Venture capital (VC) is a form of financing that is private and provided by investors, investment banks, or other financial institutions to startup companies and small businesses, particularly those with long-term growth potential. Often seen as the “engine of economic growth”, venture capital investors provide funds to early-stage companies or start-ups in exchange for equity or ownership stake. To help introduce you to the world of Venture Capital, we’ve compiled a list of some of the most common terms in this field. You can find part one of this blog here.
Common Venture Capital Terms & Concepts
Securities and Exchange Commission (SEC): The SEC is a federal government regulatory agency. It operates independently to protecting investors, securities markets, and capital formation.
Minimum viable product (MVP): The minimum viable product is a version of a product that has enough features to attract early customers for product development and feedback.
Burn rate: The burn rate is the rate at which an enterprise spends venture capital in excess of income.
Freedom to operate: The freedom to operate can be defined as the ability to make and sell a product without infringing on exiting third party rights.
Accredited investor: An accredited investor is an individual or business entity, one that may not be registered with financial authorities, that can trade securities by satisfying certain requirements regarding status or income.
Anti-dilution: An anti-dilution clause is a clause that allows investors to maintain the ownership shared regardless of new issued shared.
Types of Anti-Dilution Provisions:
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- Full Ratchet: A full ratchet provision is a clause that protects investors that own options or convertible securities, allowing the investors to convert at the lowest sale price offered.
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- Weighted average: The weighted average provision is conducted using a formula to determine the new conversion price.
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Cap table: Cap tables, or capitalization table, provide analysis of a company’s percentage of equity capitalization.
Clawback: A clawback is contractual clause used to force fraudulent executives to return due bonuses and pay.
Sources:
- https://hbr.org/1998/11/how-venture-capital-works
- https://medium.com/rbl1/100-venture-capital-terms-the-ultimate-vc-glossary-71a08b938b7a
- https://dictionary.cambridge.org/us/dictionary/english/clawback