Know These 10 Pieces of Lingo for Private Equity and Venture Capital

You can't just be a good modeling monkey to impress your bosses. Along with financial modeling skills, it is essential to be able to speak the language of the industry one wants to be successful in. Without the appropriate language, it would become increasingly difficult for people to do business in an industry. And it is the same with the PEVC industry as well. Some of the important terms which are necessary to know in the PEVC industry are given below:

1.Down Round: a round of financing whereby the valuation of the company is lower than the value determined by investors in an earlier round.

2.PIPE: PIPE is an acronym used for Private investment in public equities (PIPEs). It is used for investments by a private equity fund in a publicly traded company.

3.‘A’ Round: a financing event whereby venture capitalists become involved in a fast growth company that was previously financed by founders and/or angels.

4.Anti-dilution rights: a contract clause that protects an investor from a substantial reduction in percentage ownership in a company due to the issuance by the company of additional shares to other entities. The mechanism for making adjustments is called a ratchet.

5.Co-sale rights: the right that gives the investor a contractual right to sell some of the investor’s stock along with the founder’s stock if the founder elects to sell stock to a third party.

6.Key Man Provision: Key man provision is a clause in a venture capital of PE fund stating that, if a specified number of key named principals cease to devote a specified amount of time to the Partnership, then the “key man provision” provides that the manager of the fund is prohibited from making any further new investments until such a time that new replacement key executives are appointed, with the exception of investments that have been agreed to before the key man provision takes effect.

7.Registration Right: the rights of an investor in a startup regarding the registration of a portion of the startup’s shares for sale to the public. Piggyback rights give the shareholders the right to have their shares included in a registration. Demand rights give the shareholders the option to force management to register the company’s shares for a public offering. Often times registration rights are quite often negotiated among venture capitalists in multiple rounds of financing.
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8.Golden Handcuffs: A collection of financial incentives that are intended to encourage employees to remain with a company. They are a means to increase employee retention rates. Golden handcuffs work well when things are going well.

9.Rollup: the purchase of relatively smaller companies in a sector by a rapidly growing company in the same sector. The strategy is to create economies of scale.

10.Full ratchet: an anti-dilution protection mechanism whereby the price per share of the preferred stock of investor A is adjusted downward due to the issuance of new preferred shares to new investor B at a price lower than the price investor A originally received. Investor A’s preferred stock is repriced to match the price of investor B’s preferred stock. Usually as a result of the implementation of a ratchet, company management and employees who own a fixed amount of common shares suffer significant dilution.