As with any industry, venture capital has it own unique terminology, nomenclature or lingo aka jargon. Our goal in this section is not to teach you everything you need to become a VC but give you an overview of some common terms you may hear in discussions about or with venture capitalists.
A VC investment typically begins with the circulation of a document known as a “term sheet,” a summary of the terms the proposer (the issuer, the investor, or an intermediary) is prepared to accept. The term sheet is analogous to a letter of intent, a nonbinding outline of the principal points which the formal legal documents (assuming a financing closes) the Stock Purchase Agreement and related agreements will cover in detail.
A Cap Table (or capitalization table) is the document that shows who owns the company and what they paid to attain that ownership. In other words, this is a table showing the total amount of the various securities issued by a firm. This typically includes the amount of investment obtained from each source and the securities distributed (e.g., common and preferred shares, options, warrants, etc.) and respective capitalization ratios.
A lead investor is the firm or individual that organizes a round of financing, and usually contributes the largest amount of capital to the deal. They are the investor that is taking a lead position in an investment in a company, usually because they are investing the largest portion of a syndicated.
The lead investor is the investor in a syndicate (group of investors) that often works most closely with management and negotiates on behalf of the other investors for the price.
The size of the equity plan reserve is often a point of heavy negotiation in any venture capital transaction. Investors typically insist that an equity plan be put in place in order to attract and retain future employees. This pool of shares is then factored into the pre-investment capitalization when arriving at the price per share of preferred stock to be paid by the investors.
While the size of the equity pool is important, it can also vary significantly from one transaction to the next. A typical range for a pool is 15% to 25% after a first round of venture financing. The more complete the company’s management team is at the time of funding, arguably the lower the pool needs to be to attract and retain key hires.
As a matter of law, a corporation must have a Board of Directors, which is a body of elected or appointed members who jointly oversee the activities of a company or organization.
Boards of directors in venture-capital backed companies generally are more involved in both strategy formation and evaluation than are boards where members do not have large ownership stakes.
When a board is strategic, with investors taking “board seats,” it gains more value as an institution. A strategic board is able to direct the firm actively and open the discussion about the views of the top management. A strategic board also includes a sufficient number of independent non-executive members with appropriate competencies.
Usually A round financing happens after some success has been proven in the market (local test market, unique technology able to be valued, superior business plan and go-to market strategy, etc). Series A often follows seed and angel investments.
B, C and D are growth stage financing rounds, used to prepare companies for their exit or acquisition strategies – either capturing market share, refining product or purchasing similar companies. In the recent recession, these rounds were often used to keep companies afloat while venture capitalists waited for merger & acquisition (M&A) or public equity markets to reopen.
Registration D forms also referred to as “Form D” or “Reg D” is the only filing document that is required by the Securities and Exchange Commission in Washington, DC for private companies receiving financing.
This eight-page document details information about the offering, the company, use of proceeds, and the principals of the company.
This is an "informational only" document and is not subject to a review or approval by the SEC. Selling securities to investors without filing this document could subject the company to fines by the SEC. Thus - the Form D is an integral part of raising capital properly and legally.