This is a glossary of terms and deal slang used in the M&A business of the private capital markets and middle market transactions.¹ We have attempted to provide a comprehensive listing of terms generally used, as well as those referenced within this handbook.

10b‐5

An SEC rule that prohibits any act or omission resulting in fraud or intentional deceit (scienter) and relied on by the injured party in connection with the purchase or sale of a security. A 10b‐5 representation is a catchall representation in the merger agreement modeled from the SEC rule but without the scienter or reliance requirement, expanding the buyer's ability to claim breach of the agreement.²

add‐on 

See bolt‐on.

accelerated depreciation 

A depreciation method that yields higher depreciation in the early years and less in the later years.

accounts payable 

See payables.

accounts receivable 

See receivables.

accredited investor 

A person or legal entity, such as a company or trust fund, that meets certain net‐worth and income qualifications and is considered to be sufficiently sophisticated to make investment decisions in complex situations. Regulation D of the Securities Act of 1933 exempts accredited investors from protection under the Securities Act. Typical qualifications for a person are: $1 million net worth and the two most recent years of annual income equal to or exceeding $200,000 individually or $300,000 with a spouse, and the expectation of the same level of income for the current year; $5 million in assets for an entity.

adjusted working capital 

A method of calculating working capital where certain items are expressly included or excluded from current assets or current liabilities such as deferred tax assets (e.g., loss carryforward) or contingent liabilities (e.g., pending litigation).³

advisory board 

See board of advisors.

affiliated person 

An individual in a position to exert direct influence on the future activities of a corporation. Usually these persons include directors, senior corporate officers, members of the immediate family, and owners of 10% or more of the voting shares of stock.

alternative asset class 

A class of investments that includes private equity, real estate, and oil and gas, but excludes publicly traded securities. Pension plans, college endowments, and other relatively large institutional investors typically allocate a certain percentage of their investments to alternative assets with an objective to diversify their portfolios.

antidilution 

A contract clause that protects an investor from issuances of securities at a price below that paid by the investor; upon a sale at a lower price, the clause applies a formula to the investor's investment that increases the number of shares issuable to the investor. There are two basic antidilution provisions—weighted average and ratchet.

appraisal report 

A written report designed to arrive at a valuation of a property, equipment, or business.

appraisal rights 

The statutory right available in most states to a corporation's minority shareholders who object to a merger to have a fair price of their stock determined in a judicial proceeding and to require the corporation to repurchase their stock at that price. Appraisal rights are usually not available unless the shareholder meets certain requirements, such as voting against the merger or abstaining from voting.⁴

asset‐based lending (ABL) 

The traditional definition of asset‐based financing refers to a loan extended to a borrower in the form of a revolving credit facility or term loan. An asset‐based loan in the form of a revolving credit facility focuses on the level of current assets of a company. A loan amount is negotiated up front, and the amount of the loan that a lender funds will be a function of the levels of assets generated or held by the borrower. Typical revolving credit facilities apply a negotiated percentage to the level of accounts receivable and the level of inventory in order to determine the variable levels of borrowing capacity available to a borrower over the life of a loan.

bankruptcy 

Bankruptcy law provides for the development of a plan that allows debtors who are unable to pay their creditors to resolve the debts through the division of their assets among creditors. This supervised division also allows the interests of all creditors to be treated with some measure of equality. Certain bankruptcy proceedings allow debtors to stay in business and use revenue generated to resolve their debts. An additional purpose of bankruptcy law is to allow certain debtors to free themselves (to be discharged) of the financial obligations they have accumulated, after their assets are distributed, even if their debts have not been paid in full. There are two basic types of bankruptcy proceedings. A filing under chapter 7 is called liquidation, which is the most common type of bankruptcy proceeding. Liquidation involves the appointment of a trustee who collects the nonexempt property of the debtor, sells it, and distributes the proceeds to the creditors. Bankruptcy proceedings under chapters 11, 12, and 13 involve the rehabilitation of the debtor to allow them to use future earnings to pay off creditors.

basket 

The threshold claim amount that must be reached before the seller becomes liable for the buyer's losses. Typically, baskets function in one of two ways. Under a “deductible” basket, the seller is liable only for damages in excess of the threshold amount. If the agreement includes a “first dollar” or “tipping” basket, the seller is liable for all damages once the threshold amount has been reached.⁵

basis point 

The measure used for quoting yields on bonds and notes. A basis point is 0.01% of yield.

beta 

A product that is being tested by potential customers prior to being formally launched into the marketplace.

blue‐sky laws 

State regulations governing the sale of securities. These regulations provide investors with full and complete disclosures regarding contemplated investment opportunities.

board of advisors 

A group of individuals, typically composed of technical and industry experts, who provide guidance and feedback to the company's managers and board of directors. The board of advisors does not have a fiduciary responsibility and is usually established by the senior management and the board of directors.

board of directors 

A group of individuals, typically composed of managers, investors, and experts, who have a fiduciary responsibility for the well‐being and proper guidance of a corporation. The board is elected by the shareholders.

boat anchor 

In business, a person, project, or activity that hinders the growth of a company.

bolt‐on 

A smaller business acquired by a larger company; the term is often used in the context of an acquisition by a platform investment (company) of a private equity investor.

book 

See private placement memorandum (PPM) and confidential information memorandum (CIM).

boot 

Nonstock contribution in a merger or reorganization.

breakeven 

The level of revenue in a business in which sales minus variable costs minus fixed costs equals zero.

breakup fee 

The amount paid by a selling company to a potential buyer when the seller terminates an agreement in favor of a higher bid for the selling company.

bridge financing 

Temporary funding that will eventually be replaced by permanent capital from equity investors or debt lenders. In venture capital, a bridge is usually a short‐term note (6 to 12 months) that converts to preferred stock; in addition to receiving interest, a bridge lender receives warrant coverage to compensate the investor for taking an early risk in the company. Typically, the bridge lender has the right to convert the note to preferred stock at a price equal to the price of the preferred stock in the next financing round that meets minimum specified levels of funding. See Hamburger Helper bridge; wipeout bridge.

broad‐based weighted average ratchet 

A type of antidilution mechanism. A weighted average ratchet adjusts downward the price per share of the preferred stock of investor A due to the issuance of options, warrants, convertible securities, or shares to new investor B at a price lower than the price investor A originally paid. Investor A's preferred stock is repriced to a weighted average of investor A's price and investor B's price. A broad‐based weighted average antidilution formula uses all common stock outstanding on a fully diluted basis (including all convertible securities, warrants, and options) in the denominator of the formula for determining the new weighted average price. See narrow‐based weighted average antidilution.

burn rate 

The rate at which a company with little or no revenue uses cash to cover expenses, usually expressed on a monthly or weekly basis. The term is typically used in reference to start‐ups.

business development company (BDC) 

A publicly traded fund that invests in small private companies primarily using debt. See Chapter 2 for an additional explanation.

business structures 

Legal alternatives of business ownership.

• Corporation: An ownership structure that allows a number of individuals or companies to own shares of the capital investment in a business. A corporation is a stand‐alone legal entity, so it offers risk protection to its owners, managers, and investors from liability resulting from its actions, including bankruptcy. The invested moneys are at risk.
• C corporation: A designation for tax purposes but not relevant for structural purposes; with respect to taxation, there is no limit to the number of shareholders. Profit and loss remains on the C corporation books. Ownership is represented by the possession of common or preferred stock. The C corporation pays income taxes. Earnings are distributed to shareholders in the form of dividends. Dividends are taxable to the recipients when received. Income taxes on profits are paid twice: once by the corporation each fiscal year and a second time by the shareholders receiving distributions from the corporation.
• Partnership: A relationship between two or more persons who join to carry on a trade or business, with each person contributing money, property, labor, or skill and each expecting to share in the profits and losses of the business as reported in Form K‐1 for each partnership fiscal year. Earnings are taxed only once. Related glossary terms follow:
  • Family limited partnership (FLP): A holding company owned by two or more family members, created to retain a family's business interests, real estate, publicly traded and privately held securities, or other assets contributed by its members. The purpose of creating such an entity is generally to achieve creditor protection and reduce gift and estate taxes while maintaining control over the management and distribution of the partnership's assets.⁶
  • General partner (GP): A class of partner in a partnership. Each general partner retains liability for the actions of the partnership and is personally liable for partnership debts. In the private equity world, the GP is the fund manager while the limited partners (LPs) are the institutional and high‐net‐worth investors in the partnership. The GP earns a management fee and, after limited partners receive a return of their capital, a percentage of profits (see carried interest) typically based on an 80/20 split, where 80% is distributed to the limited partners.
  • Limited liability company (LLC): An ownership entity formed under state law and designed to limit the founders' and investors' losses to the amount of their investment. An LLC does not pay taxes; rather, its owners pay taxes on their proportion of the LLC profits at their individual tax rates. An LLC may be classified for federal income tax purposes as either a partnership or an entity disregarded as an entity separate from its owner by applying the IRS regulations, and as determined on IRS Form 8832, Entity Classification Election. LLCs may elect to be taxed as corporations.
  • Limited liability partnership (LLP): A legal entity formed under a state limited partnership law for professionals. Generally, a partner in an LLP is responsible for their own actions, but is not personally liable for the debts of the LLP or any other partner, nor is a partner liable for the acts or omissions of any other partner, solely by reason of being a partner.
  • Limited partner (LP): An investor in a limited partnership. The general partner is liable for the actions of the partnership while the limited partners are generally protected from legal actions and any losses beyond their original investment.
  • Limited partnership: A legal entity formed under a state's limited partnership law and composed of at least one general partner and one or more limited partners. The general partner manages the business or trade and is liable for the actions of the partnership while the limited partners are generally protected from legal actions and any losses beyond their investment. The general partner receives a management fee and a percentage of profits (see carried interest), while the limited partners receive income, capital gains, and tax benefits.
• S corporation: A tax designation that is not relevant for structural purposes; with respect to taxation, an ownership structure that limits its number of shareholders to 100. An S corporation does not pay income taxes; rather, its owners pay income taxes on their proportion of the corporation's profits allocated to them on their K‐1 tax form for each fiscal year. Taxes are paid on income allocated to shareholders whether or not the income is actually distributed to them. Losses are also passed to shareholders as reported on Form K‐1. Losses can be deducted from shareholder taxable income under certain IRS rules. S corporation earnings are taxed only one time because earnings pass through to the investors.
• Sole proprietorship (SP): An unincorporated business owned and controlled by one person under their name or doing business as (DBA) a name other than theirs. Many successful SPs start as garage operations and are subsequently converted into entities such as corporations or LLCs.

buy‐n‐build

A strategy to acquire a platform company and then add‐on or bolt‐on additional businesses to scale and grow.

buyout firm 

An entity in the private equity industry that purchases a controlling interest in a company (as in a leveraged buyout), in many cases accompanied by a management team (as in a management buyout).

buy‐sell agreement 

A contract that sets forth the conditions under which shareholders must first offer their shares for sale to the other shareholders before being allowed to sell to entities outside the company.

C corporation 

See business structures.

cap 

The maximum recovery a buyer may obtain for indemnification claims. Many agreements include separate caps for different types of breaches.⁷

CapEx 

See capital expenditure.

capital acquisition brokers (CABs) 

Firms that engage in a limited range of activities, including advising companies and private equity funds on capital raising and corporate restructuring, and acting as placement agents for sales of unregistered securities to institutional investors under limited conditions.⁸

capital asset pricing model (CAPM) 

Used to determine the required rate of return for stocks.

capital call 

When a general partner requests that an investor in a partnership or LLC provide additional capital. Usually an investor will agree to a maximum investment amount and the general partner will make a series of capital calls over time to the investor as opportunities arise to finance the capital requirements of targeted companies.

capital charge 

The product of the cost of capital times the amount of capital used by a particular company or business unit. Typically referred to in the calculation of economic profits versus operating profits.

capital efficiency (leverage alliances) 

The concept of efficient deployment of capital by venture capitalists. Best practices include offshore development and understanding the sales and distribution model for a start‐up business before ramping operations; hire two to four people to experiment and test the market, then ramp.

capital expenditure (CAPEX or CapEx) 

The investment of funds in fixed or capital assets of a company. Among other things, this can include software, office equipment, buildings, land, factory, and equipment.

capital gains (losses) 

A tax classification of investment earnings (losses) resulting from the purchase and sale of assets. Typically, an investor prefers that investment earnings be classified as long‐term capital gains (held for a year or longer), which are taxed at a lower rate than ordinary income.

capital stock 

Stock authorized by a company's charter and having par value, stated value, or no par value. Capital stock includes common stock and preferred stock.

capitalization table (cap table) 

A table showing the owners of a company's shares and their ownership percentages. It also lists the forms of ownership, such as common stock, preferred stock, warrants, and options.

capped participating preferred 

Preferred stock whose participating feature is limited so that an investor cannot receive more than a specified amount without converting to common stock. See participating preferred stock.

carried interest 

A share in the profits of a private equity fund. Typically, a fund must return the capital given to it by limited partners before the general partner can share in the profits of the fund. The general partner will then receive a 20% carried interest, although some successful firms receive 25 to 30%. Also known as carry or promote.

cash cow 

One of the four categories (quadrants) in the Boston Consulting Group's growth‐share matrix. Cash cows fund their own growth, pay the corporate dividend, pay the corporate overhead, pay the corporate interest charges, supply the funds for R&D, and supply the investment resources for other products. They justify the debt capacity for the whole company, so protect them. By definition, a cash cow has a return on assets that exceeds the growth rate. Only if that is true will it generate more cash than it uses. This requires a high return and slow growth if the cash generation is to be high. Almost invariably the cash cow has a high market share relative to the next two or three competitors.

cash flow 

The amount of cash generated from operations. This amount may be negative. Generally considered the amount of cash available to stockholders and long‐term lenders of the corporation. There are several calculations that serve as a proxy for cash flow: net operating profit less adjusted taxes (NOPLAT), earnings before interest and taxes (EBIT), or earnings before interest, taxes, depreciation, and amortization (EBITDA).

cash‐free, debt‐free 

A concept in M&A transactions whereby the cash (and cash equivalents) and the funded debt of the target remains with the seller of the business.

catch‐up 

A clause in the agreement between the general partner and the limited partners of a private equity fund. Once the limited partners have received a certain portion of their expected return, the general partner can then receive a majority of profits until the previously agreed‐on profit split is reached.

CF(q) (corporate finance qualification) 

A UK‐based credential granted by the Institute of Chartered Accountants in England and Wales (ICAEW) in partnership with the Chartered Institute for Securities and Investments (CISI) confirming expertise and experience in corporate finance. Also see corporate finance.

change of control 

A merger, consolidation, or acquisition involving all or substantially all of the assets of an entity. Changes in control often trigger acceleration provisions (e.g., vesting of equity compensation paid to officers or other employees or with respect to earnouts).⁹

change of control bonus 

A bonus of cash or stock given to members of a management group upon successful completion of the sale of a company.

charitable remainder trust (CRT) 

A giving vehicle, typically used as part of a tax‐saving strategy, whereby an appreciated asset, such as a business, is transferred into an irrevocable trust.

clawback 

A clause in an agreement between the buyer and seller or an investor and a company. The clawback gives one party the right to reclaim a portion of the investment or purchase price from the other in the case of certain negative events or failure to perform.

closing 

The conclusion of a transaction whereby all necessary legal documents are signed.

CM&AA 

The Certified Merger & Acquisition Advisor (CM&AA) designation is awarded by the Alliance of Merger & Acquisition Advisors and their academic partners (Loyola University Chicago, DePaul University, University of Maryland, and Pepperdine University) to professionals who evidence mastery of the M&A body of knowledge and a commitment to staying abreast of new developments in the field of investment banking and mergers and acquisitions. It also recognizes professional achievement and competence, serves as a tool to both attract and serve new clients, provides identification with other professionals in the field, and potentially stimulates career advancement.
CM&AA professionals are accredited experts in one or more professional fields (e.g., CPA, accountant, lawyer, corporate finance, valuation expert, CFA, or MBA with Wall Street–type investment banking experience) and understand the overall investment banking process for selling and buying middle market companies.

collateral 

Assets of the borrower, such as real estate, accounts receivable, or equipment, for which a lender has an equitable interest until a loan obligation is fully paid.

comfort letter 

A nonbinding indication of interest by an investor or lender in a potential transaction.

commercial bank 

Widely known as a source of debt financing for businesses. Commercial banks generally provide lines of credit, term loans, and revolving loans. Traditionally, commercial banks are cash‐flow lenders and view collateral as a secondary source of repayment; from experience, bankers' actions do not always evidence this thinking. Focus is placed on lending to borrowers who have durable and predictable cash flows. To assure liquidity and stability for the public, banks are highly regulated by states, by the Federal Deposit Insurance Corporation (FDIC), and by the operating cash cycle (OCC).

commitment 

An obligation, typically the maximum amount that an investor or lender agrees to invest in a fund or loan to a company.

common stock 

A type of security representing ownership rights in a company. Usually, company founders, management, and employees own common stock whereas investors own preferred stock. In the event of a company's liquidation, the claims of secured and unsecured creditors, bondholders, and preferred stockholders take precedence over those of common stockholders. See preferred stock.

comparable 

A publicly traded company with similar characteristics to a private company that is being valued. For example, a telecommunications equipment manufacturer whose market value is two times revenues can be used to estimate the value of a similar and relatively new company with a new product in the same industry. See liquidity discount.

confidential information memorandum (CIM) 

A document or presentation that describes a target company for a transaction. It generally describes the target's business, products/services, market, strategy, financial performance, and transaction objectives. The CIM is similar to a private placement memorandum, but is not specifically used for securities transactions.

consequential damages 

Damages that are not a direct result of an act, but a consequence of the initial act. To be awarded consequential damages, it typically must be shown that the damages were a foreseeable result of the initial act.¹⁰

consolidation 

See rollup.

contingent value rights (CVRs) 

Provide the holder with the right to sell a share of stock in the underlying company at a fixed price during the life of the right.

contribution margin 

Selling price minus variable cost. For a business operating above breakeven, the contribution margin from incremental sales becomes operating profit.

control 

The authority of an individual or entity that owns more than 50% of equity in a company or owns the largest block of shares compared to other shareholders.

convergence 

The Financial Accounting Standards Board (FASB) is working with the International Accounting Standards Board (IASB) to converge their respective accounting standards into a set of rules that will meet the needs of preparers and users of financial statements and other accounting information in all global constituencies.

conversion 

The right of an investor or lender to force a company to replace the investor's preferred shares or the lender's debt with common shares at a preset conversion ratio. A conversion feature was first used in railroad bonds in the 1800s.

convertible debt 

A loan that allows the lender to exchange the debt for common shares in a company at a preset conversion ratio.

convertible preferred stock 

A type of stock that gives an owner the right to convert to common shares of stock. Preferred stock is granted certain rights not normally granted to the holders of common stock, such as decision‐making management control, a guaranteed return on investment, or senior priority in receiving proceeds from a sale or liquidation of the company. Convertible preferred is the most common tool for private equity funds to invest in companies.

convertible security 

A security that gives its owner the right to exchange the security for common shares in a company at a preset conversion ratio. The security is typically preferred stock or debt.

corporate charter 

The document prepared when a corporation is formed. The charter sets forth the objectives and goals of the corporation, as well as a general statement of what the corporation can and cannot do while pursuing these goals.

corporate finance 

Addresses the capital structure of a corporation, including its funding and the actions that management takes to increase the value of the business. Corporate finance also includes the tools and analysis utilized to prioritize and distribute financial resources. The ultimate purpose of corporate finance is to maximize the value of a business through planning and implementation of resources, while balancing risk and profitability.¹¹

corporate liquidation 

The various regulated processes to close down an insolvent company.

corporate resolution 

A document stating that the corporation's board of directors has taken a specified action, such as authorizing management to act on behalf of the corporation.

corporate venturing 

Venture capital provided by in‐house investment funds of large corporations to further their own strategic interests.

corporation 

See business structures.

cost of capital 

Actual or implied interest rate for the use of money or assets of a company.

cost of goods sold (COGS) 

Same as cost of sales.

cost of revenue 

Same as cost of goods sold, although the term usually refers to costs incurred to generate service revenues versus those of product revenues. Cost of revenue and cost of goods sold are usually comprised of direct and indirect costs. Direct costs are those that are attributed directly and proportionally to creating the product or service (i.e., materials and labor). Indirect costs are those expenses that are attributed to creating the product or service but are general in nature and not easily allocated on a per‐unit basis (i.e., engineering support costs and facilities costs related to producing the product or service).

cost of sales (COS) 

The burdened expenses incurred to generate the revenue of a company; includes direct and indirect costs.

covenant 

A legal promise to do or not do a certain thing. For example, in a financing arrangement, company management may agree to a negative covenant whereby it promises not to incur additional debt. The penalties for violation of a covenant may vary from repairing the mistake to losing control of the company. In a merger agreement, covenants may require the parties to take actions both before and after the closing.¹²

crowdfunding 

Generally, the use of the Internet by small businesses to raise capital through limited investments from a large number of investors.¹³

cumulative dividends 

The owner of preferred stock with cumulative dividends has the right to receive accrued (previously unpaid) dividends in full before dividends are paid to any other classes of stock.

current ratio 

The ratio of current assets to current liabilities. A ratio of less than 1 indicates negative working capital. The current ratio is used to measure liquidity.

data room 

A central location for due diligence materials provided by a company to all potential purchasers or investors in connection with an acquisition or investment. Most data rooms are now electronic storage locations, also referred to as virtual data rooms.

days sales outstanding (DSO) 

The average period, in days, in which a company's accounts receivable remain due from the customer.

deal fatigue 

Weariness from the stress, anxiety, and emotional volatility of working through a transaction process, particularly the emotional fatigue felt by the individual seller(s) of a privately held company.

deal flow 

A measure of the number of potential investments or transactions that a fund, lender, advisor, or buyer reviews in any given period.

debt‐for‐equity swaps 

A voluntary exchange of outstanding debt for equity of equal market value.

debt service 

The ratio of a loan payment amount to available cash flow earned during a specific period. Typically, lenders insist that a company maintain a certain debt service ratio or else risk penalties such as having to pay off the loan immediately.

debt‐to‐equity (D/E) ratio 

Total liabilities divided by total equity of the entity as shown in its balance sheet. The D/E ratio measures the entity's leverage level. A debt‐to‐equity ratio of 1 indicates that the entity's total liabilities equal the equity dollar amount.

default 

A company's failure to comply with the terms and conditions of a financing arrangement.

definitive agreement 

The final, fully negotiated agreement between parties, containing all material terms, conditions, and agreements relating to the subject matter of the transaction in question.

deficiency guaranty 

A guarantee limited in amount to the deficiency suffered by the creditor in the event of default on a loan or debt, usually covering the first loss by the lender. A limited deficiency guaranty will contain a maximum or limit of exposure for the guarantor.

demand right 

A type of registration right. Demand rights give an investor the right to force a company to register its shares with the SEC.

dilution 

The reduction in the ownership percentage of current investors, founders, and employees caused by the issuance of new shares to new investors.

dilution protection 

See antidilution; ratchet.

direct costs 

See cost of revenue.

disbursement 

An investment by a fund in a company.

discounted cash flow (DCF) 

Calculation of the present value of a stream of forecasted cash flow discounted using an interest rate appropriate to the risk of the venture creating the cash flow.

discounted free cash flow (DFCF) 

An equity valuation method in which a discount percentage is applied to a stream of forecasted free cash flows, where free cash flow is defined as net operating cash flow increased by net debt issuances and decreased by net investment.

discount rate 

The interest rate used to determine the present value of a series of future cash flows.

distribution 

The transfer of cash or securities to a limited partner resulting from the sale, liquidation, or IPO of one or more portfolio companies in which a general partner chose to invest.

divestiture 

The sale of a company or the business unit of a company.

dividends 

Payments made by a company to the owners of its securities out of earnings of the company based solely on the amount of securities owned.

dividend yield 

The dollar dividend per share divided by the current price per share.

domain expertise 

Intelligence of an investor, partner, or potential employee in the specific business or industry occupied by a company.

donor advised fund 

Generally, a donor advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.

double taxation 

The same income being taxed twice, once at the entity level and once at the individual level. Thus, dividends, which are paid out of after‐tax corporate profits, are double‐taxed when individuals have to pay taxes on them as well.

down round 

A round of financing whereby the valuation of the company is lower than the value determined by investors in an earlier round.

drag‐along rights 

The contractual right of an investor in a company to force all other investors to agree to a specific action, such as the sale of the company.

due diligence 

The investigatory process performed when considering a transaction with a third party to evaluate the business and finances of a company. In M&A, traditional or technical due diligence focuses on financial information, taxes, legal and regulatory compliance, environmental compliance, human resources, contracts, information technology, and so on. Strategic due diligence explores whether the potential of the deal is realistic by testing the rationale.

earnout 

An agreement in the sale of a company where the buyer agrees to pay the seller consideration in the future (typically cash or stock) based on certain future events, milestones, or performance of the business postclose.

earnings before interest and taxes (EBIT) 

A measurement of the operating profit of a company. One possible valuation methodology is based on a comparison of private and public companies' value as a multiple of EBIT.

earnings before interest, taxes, depreciation, and amortization (EBITDA) 

A measurement of the cash flow of a company. One possible valuation methodology is based on a comparison of private and public companies' value as a multiple of EBITDA less funded debt. Only income‐related taxes are used in the calculation of EBITDA (as opposed to sales, use, or payroll taxes).

EBITDAC 

The same as EBITDA, plus adjustments for the impact of Covid‐19 and the economic shutdown of 2020.

economic profit 

The difference between the amount of money received in connection with the sale of a good or service and the cost of goods or services sold analyzed on the basis of their opportunity cost. Also defined as EBIT minus a charge for the cost of capital deployed to generate the EBIT.

elevator pitch 

A concise presentation, lasting only a few minutes (an elevator ride), by an entrepreneur to a potential investor about an investment opportunity.

emerging growth company 

A growth company with revenues from $1 million to $10 million.

employee stock ownership program (ESOP) 

An equity plan established by a company that permits the grant of company stock options as long‐term incentive compensation for employees.

employment agreement 

The traditional document used in relationships between employees and employers for the purpose of establishing the rights, responsibilities, and obligations of both parties during the employment period.

equity 

The ownership structure of a company represented by common shares, preferred shares, or unit interests: Equity = Assets – Liabilities.

escrow 

A portion of the consideration that is deposited with a neutral third party (in the case of an escrow) or withheld by the buyer (in the case of a holdback) to be applied toward potential future indemnification claims by the buyer. After a specified period of time (the survival period) any consideration remaining in the escrow or holdback account is released to the selling shareholders.¹⁴

evergreen fund 

A fund that reinvests its profits in order to ensure the availability of capital for future investments.

exit alternative 

The options or alternatives that the owners of a business may have to create liquidity (or monetize) from their investment in the business. See exit strategy.

exit strategy 

The plan for generating profits for owners and investors of a company. Typically, exit strategies include mergers and acquisitions, recapitalizations, ESOPs, and initial public offerings (IPOs).

expansion stage 

The stage of a company characterized by a complete management team and a substantial increase in revenues.

factoring 

The selling of a company's accounts receivable, at a discount, to a third party who either then assumes the credit risk of the account debtors, known as nonrecourse factoring, or assumes no credit risk, known as recourse factoring, and receives cash as the company's customers pay their accounts.

fairness hearing 

The hearing conducted by a state agency in connection with a proposed business combination, merger, or acquisition that results in the issuer of securities receiving a transactional exemption from registration of the securities, and the target shareholders, other than affiliates of the resulting company, receiving freely tradable shares.

fairness opinion 

A letter issued by an investment bank to assess the fairness of a transaction such as the negotiated price for a merger or an acquisition.

Financial Accounting Standards Board (FASB) 

The private‐sector organization empowered to establish financial accounting and reporting standards. Although this function legally resides with the Securities and Exchange Commission for public companies, the SEC has traditionally provided the private sector with the opportunity for self‐regulation. Since 1973, the SEC has relied on the FASB for standard setting. The FASB operates under the oversight of the Financial Accounting Foundation, which is responsible for funding the activities of both the FASB and its counterpart for state and local government, the Governmental Accounting Standards Board. The Financial Accounting Foundation also is responsible for selecting the members of both accounting standards boards and their respective advisory councils. Eleven members of the board of trustees of the Financial Accounting Foundation are nominated by eight organizations and approved by the trustees. The nominating organizations are:

1. The American Accounting Association
2. The American Institute of Certified Public Accountants
3. The Association for Investment Management and Research
4. Financial Executives International
5. The Government Finance Officers Association
6. The Institute of Management Accountants
7. The National Association of State Auditors, Comptrollers and Treasurers
8. The Securities Industry Association

Five additional trustees serve as at‐large members and are selected by the board of trustees. The Foundation is incorporated to operate exclusively for charitable, educational, scientific, and literary purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code.

financial engineering

The financial structuring of a company or particular transaction.

financial intermediaries 

Institutions that provide the market function of matching borrowers and lenders or traders.

financial investor 

An investor interested solely in achieving a financial return from an investment, rather than a return coupled with a strategic benefit associated with the investment.

financing slack 

The difference between the debt that a firm chooses to carry and the optimal debt that it could carry, when the former is less than the latter.

financing statement 

Document filed with a lender detailing personal property taken as collateral from a borrower. The financing statement, a standard document under the Uniform Commercial Code, is filed with the secretary of state or other designated public official. The document is time stamped, the filing date is noted, and a file number is assigned, placing the public on notice to the lender's claim to the specified collateral.

FINRA (Financial Industry Regulatory Authority) 

A private American corporation that acts as a self‐regulatory organization that regulates member brokerage firms and exchange markets under the authority of the SEC.

fire sale 

The sale of merchandise and other assets after a fire at very low prices. It is also used figuratively when merchandise and other assets of companies are sold at very low prices to ensure a fast disposal of surplus items.

firm commitment 

A commitment by a syndicate of investment banks to purchase all the shares available for sale in a public offering of a company. The shares will then be resold to investors by the syndicate.

fixed charge coverage ratio 

This ratio is used by lenders to compare committed fixed payments to available cash flow. Listed here are two actual formulas used by asset‐based lenders to illustrate the concept:

1. The ratio calculated on a rolling four‐quarter basis of (i) EBITDA to (ii) the sum of (a) cash interest expense, plus (b) cash tax expense, plus (c) current maturities of long‐term debt, subordinated debt, and capital leases of the borrower, plus (d) the sum of dividends or distributions paid by the borrower during this period, plus (e) nonfinanced capital expenditures.
2. The ratio of (i) EBITDA plus cash equity minus unfinanced capitalized expenditures made during such period minus cash taxes, dividends and distributions, if any, made during such period to (ii) all senior debt payments plus, without duplication, all subordinated debt payments during such period. In this case, senior debt payments include all cash actually expended by borrower to make (a) interest payments on any advances hereunder, plus (b) payments for all fees, commissions, and charges set forth herein and with respect to any advances, plus (c) capitalized lease payments, plus (d) payments with respect to any other indebtedness for borrowed money.

flipping

The act of selling shares immediately after an initial public offering. Investment banks that underwrite new stock issues attempt to allocate shares to new investors who indicate they will retain the shares for several months.

Form S‐1 

Registration statement under the Securities Act of 1933. This form is typically used in conjunction with a company's initial public offering of securities.

forward contract 

An agreement to buy or sell an underlying asset at a fixed price at a future point in time.

founder 

A person who participates in the creation of a company. Typically, founders manage the company until it has enough capital to hire professional managers.

free cash flow 

The amount of cash a company has after expenses, debt service, capital expenditures, and dividends. Free cash flow measures the financial comfort level of the company as a going concern.

friends and family financing 

Capital provided by the friends and family of founders of an early‐stage company. Founders should be careful not to create an ownership structure that may hinder the participation of professional investors once the company begins to achieve success.

full ratchet 

An antidilution protection mechanism whereby the price per share of the preferred stock of investor A is adjusted downward due to the issuance of options, warrants, or securities 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 option, warrant, or securities. See broad‐based weighted average ratchet; narrow‐based weighted average antidilution.

fully diluted basis 

A methodology for calculating any per‐share ratios whereby the denominator is the total number of shares issued by the company on the assumption that all warrants and options are exercised and that all convertible securities have been converted.

fundamental rep 

A representation typically made in a purchase agreement that is deemed to be most important and correct. Typical examples include title to assets, authorization and power to execute the agreement, capital structure, and taxes.

funded debt 

A liability resulting from a financing transaction in which cash was loaned to the business, as opposed to a liability created as a result of company operations. Examples include a bank credit facility, subordinated note from a lender, or a note payable to an investor. Examples that are not funded liabilities include accounts payable or accrued payroll.

fund of funds 

A fund created to invest in private equity funds to minimize portfolio management efforts.

GAAP 

See Generally Accepted Accounting Principles (GAAP).

Generally Accepted Accounting Principles (GAAP) 

A voluminous set of standards, interpretations, opinions, and bulletins developed by the Financial Accounting Standards Board.

general partner (GP) 

See business structures.

going‐concern value 

The value of a company to another company or individual in terms of an operating business. The difference between a company's going‐concern value and its asset or liquidation value is deemed goodwill and plays a major role in mergers and acquisitions.

golden parachute 

A contractual clause in a management contract that allows the manager to be paid a specified sum of money in the event the control of the firm changes.

GP 

See business structures.

greenmail 

The purchase of a potential hostile acquirer's stake in a business at a premium over the current fair market value of the stock.

grossing up 

An adjustment of an option pool for management and employees of a company that increases the number of shares available over time. This usually occurs after a financing round whereby one or more investors receive a relatively large percentage of the company.

gross margin 

Revenue associated with the sale of a product or service less the direct costs of providing the product or service.

growth CAPEX 

The amount of CAPEX greater than the maintenance CAPEX that is required to support a business's near‐ to mid‐term growth plans.

growth stage 

The stage of a company when it has received one or more rounds of financing and is generating revenue from its product or service. Same as middle stage.

haircut 

Reduction in value taken by one party in order to compensate another party or facilitate a transaction.

hair on the deal 

Refers to certain negative or less‐than‐desirable attributes, situations, events, or characteristics of a transaction (or the target of an investment or acquisition), particularly those that create additional risk for the buyer or investor.

Hamburger Helper bridge 

A colorful label for a traditional bridge loan that includes the right of the bridge lender to convert the note to preferred stock at a price that is a 20% discount from the price of the preferred stock in the next financing round.

Hart‐Scott‐Rodino Act 

A law permitting the Federal Trade Commission and the U.S. Department of Justice to examine potential investments and acquisitions and to deny permission to the companies to consummate the proposed transaction where they determine that the transaction has the potential for reducing competition in an industry or business segment.

harvest 

To generate cash or stock from the sale or IPO of companies in a private equity portfolio of investments.

heads of agreement (HOA) 

Another term for letter of intent. Typically used in the UK, Australia, and New Zealand.

heads of terms 

See heads of agreement.

hedge 

A transaction that reduces the risk of an investment.

hockey stick 

The general shape and form of a chart showing revenue, customers, cash, or some other financial or operational measure that increases dramatically at some point in the future. Entrepreneurs often develop business plans with hockey stick charts to impress potential investors.

holdback 

See escrow.

holding period 

The length of time an asset (property) is held by its owner. The holding period for short‐term capital gains and losses is one year or less. The holding period for long‐term capital gains and losses is more than one year. To figure the holding period, begin counting on the day after you receive the property and include the day you disposed of it.

hot assets 

The term hot assets is not found in the tax code but is used to define assets that have an ordinary income taint when a partnership interest (a capital asset) is sold. Since 1997, hot assets in the sale of a partnership interest are unrealized receivables and inventory items of the partnership. When gain is recognized with certain partnership distributions, the hot asset definition is modified to include unrealized receivables and substantially appreciated inventory.

hot issue 

Stock in an initial public offering that is in high demand.

hurdle rate 

A minimum rate of return required before an investor will make an investment.

incidental damages 

Damages that are awarded as compensation for the buyer's commercially reasonable expenses resulting from a breach by the seller. Examples include the costs of handling, shipping, and replacing faulty inventory, costs associated with restatement of the seller's financials, and the costs associated with bringing the seller into compliance with applicable regulations.¹⁵

indemnification 

Where one party (typically the seller) agrees to reimburse the other (typically the buyer) for any losses they incur as a result of the transaction.¹⁶

indicative offer 

Short‐form term sheet in which a potential investor, partner, or acquirer provides a target with an informal description of the material terms and conditions of an offer.

indication of interest (IOI) 

See indicative offer.

information asymmetry 

An imbalance that arises any time one party to a transaction or agreement has more or better information than others.

initial public offering (IPO) 

The first offering of stock by a company to the public. New public offerings must be registered with the Securities and Exchange Commission.

insider information 

Material information about a company that has not yet been made public. It is illegal for holders of this information to make trades based on it, however received.

inside round 

A round of financing in which the investors are the same investors as the previous round.

insiders 

Directors and senior officers of a corporation—in effect, those who have access to inside information about a company. An insider also is someone who owns more than 10% of the voting shares of a company.

insolvency risk 

The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk.

insolvent 

Unable to pay debts (i.e., a firm's liabilities exceed its assets).

installment sale 

A sale of property where you receive at least one payment after the tax year of the sale. If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. This method of reporting gain is called the installment method. You cannot use the installment method to report a loss. You can choose to report all of your gain in the year of sale.¹⁷

institutional investors 

Organizations that invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds.

interest 

The price paid for borrowing money. It is expressed as a percentage rate over a period of time and reflects the rate of exchange of present consumption for future consumption. Also, a share or title in property.

interest coverage ratio 

Earnings before interest and taxes divided by the interest expense. The interest coverage ratio is a measure of the firm's capacity to service its interest payments, with higher coverage ratios representing more safety.

interest coverage test 

A debt limitation that prohibits the issuance of additional long‐term debt if the issuer's interest coverage would, as a result of the issue, fall below some specified minimum.

interest deduction 

An interest expense, such as interest on a margin account, that is allowed as a deduction for tax purposes.

interest expense 

The money a corporation or individual pays out in interest on loans.

interest in arrears 

Interest that is due only at the maturity date rather than periodically over the life of the loan.

interest‐only loan 

A loan in which payment of principal is deferred and interest payments are the only current obligation.

interest tax shield 

The reduction in income taxes that results from the tax‐deductibility of interest payments.

interim statement 

A financial statement that reflects only a limited period of a company's financial statement, not the entire fiscal year.

internal finance 

Finance generated within a firm by retained earnings and depreciation.

internal growth rate 

The maximum rate a firm can expand without outside sources of funding. Growth generated by cash flows retained by the company.

internal rate of return (IRR) 

The interest rate that is applied to a stream of cash outflows and inflows that causes the sum of the outflows and inflows to equal zero.

International Accounting Standards Board (IASB) 

In March 2001, the International Accounting Standards Committee (IASC) Foundation was formed as a not‐for‐profit corporation incorporated in the state of Delaware. The IASC Foundation is the parent entity of the International Accounting Standards Board, an independent accounting standard‐setter based in London, UK. On April 1, 2001, the International Accounting Standards Board (IASB) assumed accounting standard‐setting responsibilities from its predecessor body, the International Accounting Standards Committee.

International Financial Reporting Standards (IFRS) 

A set of accounting standards, developed by the International Accounting Standards Board (IASB), that is becoming the global standard for the preparation of public company financial statements.

intrinsic value of a firm 

The present value of a firm's expected future net cash flows discounted by the required rate of return.

inventory turnover 

A measure of how often a company sells and replaces its inventory. It is the ratio of annual cost of sales to the latest inventory. One can also interpret the ratio as the time for which inventory is held. For example, a ratio of 26 implies that inventory is held, on average, for two weeks. It is best to use this ratio to compare companies within an industry (high turnover is a good sign) because there are huge differences in this ratio across industries.

invested capital 

Total assets minus non‐interest‐bearing liabilities. This term is used in the calculation of return on invested capital (ROIC).

investment banks 

Financial intermediaries who perform a variety of services, including aiding in the sale of securities, facilitating mergers and other corporate reorganizations, acting as brokers to both individual and institutional clients, and trading for their own accounts.

investment tax credit 

A tax credit provided by some states for investments made into qualified investments.

investment thesis/investment philosophy 

The fundamental ideas that determine the types of investments that an investment fund will choose in order to achieve its financial goals.

IPO 

See initial public offering (IPO).

IRR 

See internal rate of return (IRR).

issuer 

A company that sells its debt or equity securities.

joint and several 

When several persons sign a note, loan, or obligation whereby each person is legally obligated to become liable for the payment of the entire note (versus their prorated share).

junior debt 

A loan that has a lower priority than a senior loan in case of a liquidation of the assets of the borrowing company. Also referred to as second lien, last‐out participation, or tranche B debt. While subordinated debt is technically junior to the senior debt in a company, it typically sits below junior debt and is unsecured.

junk bond 

A bond with a speculative credit rating of BB (S&P) or BA (Moody's) or lower. Junk or high‐yield bonds offer investors higher yields than bonds of financially sound companies. Two agencies, Standard & Poor's and Moody's Investors Service, provide the rating systems for companies' credit.

Keogh plan 

A type of pension account in which taxes are deferred. Available to those who are self‐employed.

kicker 

An additional feature of a debt obligation that increases its marketability and attractiveness to investors.

last‐out participation 

See junior debt.

later stage 

The stage of a company that has proven its concept, achieved significant revenues compared to its competition, and is approaching cash‐flow breakeven or positive net income. The rate of return for venture capitalists who invest in later‐stage, less risky ventures is lower than in earlier‐stage ventures.

LBO 

See leveraged buyout (LBO).

lead investor 

The investor who makes the largest investment in a financing round and manages the documentation and closing of that round. The lead investor sets the price per share of the financing round, thereby determining the valuation of the company.

legacy 

In the context of M&A and selling companies, legacy is what the seller wants the outcome of an ownership‐interest transition to be (whether to a family or a third‐party buyer) in nonfinancial as well as financial terms. Elements of this desired outcome typically include how the seller's company is perceived in the marketplace; its ongoing reputation with suppliers, customers, employees, and the community; stakeholders' perception of how and how successfully the transition was made; who the new owners are; and how the company is likely to be operated postclosing.

letter of intent (LOI) 

A document confirming the intent of a party to enter into a transaction under certain broadly agreed to terms and conditions subject to verification. By signing this document, the subject company agrees to begin the legal and due diligence process prior to the closing of the transaction. An LOI is legally nonbinding (with the exception of a few terms), yet intended to be binding in principle. See term sheet.

leverage 

The use of debt to acquire assets, build operations, and increase revenues. By using debt, a company is attempting to achieve results faster than if it used only its cash available from preleverage operations.

leveraged buyout (LBO) 

The purchase of a company or a business unit of a company by an outside investor using mostly borrowed capital.

leveraged recapitalization 

A transaction in which a firm borrows money and either buys back stock or pays a dividend, thus increasing its debt ratio substantially.

LIBOR 

See London Interbank Offered Rate (LIBOR).

limited deficiency guaranty 

See deficiency guarantee.

limited liability company (LLC) 

See business structures.

limited liability partnership (LLP) 

See business structures.

limited partner (LP) 

See business structures.

limited partnership 

See business structures.

line of credit 

An informal loan arrangement between a bank and a customer allowing the customer to borrow up to a prespecified amount. Also called credit line.

liquidation 

The selling off of all assets of a company prior to the complete cessation of operations. Corporations electing formal insolvency proceedings to liquidate declare Chapter 7 bankruptcy. In a liquidation, the claims of secured and unsecured creditors, bondholders, and preferred stockholders take precedence over common stockholders.

liquidation analysis 

Consideration of the market factors that influence the values of assets to be liquidated in connection with the cessation of a going concern's operations.

liquidation balance sheet 

A company's balance sheet adjusted to reflect reductions in the value of assets that are normally experienced when the assets of a going concern are sold off after the entity stops conducting business. See liquidation value.

liquidation preference 

The contractual right of an investor to priority in receiving the proceeds from the liquidation of a company. For example, a venture capital investor with a 2x liquidation preference has the right to receive two times their original investment upon liquidation.

liquidation value 

The estimated amount of money that an asset or company could quickly be sold for, such as if it were to go out of business.

liquidity discount 

A decrease in the value of a private company compared to the value of a similar but publicly traded company. Since an investor in a private company cannot readily sell their investment, the shares in the private company are normally valued less than those of a comparable public company.

liquidity event 

A transaction whereby owners of a significant portion of the shares of a private company sell their shares in exchange for cash or shares in another, usually larger company. For example, an IPO is a liquidity event.

lockup agreement 

Investors, management, and employees often agree not to sell their shares for a specific time period after an IPO, usually 6 to 12 months.

London Interbank Offered Rate (LIBOR) 

A short‐term interest rate often quoted as a one‐, three‐, or six‐month rate for U.S. dollars.

LP 

See business structures.

M&A 

Acronym for mergers and acquisitions. Used in the middle market to mean the buying and selling of companies.

M&A Broker 

A term defined by the SEC, an M&A Broker is a person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately held company through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company, to a buyer who will actively operate the company, or the business conducted with the assets of the company.¹⁸

materiality scrape 

A provision in a purchase agreement that effectively overrides or negates the materiality qualifier in certain other provisions of the document.

maintenance CAPEX 

The amount of CAPEX required to sustain a business's performance at or near its current level of operations.

management buyout (MBO) 

A leveraged buyout controlled by the members of the management team of a company or a division of a company.

management fee 

A fee charged to the limited partners in a fund by the general partner. Management fees in a private equity fund typically range from 0.75% to 3% of capital under management, depending on the type and size of fund.

management presentation 

A program presented by the officers, directors, or management of a company in connection with a potential equity or debt transaction, strategic or collaborative partnering agreement, or sale of a business or product line.

management rights 

The rights often required by a venture capitalist as part of the agreement to invest in a company. The venture capitalist has the right to consult with management on key operational issues, attend board meetings, and review information about the company's financial situation.

marginal cost 

An increase or a decrease in the total costs of a business firm as the result of one more or one less unit of output. Also called incremental cost or differential cost. A firm is operating at optimum output when marginal cost coincides with average total unit cost. Thus, at less‐than‐optimum output, an increase in the rate of production will result in a marginal unit cost lower than average total unit cost; production in excess of the optimum point will result in marginal cost higher than average total unit cost.

market capitalization 

The value of a publicly traded company as determined by multiplying the number of shares outstanding by the current price per share.

MBO 

See management buyout (MBO).

memorandum of understanding (MOU) 

Essentially a letter of intent.

merchant banking 

A merchant bank invests its own capital in leveraged buyouts, corporate acquisitions, and other structured finance transactions. Merchant banking is a fee‐based business, where the bank assumes market risk but no long‐term credit risk. The Gramm‐Leach‐Bliley Act allows financial holding companies, a type of bank holding company created by the Act, to engage in merchant banking activities.

mezzanine 

A layer of financing that has intermediate priority (seniority) in the capital structure of a company. For example, mezzanine debt has lower priority than senior debt but higher priority than equity. Mezzanine debt usually has a higher interest rate than senior debt and often includes warrants. In venture capital, a mezzanine round is generally the round of financing that is designed to fund the operations of a company to a liquidity event such as an IPO.

middle market 

Generally refers to companies with revenues from $5 million to $1 billion. The core of the middle market (or the middle‐middle market) is about $150 million to $500 million and the lower‐middle market is $5 million to $150 million. Also see emerging growth companies.

middle‐middle market 

See middle market.

middle stage 

The stage of a company when it has received one or more rounds of financing and is generating revenue from its product or service. Same as growth stage.

monetary assets and liabilities 

Assets and liabilities in which the amounts are fixed in currency units. If the value of the currency unit changes, it is still settled with the same number of units.

multiple 

A valuation methodology that compares public and private companies in terms of a ratio of value to an operations figure such as revenue or net income. For example, if several publicly traded computer hardware companies are valued at approximately two times revenues, then it is reasonable to assume that a start‐up computer hardware company that is growing fast has the potential to achieve a valuation of two times its revenues. Before the start‐up issues its IPO, it will likely be valued at less than two times revenue because of the lack of liquidity of its shares. See liquidity discount.

narrow‐based weighted average antidilution 

A type of antidilution mechanism that adjusts downward the price per share of the preferred stock of investor A due to the issuance of options, warrants, or securities to new investor B at a price lower than the price investor A originally paid. Investor A's preferred stock is repriced to a weighted average of investor A's price and investor B's price. A narrow‐based weighted average antidilution formula uses only common stock outstanding in the denominator for determining the new weighted average price.

Nasdaq 

Formerly an acronym for the National Association of Securities Dealers Automated Quotation system. An electronic quotation system that provides price quotations to market participants about the more actively traded common stock issues in the over‐the‐counter market. About 4,000 common stock issues are included in the Nasdaq system.

NDA 

See nondisclosure agreement (NDA).

net capital expenditure 

The difference between capital expenditures and depreciation. It is a measure of the financing needed, from internal or external sources, to meet investment needs.

net operating income (or loss) 

See operating profit (or loss).

net operating profit less adjusted taxes (NOPLAT) 

The after‐tax operating profits of a company after adjusting the taxes to a cash basis.

net present value (NPV) 

The sum of the discounted present values of the expected cash flows of the investment.

net working capital (NWC) 

The sum of the current assets of a business (excluding cash) minus the sum of the current liabilities of a business (excluding funded debt). NWC usually excludes related‐party transactions of the target entity.

no‐shop 

A seller is not permitted to initiate or engage in discussions with a competing acquirer, which gives the present acquirer exclusivity (and incentive to pursue the transaction) for defined period of time.¹⁹

nonbinding offer (NBO) 

Sometimes referred to as an indicative offer, it is nearly the same as a letter of intent with less detail.

noncompete 

An agreement often signed by employees and management whereby they agree not to work for competitor companies or form a new competitor company for a certain time period after termination of employment.

noncumulative dividends 

Dividends that are payable to owners of preferred stock at a specific point in time only if there is sufficient cash flow available after all company expenses have been paid.

nondisclosure agreement (NDA) 

An agreement issued by entrepreneurs to protect the privacy of their ideas when disclosing those ideas to third parties.

noninterference 

An agreement often signed by employees and management whereby they agree not to interfere with the company's relationships with employees, clients, suppliers, and subcontractors for a certain time period after termination of employment.

nonrecourse 

The absence of any legal claim against a seller or prior endorser. The seller (or the endorser of a check or other negotiable document) is not liable or otherwise responsible for payment to the holder.

nonsolicitation 

An agreement often signed by employees and management whereby they agree not to solicit other employees of the company regarding job opportunities.

NOPLAT 

See net operating profit less adjusted taxes (NOPLAT).

normalized EBITDA 

EBITDA adjusted with add‐backs and other adjustments so that the operating EBITDA of the business fairly represents the financial performance of the business independent of the specific costs related to the owners (in a privately held company). A mental framework from which to view this concept is to consider what costs the business would incur as a stand‐alone entity of a larger company, for example, what is market rate compensation for the individual(s) who will replace the current owners or what perks are beyond market expectations that would go away when the current owner no longer works there (cars, planes, country club, excess insurance premiums, compensation for other family members, etc.).

NYSE 

See New York Stock Exchange (NYSE).

offering memorandum 

A legal document that provides details of an investment to potential investors. Sometimes called the book. See private placement memorandum (PPM).

OID 

See original issue discount (OID).

operating profit (or loss) 

Earnings before interest and taxes or operating income.

opportunity cost 

The cost assigned to a project resource that is already owned by the firm. It is based on the next best alternative use.

optics 

The way a concept is presented. Sometimes entrepreneurs' presentations are strong on optics but weak in content.

option pool 

A group of options set aside for long‐term, phased compensation to management and employees.

options 

See stock option.

original issue discount (OID) 

A discount from par value of a bond or debt‐like instrument. In structuring a private equity transaction, the use of a preferred stock with liquidation preference or other clauses that guarantee a fixed payment in the future can potentially create adverse tax consequences. The IRS views this cash‐flow stream as, in essence, a zero‐coupon bond upon which tax payments are due yearly based on so‐called phantom income imputed from the difference between the original investment and guaranteed eventual payout.

origination fee 

A fee charged by a lender or investor to formally process a loan or conduct due diligence. Generally expressed as a percentage of the amount to be lent or invested.

orphan 

A start‐up company that does not have a venture capitalist as an investor.

outstanding shares 

The total amount of common shares of a company, not including treasury stock, convertible preferred stock, warrants, and options.

oversubscription 

When demand exceeds supply for shares of an IPO or a private placement.

owner motives 

What the owner/seller of a business cares about for the current and future of their business—their ambitions, value, desires, and expected outcomes. In the public markets, the owners' motives are to increase shareholder value. In the private capital markets, owner motives vary broadly from financial returns, to protecting employees, to family ambitions, to societal objectives, to career or retirement goals.

par 

Equal to the nominal or face value of a security.

pari passu 

A legal term referring to the equal treatment of two or more parties in an agreement. For example, an investor may agree to have registration rights that are pari passu with the other investors in a financing round.

participating dividends 

The right of holders of certain preferred stock to receive dividends and participate in additional distributions of cash, stock, or other assets.

participating preferred stock 

A unit of ownership that repays an investor the face amount of the original investment, plus an amount equal to the investor's pro rata ownership of a company.

partnership 

See business structures.

payables 

Accounts payable resulting from purchases of materials and services from vendors and other creditors on credit terms.

payback 

The length of time it will take for nominal cash flows from a project to cover the initial investment.

pay to play 

A clause in a financing agreement whereby any investor that does not participate in a future round agrees to suffer significant dilution compared to other investors. The most onerous version of pay to play is automatic conversion to common shares, which in essence ends any preferential rights of an investor, such as the right to influence key management decisions.

PEG 

Abbreviation for private equity group.

piggyback rights 

The rights of an investor to have shares included in a registration filed with the SEC.

PIK 

Abbreviation for payment in kind.

pink sheets 

Refers to over‐the‐counter trading. Daily publication of the National Quotation Bureau that reports the bid and ask prices of thousands of OTC (over‐the‐counter) stocks, as well as the market makers who trade each stock.

PIPE 

See private investment in public equities (PIPE).

placement agent 

A company that specializes in finding institutional investors who are willing and able to invest in a transaction. Management typically hires a placement agent so the managers can focus on operating their company rather than on raising capital.

platform 

A company acquired by a private equity group as an entry into a particular market or industry. A platform company is usually a relatively significant investment for the PEG, and is likely the buyer of add‐on businesses as part of a buy‐and‐build strategy.

poison pill 

A security or a provision that is triggered by the hostile acquisition of a company, resulting in a large cost to the acquirer.

portfolio company (portco) 

A company that has received an investment from an investment fund.

PPM 

See private placement memorandum (PPM).

preference 

Seniority, usually with respect to dividends and proceeds from a sale or dissolution of a company.

preferred stock 

A type of stock that has certain rights that common stock does not have. These special rights may include dividends, participation, liquidity preference, antidilution protection, and veto provisions, among others. Private equity investors usually purchase preferred stock when they make investments in companies.

private equity 

Equity investments in nonpublic companies.

private investment in public equities (PIPE) 

A PIPE is a transaction in which accredited investors are allowed to purchase stock in a public company, usually below the listed market price. The stock is registered with the SEC so that it may later be resold to the public.

private placement 

The sale of a security directly to a limited number of institutional and qualified individual investors. If structured correctly, a private placement avoids registration with the Securities and Exchange Commission.

private placement memorandum (PPM) 

A document explaining the details of an investment to potential investors. For example, a private equity fund will issue a PPM when it is raising capital from institutional investors. Also, a start‐up may issue a PPM when it needs growth capital. Same as an offering memorandum.

private securities 

Securities that are not registered with the Securities and Exchange Commission and do not trade on any exchanges. The price per share is negotiated between the buyer and the seller (the issuer).

pro rata 

Shared or divided according to a ratio or in proportion to participation.

prospectus 

Formal written document to sell securities that describes the plan for a proposed business enterprise, or the facts concerning an existing one, that an investor needs to make an informed decision. Prospectuses are used by mutual funds to describe fund objectives, risks, and other essential information. Also called an offering circular or circular.

prudent man rule 

A fundamental principle for professional money management, which serves as a basis for the Prudent Investor Act. The principle is based on a statement by Judge Samuel Putnam in 1830: “Those with the responsibility to invest money for others should act with prudence, discretion, intelligence and regard for the safety of capital as well as income.”

public and private information 

Public information refers to any information that is available to the investing public, whereas private information is information that is restricted to only insiders or a few investors in the firm.

purchase order (PO) financing 

Credit obtained from a third party based on advancing a portion of the proceeds of the company's potential sale in connection with the promise by a customer that products or services will be purchased in specific quantities.

purchase price adjustment (PPA) 

A common deal feature whereby the transaction consideration is adjusted shortly after closing in accordance with a specified financial metric, given such metrics are generally estimated at the time of closing and more accurately calculable after a certain amount of time after closing. While there are a number of metrics used to determine the adjustment, the most common is some variation of a net working capital formula. The adjustment can be in favor of either the buyer or selling shareholders.²⁰

puts 

The right to sell an underlying asset at a price that is fixed at the time the right is issued and during a specified time period.

qualified opinion 

An auditor's opinion expressing certain limitations of an audit. The opposite of unqualified opinion.

quartile 

One‐fourth of the data points in a data set. Often, private equity investors are measured by the results of their investments during a particular period of time. Institutional investors often prefer to invest in private equity funds that demonstrate consistent results over time, placing in the upper quartile of the investment results for all funds.

quiet period 

Refers to the period of time during which a company makes no public comments, and approximates the period of time during which a company has a registration statement filed with the SEC. Same as waiting period.

raider 

An individual or corporate investor who intends to take control of a company (often ostensibly for greenmail) by buying a controlling interest in its stock and installing new management. Raiders who accumulate 5% or more of the outstanding shares in the target company must report their purchases to the SEC, the exchange of listing, and the target itself.

ratchet 

A mechanism to prevent dilution. An antidilution clause is a contract clause that protects an investor from a reduction in percentage ownership in a company due to the future issuance by the company of additional shares to other entities. A ratchet protects an investor by reducing the effective purchase price paid by the investor to the lowest price paid by a subsequent investor for options, warrants, or securities.

realization ratio 

The ratio of cumulative distributions to paid‐in capital. The realization ratio is used as a measure of the distributions from investment results of a private equity partnership compared to the capital under management.

recapitalization 

The reorganization of a company's capital structure.

receivables 

Accounts receivable resulting from sales of products or services to customers on credit terms.

recourse 

A type of loan. If a loan is with recourse, the lender has the ability to fall back to the guarantor of the loan if the borrower fails to pay. For example, Bank A has a loan with Company X. Bank A sells the loan to Bank B with recourse. If Company X defaults, Bank B can demand that Bank A fulfill the loan obligation.

redeemable preferred 

Preferred stock that can be purchased by a company in exchange for a specific sum of money, or preferred stock that an investor can force a company to repurchase.

redemption or call 

The right of the issuer to force holders on a certain date to redeem their convertibles for cash. The objective usually is to force holders to convert into common shares prior to the redemption deadline. Typically, an issue is not called away unless the conversion price is 15 to 25% below the current level of the common shares. An exception might occur when an issuer's tax rate is high, and the issuer could replace it with debt securities at a lower after‐tax cost.

redemption rights 

The right of an investor to force a company to buy back the shares issued as a result of the investment. In effect, the investor has the right to take back their investment.

registration 

The process whereby shares of a company are registered with the Securities and Exchange Commission under the Securities Act of 1933 in preparation for a sale of the shares to the public.

registration rights 

The rights of investors to have their shares included in a registration. Demand rights are granted to investors to permit the investors to force management to register the investors' shares for a public offering. Piggyback rights are granted to investors to permit the investors to add their shares to a registration statement filed by the company on behalf of the company or on behalf of other investors.

Regulation D (Reg D) 

An SEC regulation that provides a safe harbor from the registration requirements of the Securities Act of 1933. An unlimited number of accredited investors may participate, but only 35 nonaccredited investors can participate.

Regulation S (Reg S) 

An SEC regulation that governs offers and sales of securities made outside the United States without registration under the Securities Act of 1933.

REIT 

See real estate investment trust (REIT).

reps & warranties 

See representations and warranties.

representations and warranties 

Representations are statements of fact by the seller regarding the condition of its business, covering virtually all aspects of the company. Warranties are the seller's assurances to the buyer that the representations are true, and that if they are not, the buyer will be entitled to seek legal remedies.²¹

representations and warranties insurance (RWI) 

An insurance policy issued to the buyer in an M&A transaction to indemnify the buyer for covered losses it suffers resulting from a breach of the representations and warranties made by the seller (and/or selling shareholders) in the acquisition agreement.²²

reserve

1. In asset‐based lending, the difference between the value of the collateral and the amount lent. From the point of view of financial statements, reserves are provided as an estimate of liabilities that have a good probability of arising; bad‐debt reserve attempts to estimate what percentage of the firm's debtors will not pay (based on previous records and practical experience). Reserves are always a subjective estimate (since they reflect contingent liabilities).
2. An accounting entry that properly reflects contingent liabilities.

restricted stock

Shares that cannot be traded in the public markets. In some instances these shares are subject to transfer restrictions in the private market.

restructure 

A transaction or series of transactions associated with rearranging the debt or equity structure of a company, and typically associated with poor financial performance of the company.

return on assets (ROA) 

An indicator of profitability. Determined by dividing net income for the past 12 months by total average assets. The result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets).

return on equity (ROE) 

An indicator of profitability. Determined by dividing net income for the past 12 months by common stockholder equity (adjusted for stock splits). The result is shown as a percentage. Investors use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets (ROA) multiplied by financial leverage (total assets/total equity).

return on invested capital (ROIC) 

NOPLAT divided by invested capital. Invested capital is calculated by subtracting non‐interest‐bearing liabilities from total assets.

return on investment (ROI) 

The proceeds from an investment, during a specific time period, calculated as a percentage of the original investment.

return on sales (ROS) 

A measurement of operational efficiency equaling net pretax profits divided by net sales expressed as a percentage.

reverse split 

A proportionate decrease in the number of shares, but not the total value of shares, of stock held by shareholders. Shareholders maintain the same percentage of equity as before the split. For example, a 1‐for‐3 split would result in stockholders owning one share for every three shares owned before the split. After the reverse split, the firm's stock price is, in this example, three times the prereverse split price. A firm generally institutes a reverse split to boost its stock's market price. Some think this attracts investors.

revolving loan 

A loan with a stated maximum loan amount, but variable amounts that can actually be drawn down by a borrower that are determined periodically by reference to certain levels of borrower assets. Assets used to determine a borrower's available loan amount normally include accounts receivable and inventory. Also called revolver or revolving credit facility.

right of co‐sale with founders 

A clause in venture capital investment agreements that allows the VC fund to sell shares at the same time that the founders of a start‐up choose to sell.

right of first refusal 

A contractual right to participate in a transaction. For example, a venture capitalist may participate in a first round of investment in a start‐up and request a right of first refusal in any following rounds of investment.

rights offering 

An offering of stock to current shareholders that entitles them to purchase the new issue.

road show 

Presentations made in several cities to potential investors and other interested parties. For example, a company will often conduct a road show to generate interest among institutional investors prior to its IPO.

ROI 

See return on investment (ROI).

rollover equity 

The ownership of a seller of a business that is reinvested (i.e., rolled over) into the buyer of their business as part of a recapitalization or M&A transaction.

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.

round 

A financing event usually involving several private equity investors.

Rule 144 

A rule of the Securities and Exchange Commission that specifies the conditions under which the holder of shares acquired in a private transaction may sell those shares without registration.

sandbagging 

Having knowledge of a breach of a representation, warranty, or covenant of the other party in an acquisition agreement, continuing with the consummation of the transaction nonetheless, and potentially seeking indemnification for any losses that may result from such breach postclosing.²³

salvage value 

The estimated liquidation value of the assets invested in the project at the end of the project's life.

Sarbanes–Oxley 

Corporate regulations resulting from the Sarbanes–Oxley Act of 2002. The Act creates a set of disclosure obligations intended to restore confidence in the financial information provided by publicly traded companies to the investing public. The Act creates a five‐member Public Company Accounting Oversight Board (PCAOB), which has the authority to set and enforce auditing, attestation, quality control, and ethics (including independence) standards for auditors of public companies. It also is empowered to inspect the auditing operations of public accounting firms that audit public companies as well as impose disciplinary and remedial sanctions for violations of the board's rules, securities laws, and professional auditing and accounting standards.

scalability 

A characteristic of a new business concept that entails the growth of sales and revenues with a much slower growth of organizational complexity and expenses. Venture capitalists look for scalability in the start‐ups they select to finance.

scale‐up 

The process of a company growing quickly while maintaining operational and financial controls in place.

Schedule K‐1 

An IRS form sent by legal entities that pay no income taxes to each owner of the entity, indicating the recipient's share of income or loss for the fiscal year.

S corporation 

See business structures.

SEC 

See Securities and Exchange Commission (SEC).

secondary market 

A market for the sale of partnership interests in private equity funds. Sometimes limited partners choose to sell their interest in a partnership, typically to raise cash or because they cannot meet their obligation to invest more capital according to the takedown schedule. Certain investment companies specialize in buying these partnership interests at a discount.

second lien debt 

See junior debt.

Securities and Exchange Commission (SEC) 

The regulatory body that enforces federal securities laws such as the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended over the years.

security 

A document that represents an interest in a company. Shares of stock, notes, and bonds are examples of securities.

seed capital 

Investment provided by angels, friends, and family to the founders of a start‐up in its seed stage.

seed stage 

The stage of a company when it has just been incorporated and its founders are developing their product or service.

seller financing 

A note payable or loan to the shareholder(s) or owner(s) of a business provided in the sale or transition of a company by the buyer. Seller financing is typically used to bridge a valuation gap either where other forms of financing are not available or where a buyer desires to preserve the borrowing ability of the selling company for secured financing. Seller financing is typically unsecured and subordinated below all other debt.

seller note 

See seller financing.

senior debt 

A loan that has a higher priority in case of liquidation of the assets of a company.

seniority 

Higher priority.

series A preferred stock 

Preferred stock issued by a company in exchange for capital from investors in the A round of financing. The preferred stock has priority over common stock for dividends and the proceeds of any liquidation or sale of a company.

shell 

Usually refers to a company with little or no assets with more than 300 shareholders that is formed for the purpose of becoming a de facto public entity. This shell company is used to acquire or merge with a privately held company as a vehicle for the private company to become public without an initial public offering.

SIC (Standard Industrial Classification) 

A four‐digit industry code used by most services in the United States to classify firms. For a broader aggregation, the classification is often done using the first two digits of the code.

Small Business Administration (SBA) 

An agency of the United States government that focuses on aiding, counseling, assisting, and protecting the interests of small businesses. As it relates to financing growth companies, the SBA sometimes provides loans directly and through commercial banks for small businesses.

Small Business Investment Company (SBIC) 

A company licensed by the Small Business Administration to receive government loans in order to raise capital to use in venture investing.

sole proprietor (SP) 

See business structures.

special purpose acquisition company (SPAC) 

A company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. Also known as a blank check company.²⁴

spinoff 

A company can create an independent company from an existing part of the company by selling or distributing new shares in a so‐called spinoff.

spinout 

A division of an established company that becomes an independent entity.

stalking horse 

A third‐party bidder in the investment or acquisition process that is used by a company to obtain a higher share or acquisition price.

stock 

A share of ownership in a corporation.

stock grant 

A determination by the board of directors of a company to issue stock to an employee or third party in connection with the provision of services to a company or the extension of debt or equity to a company.

stock option 

A right to purchase or sell a share of stock at a specific price within a specific period of time. Stock purchase options are commonly used as long‐term incentive compensation for employees and management of fast‐growth companies.

strategic due diligence 

See due diligence.

strategic investor 

A third party that agrees to invest in a company in order to have access to a proprietary technology, product, or service. By having this access, the third party can potentially achieve its strategic goals.

structured overadvance 

A loan in excess of the agreed‐on borrowing base. Repayment is typically scheduled within 12 to 24 months.

subordinated debt 

A loan that has a lower priority than a senior loan in case of a liquidation of the asset or company. See junior debt.

survival 

The time period after closing in which the buyer may make a claim against the seller or selling shareholders for breach of their representations, warranties, and covenants. The time period is usually shorter than the applicable statute of limitations.²⁵

sweat equity 

Ownership of shares in a company resulting from work rather than investment of capital.

sweetener 

A feature of a security that makes it more attractive to potential purchasers. An example is a warrant.

synergy 

The additional value created by bringing together two entities and pooling their strengths. In the context of a merger, synergy is the difference between the values of the merged firm and the sum of the values of the firms operating independently.

tag‐along right 

The right of an investor to receive the same rights as owners of a majority of the shares of a company. For example, if a majority shareholder wants to sell their interest in a company, an investor with minority ownership and tag‐along rights would be able to sell their interest as well.

takedown 

A schedule of the transfer of capital in phases in order to complete a commitment of funds. Typically, a takedown is used by a general partner to secure capital from an entity's limited partners to fund the entity's investments.

takeover 

The transfer of control of a company.

target 

A company that is being sold in a divestiture or pursued in the context of an acquisition.

TED spread 

The difference between LIBOR and the three‐month U.S. Treasury bill rate.

10‐bagger 

An investment that returns 10 times the initial capital.

term loan 

A fixed amount of money advanced by a lender to a borrower where the borrower is expected to repay the loan amount plus interest over a specified period of time. The repayment terms are negotiated based on the ability of the borrower to repay the loan based on financial projections provided by the borrower and agreed to by the lender. A term loan may be repaid in a lump sum at the end of a fixed period or amortized and paid in specified periodic payments during the term of the loan.

term sheet 

A document confirming the intent of an investor to participate in a round of financing or for one party to purchase or sell a company to the other party. More broadly, a term sheet refers to a summary of the most important terms and conditions that the parties are agreeing to for a transaction. By signing this document, the subject company agrees to begin the legal and due diligence process prior to the closing of the transaction. Very similar to a letter of intent.

tipping basket 

See basket.

tranche 

The piece, portion, or slice of a deal or structured financing. The so‐called A‐to‐Z securities of a collateralized mortgage obligation (CMO) offering of a partitioned mortgage‐backed securities (MBS) portfolio. It can also refer to segments that are offered domestically and internationally. Tranches have distinctive features that for economic or legal purposes must be financially engineered or structured in order to conform to prevailing requirements.

tranche B 

See junior debt.

transition 

In the context of M&A, to transfer the management, control, and ownership of a business over time.

treasury stock 

Common stock that has been repurchased by the company and held in the company's treasury.

tuck‐in 

See bolt‐on.

turnaround 

A process resulting in a substantial increase in a company's revenues, profits, and reputation. Typically used to describe a poorly performing or distressed situation.

underwriter 

An investment bank that chooses to be responsible for the process of selling new securities to the public. An underwriter usually chooses to work with a syndicate of investment banks in order to maximize the distribution of the securities.

unitranche financing 

A hybrid senior loan product that blends first‐ and second‐lien debt, and in some instances mezzanine, into a single tranche.

unrestricted stock 

Freely tradable shares.

venture capital 

A segment of the private equity industry that focuses on investing in companies with high growth rates and the potential of very high returns.

venture capital method 

A valuation method whereby an estimate of the future value of a company is discounted by a certain interest rate and adjusted for future anticipated dilution in order to determine the current value. Usually, discount rates for the venture capital method are considerably higher than public stock return rates, representing the fact that venture capitalists must achieve significant returns on investment in order to compensate for the risks they take in funding unproven companies.

vintage 

The year that a private equity fund stops accepting new investors and begins to make investments on behalf of those investors.

virtual data room 

See data room.

voting rights 

The rights of holders of preferred and common stock in a company to vote on certain acts affecting the company. These matters may include payment of dividends, issuance of a new class of stock, merger, or liquidation.

waiting period 

See quiet period.

walk‐away point 

A predetermined amount at which either the buyer will not pay a higher price or the seller will not accept a lower price.

warrant 

A security that gives the holder the right to purchase shares in a company at a predetermined price. A warrant is a long‐term option, usually valid for several years. Typically, warrants are issued concurrently with debt instruments in order to increase the appeal of the debt instrument to potential investors.

washout round 

A financing round in which previous investors, the founders, and management suffer significant dilution. Usually as a result of a washout round, the new investor gains majority ownership and control of the company.

weighted average antidilution 

An antidilution protection mechanism whereby the conversion rate of preferred stock is adjusted in order to reflect the issuance of options, warrants, or securities at a price less than the conversion rate of the existing preferred stock.

weighted average cost of capital (WACC) 

A calculation of the cost of capital by adding the products of relative amounts of equity, debt, and preferred stock investments multiplied by their respective rates of return:

r _WACC = r_E[E/(E + D + P)] + r_D[D/(E + D + P)] + r_P[P/(E + D + P)]

white space

Market opportunities that are not being pursued within a company's plan; new opportunity areas.

wipeout bridge 

A short‐term financing that has onerous features whereby if the company does not secure additional long‐term financing within a certain time frame, the bridge investor gains ownership control of the company. See bridge financing.

wipeout round 

See washout round.

write‐down 

A decrease in the reported value of an asset or a company.

write‐off 

A decrease in the reported value of an asset or a company to zero.

write‐up 

An increase in the reported value of an asset or a company.

yield 

The percentage return paid on a stock in the form of dividends, or the effective rate of interest paid on a bond or note.

zombie 

A company that has received capital from investors but has generated only sufficient revenues and cash flow to maintain its operations without significant growth. Typically, a venture capitalist has to make a difficult decision as to whether to kill off a zombie or continue to invest funds in the hopes that the zombie will become a winner.