Key Definitions & Terminology

Understanding these key terms and definitions can help new investors navigate the complex landscape of private equity and startup investing, providing a solid foundation for making informed investment decisions.

  • Accredited investor: An individual or entity that meets certain financial criteria, allowing them to invest in private securities offerings. In the U.S., this typically means having a net worth of over $1 million (excluding the value of their primary residence) or an annual income of $200,000 ($300,000 for joint income) for the last two years.
  • Angel investor: An affluent individual who provides capital for a business startup, usually in exchange for convertible debt or ownership equity. Angel investors are often among an entrepreneur’s family and friends.
  • Cap table: A cap table, or capitalization table, is a table that shows the equity capitalization for a company, detailing the ownership stakes, equity dilution, and value of equity in each round of investment by the founders, investors, and other owners.
  • Capital call: A request by a private equity fund for the investors to provide the remaining portion of their committed capital. This usually happens when the fund identifies investment opportunities and needs the capital to make those investments.
  • Carried interest: A share of any profits that the general partners of private equity and hedge funds receive as compensation, despite not contributing any initial funds. This serves as a performance incentive for fund managers.
  • Convertible note: A form of short-term debt that converts into equity, typically in conjunction with a future financing round. Instead of a return in the form of principal plus interest, the investor receives equity in the company.
  • Dilution: The reduction in existing shareholders’ ownership percentage of a company as a result of the company issuing new equity. This is a common occurrence in startup funding rounds.
  • Due Diligence: A comprehensive appraisal of a business undertaken by a prospective buyer or investor, especially to establish its assets and liabilities and evaluate its commercial potential.
  • Equity: Ownership interest in a company, represented by shares of stock. In startups and private equity, this typically means a stake in the company.
  • Exit strategy: The method by which an investor plans to get out of an investment, potentially realizing a profit. Common exit strategies include IPOs, mergers, acquisitions, or selling shares privately.
  • General Partner (GP): The managing partner in a private equity fund. GPs are responsible for the operation of the fund, including making investment decisions and managing the fund’s portfolio.
  • Initial Public Offering (IPO): The process through which a private company offers shares to the public for the first time, becoming a publicly traded company on a stock exchange.
  • Limited Partner (LP): An investor in a private equity fund. LPs typically include institutional investors, pension funds, endowments, and high-net-worth individuals. They have limited liability and are not involved in the day-to-day management of the fund.
  • Private Equity: Capital investment made into companies that are not publicly traded on a stock exchange.
  • Private Equity Firm: An investment management company that provides financial backing and makes investments in the private equity of startup or operating companies through a variety of loosely affiliated investment strategies including leveraged buyout, venture capital, and growth capital.
  • Seed funding: The initial capital used to start a business. Seed funding often comes from the founders’ personal assets, family, friends, and angel investors.
  • Series A, B, C funding: Stages of financing for startups, with Series A being the first round of significant venture capital funding, followed by Series B and C as the company grows. Each round aims to raise capital to scale operations, expand the market, or develop products.
  • Startup: A young company founded to develop a unique product or service, bring it to market, and make it appealing and irreplaceable for customers. These companies often start with high costs and limited revenue.
  • Term sheet: A non-binding agreement that outlines the basic terms and conditions under which an investment will be made. Once the parties reach an agreement on the term sheet, it serves as a basis for drafting detailed legal documents.
  • Valuation: The process of determining the current worth of an asset or a company. In the context of startups and private equity, valuation is crucial for determining how much equity an investor will receive in exchange for their capital.
  • Venture capital: A type of private equity financing provided by venture capital firms to startups and small businesses with long-term growth potential. Venture capitalists typically invest in exchange for equity, or an ownership stake.
quote

The individual investor should act consistently as an investor and not as a speculator.

Benjamin Graham
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