&F’.
Full ratchet anti-dilution: The strongest form of anti-dilution protection that allows owners of preferred shares to convert into common shares at the lowest available price. The conversion ratio applied will be such that the investor receives common stock equal to the number of shares the investor would have received if they had purchased shares at the lowest future price at which the company sells stock. It is the most favorable to the shareholders, and consequently least favorable to the company. Also called a ratchet.
For example, an investor purchases preferred stock with a 1:1 conversion ratio to common shares at a $10 share price. The company later sells common shares at $1. Full ratchet anti-dilution would see each share of preferred stock convert into ten shares of common stock, even if only one share is sold at the lower price.
Fully Diluted: This refers to the total number of shares of Common Stock the company has issued, including those which would be issued if all outstanding options, warrants, convertible preferred stock and convertible debt were to be exercised or converted. This provides a more representative view of percentage ownership of a company of all securities if treated as common stock.
Fund of funds: An investment fund that invests in other private equity or venture capital funds. Fund of funds are Limited Partners of the funds they invest in.
Grandfather Rights: A grandfather clause (or grandfather policy) is a provision in which an old rule continues to apply to some existing situations while a new rule will apply to all future cases. Those exempt from the new rule are said to have grandfather rights or acquired rights, or to have been grandfathered in.
GP: Stands for General Partner. A GP is in charge of running a fund including fundraising, making investment decisions and updating LPs.
Gross Margin: Revenue minus cost of goods sold (COGS), divided by revenue. This gives a sense of profitability per unit of sales to cover expenses.
Gross Revenue Retention (GRR): A performance metric commonly used to measure growth. It is typically applied to SaaS or companies with recurring revenue. The formula is (Beginning ARR - Churn ARR ) / Beginning ARR.
GRR measures how much revenue loss due to churn from an existing set of customers during a specified period. The max GRR rate is 100%. The higher a company’s GRR to 100% indicates better customer retention.
GRR is also referred to as Gross Renewal Rate, Gross Retention, Gross Dollar Retention Rate, Gross MRR Retention Rate.
Growth Equity: Equity investments in late-stage private companies aimed at financing market expansion and revenue growth. Such investments typically target minority positions in market segment leaders.
K-1: The Schedule K-1 is an Internal Revenue Service (IRS) tax form issued annually for an investment in partnership interests. This document reports each partner’s share of the partnership’s earnings, losses, deductions, and credits.
Key man: An employee or executive deemed important and critical to the operation of a business, and whose death, absence, or disability may have a significant adverse effect on the operations.
Key man clause: A contractual clause in an investment fund that prohibits the fund manager or general partner from making key investments if one or more named key individuals fail to devote a specified amount of time to the partnership.
Key man risk: Key man risk refers to the risk to business operations if a critical employee is unable to be devoted to a business for a prolonged period for reasons such as illness or departure from the company.
Key man insurance: Life or disability insurance that a business takes out on core employees. The policy pays the business to help replace the death or disability or key persons.
Information Rights: An investment clause giving investors rights to minimum reporting requirements from the company. This can include periodic financial reports and other information as requested by investors.
Initial Public Offering (IPO): the process by which a private company first issues stock to the public.
Inside Round: A financing round where capital is provided entirely by existing investors.
Investment Syndicate: A group of investors organized for the purpose of aggregating capital in order to make a collective investment into a single company. Also referred to simply as a syndicate.
Letter of Intent (LOI): An agreement expressing a non-binding intention between two parties to achieve a defined goal. In investment terms, VC funds sign a LOI to a startup it has an interest to invest in. This precedes the issuance of a term sheet by a fund which sets investment terms and specifies requirements in order for the transaction to be completed successfully.
Lead investor: The investor setting investment terms and leading an investment into a company’s fundraising. They will take a substantive allocation in an investment round but not necessarily the largest. Also referred to as an Anchor investor.
Limited Partner (LP): LPs are investors in an investment vehicle such as a VC fund or investment syndicate. They are silent parties with limited rights in the vehicle. In a VC fund, LPs contribute 98 - 99% of the fund’s capital.
Liquidation: An event in which investors and/or debt holders receive cash from the company from an acquisition or a sale of assets resulting from bankruptcy. The order of payout prioritizes debt holder, followed by preferred shareholders and finally common stock.
Liquidation Preference: An investment clause which gives investors enhanced rights to recover their investment in the event of a company’s liquidation or bankruptcy. This gives investors protections on their investment in the downside scenario of a company.
Liquidation preference is defined in multiples with 1x original capital being included for preferred shares.
Liquidity: The ability of an asset such as shares to be easily bought and sold. Liquidity makes transacting of such assets easy and at lower cost.
Lock-up Period: A minimum period of time before which the holder of a specific security cannot transfer or sell said security.
Management Fee: Fees charged by a fund or syndicate from limited partners’ committed capital. This is typically 2% a year for venture capital funds. There is much more variability for syndicates which may not charge any fees up to 1 - 5% of committed capital upfront.
Milestone: An event marking a significant step in a startup’s progress. This can in the form of user numbers, paying customers or revenue.
MRR: Monthly Recurring Revenue.
Net Revenue Retention (NRR): A performance metric commonly used to measure growth. It is typically applied to SaaS or companies with recurring revenue. The formula is (Beginning ARR + Expansion ARR - Churn ARR ) / Beginning ARR.
NRR measures how much revenue from an existing set of customers grew during a specified period. An NRR rate > 100% indicates that customers increase spend over time leading to revenue expansion. Margins also tend to increase since there are no acquisition costs for existing customers.
‘No shop’ clause: A term sheet clause that prohibits a company from sharing investment terms and soliciting competing investment offers for a specified period of time. It takes effect once both parties have signed the term sheet.
Most Favored Nation (MFN) status: An investment right awarding investors the same rights and benefits received by future investors if more favorable. MFN protections exist to protect earlier investors from being disadvantaged by future investors.
Non-Participating Preferred Stock: A class of preferred shares typically sold to early investors that gives them the better of 2 key benefits. The first is a liquidation preference (defined in multiples on original capital. Usually 1x) whereby preferred shares receive cash distributions in a liquidity event before common stockholders. The second is the right to receive cash distributions alongside common shareholders. In other words, non-participating preferred shareholders receive the better of their original capital back first or a share of distributions alongside common shareholders.
This is contrasted with participating preferred shares which includes both benefits.
Option: A financial instrument giving the recipient the right but not an obligation to purchase a certain number of stock at a specified strike price within a defined period. This instrument acts similarly to a warrant but is issued to employees instead of investors..
Option Pool: Common Stock reserved for sale to employees, officers and directors. It serves to attract, incentivise and retain employees. The option pool is considered as outstanding shares when calculating company valuation.
Over-allotment Option: An option awarded to underwriters to list additional shares in a public listing (IPO or secondary offering). Underwriters may issue as much as 15% more shares than planned.
Over-allotment Right: An investment clause giving investors who have fully used their rights of first refusal to invest using the pro-rata of investors who have not exercised theirs.
Pari passu: A legal term that refers to equal treatment for two or more parties in an agreement meaning “on the same terms as”.
Participating Preferred Stock: A class of preferred shares typically sold to early investors that includes 2 key benefits. The first is a liquidation preference (defined in multiples on original capital. Usually 1x) whereby preferred shares receive cash distributions in a liquidity event before common stockholders. The second is that participating preferred shares have the right to distributions with common stock. In other words, participating preferred shares receive their original capital back first and are further entitled to a share of distributions as shareholders.
This is contrasted with non-participating preferred shares which includes the more favorable of either right.
Party Round: An investment round where capital comes from a larger number of smaller investors rather and having a large lead investor with fewer smaller ones. It may be negatively perceived because larger numbers of small investors tend to conduct less diligence and have less skin in the game.
Pay to Play clause: A term sheet clause requiring an investor to participate fully in future financings of an investment.
Full participation requires an investor to invest at least their full pro-rata in future fundraising rounds. Failing which, the investor’s rights will be reduced. This can include having preferred equity converted to common shares ot a loss of anti-dilution rights.
PEG ratio: A financial metric referring to a company’s Price/Earnings (PE) ratio divided by its growth rate. It reflects the tradeoff between share price, the earnings per share (EPS), and the company’s growth rate.
Piggyback Rights: An investment clause giving investors the right to have their shares included in a Demand registration. It ensures that the investor will be able to sell their shares in the company’s public listing.
Portfolio Company: A company into which, an individual investor, syndicate or investment fund has placed investment.
Post-Money SAFE: SAFE investment vehicles which convert into equity during a qualified equity financing on a post-money basis. Assuming the equity financing is above valuation cap and conversion is based on valuation cap (rather than discount), the post-money SAFE receives shares based on the below. (See this article for a deep dive into ‘Post-money SAFEs: Founder Dilution Risk’ and the 7 Ways Post-Money SAFEs affect Founders and Investors)
- SAFE shares % = SAFE investment $ / SAFE valuation cap
- SAFE shares issued = Existing shares / (1 - SAFE shares %) x SAFE shares %
Post-Money Valuation: A company’s valuation immediately following an investment of capital. This is calculated by adding the investment amount in a transaction to an agreed (pre-money) valuation. For example, An investment of $1MN into a company that is valued at $10MN is said to have a $10MN pre-money valuation or equivalently, $11MN post-money valuation.
PPM: A Private Placement Memorandum is a legal document provided to prospective investors when selling stock or another security in a business. Also referred to as an offering memorandum or offering document. PPMs are used in private transactions wherein securities are not registered under applicable federal or state law, but rather sold as exempt from registration. The PPM describes the company selling the securities, the terms of the offering, and risks.
Pre-Money SAFE: SAFE investment vehicles which convert into equity during a qualified equity financing on a pre-money basis. Assuming the equity financing is above valuation cap and conversion is based on valuation cap (rather than discount), the pre-money SAFE receives shares based on the below. (See this article for a deep dive into ‘Pre-money SAFEs and Dilution’)
- Share price = Valuation cap / # existing shares
- SAFE shares = SAFE investment $ / Share price
Pre-Money Valuation: A company’s valuation immediately prior to an investment of capital, whereas the company’s valuation immediately following the investment is referred to as the post-money valuation. For example, An investment of $1MN into a company that is valued at $10MN is said to have a $10MN pre-money valuation or equivalently, $11MN post-money valuation.
Preemptive Rights: An investment clause that grants an investor first rights to purchase a new shares of a company before they are offered to anyone else. Such rights may be also called ‘right of first refusal (ROFR) or ‘Right to Participate Pro Rata in Future Rounds”.
Preferred Stock: A class of shares with Liquidation Preference but without voting rights and typically sold to early investors. In the event of a merger or liquidation, preferred shareholders receive distributions of liquidity before common stock (typically held by Founders) but after company debt (liquidation preference). This share class offers early investors a level of protection over other shareholders.
It may also include other rights concerning dividends, anti-dilution clauses, and managerial voting power.
Private Placement: The direct sale of a security limited to qualified buyers including accredited investors or institutional investors. Private placements include proper controls and structuring that exempt the investment from disclosure and registration policies required by regulators such as the SEC in the US.
Pro-rata rights: An investment rights giving investors the right to participate in subsequent funding rounds to maintain their percentage ownership in the company.
Protective Provisions: Protective provisions are terms that allow preferred shareholders to veto or block specific corporate actions. Protective provisions serve to help protect the interests of minority shareholders in the event that various shareholders disagree regarding the best course of action for the company.
Common actions subject to protective provisions include a sale, merger or dissolution of the company, amendments to company charter or bylaws that may affect preferred shareholder rights e.g. change in the size of the board, changes to the amount of authorized common or preferred stock (other than by conversion), issuing new stock classes with equal or better rights than existing preferred stock, redeeming or purchasing stock, declaration of or the payment of dividends.
Qualified financing: An equity financing with a specified minimum capital raised defined in a convertible note which would result in the note being converted into the equity in that financing round. It could be a venture capital financing round or an IPO.
Qualified IPO: an initial public offering with a specified minimum raise and and price. A median definition might be $20 million gross proceeds and a price per share at least 3x the share price paid by the investor. Also called a qualified public offering.
A qualified IPO triggers the conversion of convertible securities into common equity prior to closing, and termination of investor stock transfer rights.
Ratchet: See ‘full ratchet anti-dilution
Redemption Rights: An investor right requiring the company to repurchase their shares after a specified period of time. They give investors the opportunity to exit their investment after a specified period if the company is not growing enough to IPO or become an acquisition target. Redemption rights are less commonly used and exercised.
Registration Rights: An investment clause giving investors the right to require a company to list its shares publicly enabling the investor to sell them. Once exercised, registration rights can force a private company to become a publicly-traded company.
There are 2 types of registration rights, Demand rights and Piggyback rights.
Revenue: Revenue is the amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise.
Revenue Multiple: A valuation metric used to value a company based on it’s revenue. Commonly used in early stage companies as they are not profitable yet, precluding traditional finance measures such as DCF.
Right of First Refusal: An investment clause giving existing investors first rights to purchase additional stock in future fundraisings at the same terms as other investors. Existing investors typically have the right to purchare new shares up to their current ownership percentage. This may be abbreviated as ‘ROFR’. Also called Preemptive Rights.
ROI: Stands for Return on Investment. A measure of profitability calculated as the investment payout as a percentage of the original investment.
Roll up: A roll up is a business model that creates value by acquiring smaller players in an industry or vertical, merging their revenues and increasing profits by rationalising operations and using economies of scale. This model is seen in PE and also in eCommerce or D2C brands.
RSU: Stands for Restricted Stock Units. A class of stock that have restrictions on their sale or transfer.
Revenue Run Rate: Or simply ‘run rate’ is the annualised revenue of a company if its latest revenue was extrapolated over a year. It provides a measure of how much revenue the company will earn in the next 12 months
Rule 506(b): A legal “safe harbour” that allows issuers of non-public stock to sell interests to accredited investors without having to register with the SEC. Under this provision, issuers cannot engage in “general solicitation”, such as advertising.
Runway: Runway refers to how much time- typically in months that a company has before running out of cash. Investors should carefully scrutinise the assumptions behind a company’s runway. Founders sometimes include growth assumptions which lower their burn rate and therefore prolongs runway.
SAFE: Short for “simple agreement for future equity” is a convertible investment vehicle developed by Y-Combinator as a simplified alternative to convertible notes. SAFEs function similarly as a convertible note but is not a debt instrument. SAFEs give investors the right to purchase stock in a future equity round (if/when one occurs) subject to defined parameters.
There are periodic changes to the SAFE, the latest being the adoption of post-money conversion in Q4 2021 which can have substantive impacts. This is explained in depth here.
Side Letter: Separate agreements between a fund or syndicate with individual investor that deviate from terms received by other investors. Side letters can be used to offer more favourable carried interest or management fees to specific investors.
Seed Round: A company’s earliest round of external fundraising, typically backed by angel investors. Early stage VC funds may also get involved.
Senior Liquidation Preference: An investment entitlement given to certain shareholders that provides a liquidation preference ahead of other shareholders. Also known as Stacked Preference.
Shareholder Agreement: A contract governs how the company will be operated and the shareholders’ obligation and rights. It often provides protection to minority shareholders.
Shareholder Limit: Established by Section 12(g) of the Exchange Act, requires that private companies register with the SEC, depending on certain criteria, including the type of shareholders and the total number of shareholders.
Shareholder of Record: The name of a shareholder as it exists on the registrar of the issuer.
Shares Outstanding: The total number of company shares held by all shareholders, including institutional investors and restricted shares owned by a company’s executives. This metric is used to calculate key metrics such as a company’s capitalizations, earnings and cash flow per share, and price per share in the conversion of convertibles.
Stock Option: A right to purchase shares at a specific price within a specified timeframe. Stock options are often used as long term incentive compensation for management and employees.
S-3 Registration Rights: An investor right requiring a company to file a short form registration statement using Form S-3. One or two S-3 Registration Rights typically permitted each year.
Syndicate: A group of investors for the purpose of aggregating capital in order to make a collective investment into a single company. Also referred to as an ‘investment syndicate’.
For investors, refer to this article ‘Why Syndicates Make Sense for Angel Investors’.
Tag-along Right: An investment clause giving minority shareholders the right to sell their shares alongside majority shareholders. This protects minority investors by giving them the ability to sell their stake. It also creates an incentive for majority investors to include minority shareholders in negotiations, ensuring tag-along rights are exercised. Also referred to as co-sale rights.
TTM: TTM stands for trailing twelve months. It refers to a company’s financial metric for the last 12 calendar months. Most commonly applied to revenue.
Term Sheet: An investment document negotiated between an investor and a company that sets out the proposed terms of an investment into said company. Once signed, it serves as an indication of intent to complete the transaction, contingent on meeting certain terms. Term sheets are non-binding. Once signed, the company is restricted from soliciting interest from other investors. Term sheets are typically in force for 30 days, and sometimes up to 60 days.
Transfer Restrictions: Contractually-specified limitations on an individual’s ability to sell or transfer their shares in the company.
Unicorn: A startup with a valuation of $1BN or more.
Visitation Rights: The right of investors to have a non-voting observers attend company Board of Director meetings. Also called ‘Observer Rights’.
Vesting: A period over which a recipient receives a benefit. Commonly refers to employee or advisor stock agreements which are received on a predetermined schedule. A market convention is a 4 year vesting schedule with a one-year cliff. This means that the recipient will receive 25% of the stocks after one year, with the balance vesting in equal monthly instalments over the following 36 months.
Warrant: A financial instrument giving the recipient the right but not an obligation to purchase a certain number of stock at a specified strike price within a defined period. This instrument acts similarly to a stock option but is issued to investors instead of employees.
Warrant Coverage: Warrants operate similarly to options but issued to external investors. Warrants are issued alongside a loan or investment to increase investor upside. They are most commonly used in bridge financings and are expressed as a percentage of the loan or investment principle with a specified strike or exercise price set at par value to an existing valuation. For example, a 20% warrant on a loan of $100,000 gives the investor the right to purchase up to $20,000 of share at a specified price.
Washout Round: A financing round where previous investors, founders and management suffer significant dilution. The new investor in a washout round will typically gain majority ownership and control of the company.
Weighted Average Anti-dilution: A form of anti-dilution protection that adjusts the conversion ratio of preferred shares into common shares based on a lower share price and the number of shares issued at a lower price. It is not a strong as a full-ratchet. It may be calculated as narrow- and broad-based anti-dilution.
Write-Off: A decrease in the value of an investment asset.
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