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Glossary of Terms Used by Venture Capitalists

An Angel Investor is an individual that invests into a Start-Up Company. Compare Venture Capital Investor.

An Anti-Dilution provision is a contractual provision under which Preference Shares are Converted into a larger number of Ordinary Shares, to “top-up” or compensate an investor when a Down Round occurs. See also Full Ratchet and Weighted Average Ratchet.

Burn Rate is the rate at which a Start-Up Company spends money in excess of its revenue

Bootstrapped refers to a Start-Up Company being funded by its Founder’s own resources.

Cap Table or Capitalisation Table is a table that contains a list of existing shareholders, and the investors in a Round of Investment, and shows for each the number of shares that will be held by each, and the corresponding percentage ownership of the company that will be held by each progressively, as each Tranche is paid to the Company.

Closing occurs when all the legal documentation between the Start-Up Company and the investors etc are signed, and the first Tranche of the Round is paid.

Consent Matters or Reserved Matters are matters the subject of a resolution by either the company’s board of directors or general meeting, where the resolution cannot be passed without the consent of Preference Shareholders. These will be matters that are so significant that the Start-Up Company is contractually precluded from making a decision about them unless the Preference Shareholders agree to the proposed decision, such as whether or not to sell the company’s business, or a major asset. They effectively confer a veto power upon the Preference Shareholders, in relation to those matters.

Conversion occurs when a Preference Share is converted into an Ordinary Share. This may occur on an Exit, such as an IPO or a Trade Sale, or immediately prior to Liquidation. See also Anti-Dilution.

Convertible Note is an instrument that records the provision of capital to a company, which can be either repaid by the company, or instead converted into shares in the company, usually at the election of the investor providing the capital.

Cumulative Dividends are minimum annual Dividends which if unpaid in any year because the company had no profits or insufficient profits, will carry forward to the following years and accumulate, until payment is made.

Dividends are distributions or payments to a company’s shareholders of the company’s profits.

Due Diligence is an investor’s investigation and assessment of a Start-Up Company, to enable the investor to make an informed decision about whether or not to invest, and may cover such matters as the Company’s intellectual property, the commercial opportunity, the company’s financial history and other history, etc

Down Round is a Round of Investment where the price per share is lower than in the previous Round.

Drag Along right is a Preference Shareholder’s right, when selling its shares in the Start-Up company, to require Ordinary Shareholders to also sell their shares at the same time, being “dragged along” in the Trade Sale. Compare Tag Along rights

ESOP is an acronym for Employee Share Option Plan, which is a plan under which share Options are issued to a Start-Up Company’s staff and directors on favourable terms to incentivise them, and which sets out the conditions under which this occurs, including the Vesting conditions. See Option. Compare a Share Plan.

Exercise Price or Strike Price is the price for a share that is paid by an employee or director under an ESOP or Option. See Option.

An Exit is the means by which an Investor gets its investment back, as well as its return on investment. It can occur by an IPO, a Trade Sale, or a Redemption.

First Round is a Start-Up Company’s first Round of Investment from investors, excluding shares issued to Founders and other shareholders prior to the first formal investment. See also Series A.

Follow-On Investment occurs when an investor that invested in a previous Round, also invests in a later Round, the latter being referred to as a Follow On Investment.

Founder is the entrepreneur that forms a Start-Up Company.

Full Ratchet is an Anti-Dilution provision where the rate of Conversion is calculated by reference to the lowest price for which shares are issued in the lowest Down Round. Compare Weighted Average Ratchet.

IPO is an acronym for Initial Public Offering and occurs when a Start-Up Company undertakes a public capital raising and lists on a stock exchange

Lead Investor is the Venture Capital Investor that provides the largest investment in a Round, when there are a number of investors co-investing together in that Round.

Liquidation is the process of collecting the assets of a company, paying all its debts, and distributing its surplus assets (also called surplus capital) to the company’s shareholders.

Liquidation Preference is a right attaching to Preference Shares, where on Liquidation, a company’s surplus assets or surplus capital is paid to the Preference Shareholders, to a pre-determined extent, before anything is paid to Ordinary Shareholders.

Milestone is a date or an event (or combination of events) the occurrence or taking place of which trigger the payment to a Start-Up Company of a Tranche of investment. For example, each of the following may be individual Milestones, each triggering the payment of a Tranche. Alternatively, a single Milestone may be the achievement of all of them:

  1. The Board passing a resolution adopting the Company’s Annual Plan

  2. The Company hiring a person in the position of [title] having the following skills acceptable to the Board [list].

  3. A patent being granted in [country].


An Ordinary Share is the most common type of share issued by a company. The holder of Ordinary Shares has the right to Dividends, on Liquidation the right to receive surplus capital in proportion to the number of Ordinary Shares held, to attend and speak at general meetings of the company, and to vote at general meetings, having on a Poll the number of votes equal to the number of Ordinary Shares held.

An Option is a contractual right to have shares issued to the holder of the Option, at a predetermined Exercise Price or Strike Price. It is used to incentivise staff. For example, a staff member may have 10,000 options, that is, the right to be issued 10,000 shares, at 50c per share, exerciseable at any time during the Option Period. If the Start-Up Company is successful and the value of its shares increases to $5 each, the employee will exercise the option at 50c per share, to receive a share valued at $5, and obtaining a benefit of $4.50 per share. It is a right not an obligation, so if the value of the shares fall to 10c, the employee has no obligation to exercise the option.

An Option Period is the period during which an Option can be exercised, usually expressed as a fixed number of years.

Poll, at a general meeting of a company, is voting on a resolution by reference to the number of shares held, with each shareholder having one vote per share, instead of voting on a show of hands.

Pre-Emption Right is a right conferred on the holders of Preference Shares, and is the right to take up a new issue of shares before other shareholders, and the right to purchase existing shares from other shareholders who offer them for sale, again, before other shareholders can purchase them.

Pre-Money Valuation or just simply Pre-Money is the amount determined to be a Start-Up Company’s market value immediately before a Round of Investment.

Preference Shares are any class of shares that carry preferential or priority rights, compared to the rights of Ordinary Shares. The holders of Preference Shares may have a Preference or priority to receive Dividends (before dividends are paid to the holders of Ordinary Shares), surplus capital on the Liquidation of the company (before distributions of surplus capital to the holders of Ordinary Shares. They may also have the right to vote at a general meeting of the company on an “As Converted” Basis. There may also be other types of preference rights. This is the type of share usually sought by an Angel Investor and a Venture Capital Investor.

Redemption occurs when Preference Shares are redeemed by their shareholder, being given back to the Start-Up company in return for a predetermined amount, which might be the same as the price paid for the shares, but is more likely a predetermined higher amount.

Reserved Matters – see Consent Matters.

Round or Round of Investment refers to a capital raising occasion where capital is raised in return for shares. A Round of Investment can be distinguished from other Rounds by labelling the Round a Series. (See Series A, Series B etc). Rounds are paid by instalments called Tranches (see Tranche).

Seed Investment is a relatively small investment into a Start-Up Company to get it started. It could be made by an Angel Investor or a fund that makes Seed Investments. It could also be made by the Founder’s friends and family.

Series A Round is a company’s first Round of Investment to a Venture Capital Investor. Shares issued to the Founders are not normally referred to as shares in a Series.

Series A Shares are shares issued in the course of a Series A Round.

Series B Round is a company’s Round of Investment that follows the Series A Round, etc

Series B Shares are shares issued in the course of a Series B Round, etc.

Share Plan is a plan under which shares are issued to a Start-Up Company’s staff and directors to incentivise them, setting out the conditions under which this occurs, including Vesting conditions. Compare an ESOP.

Shareholders Agreement is an agreement between a company and all its shareholders regulating their relationships on such matters as Consent Rights, Pre-Emption Rights, Tag Along Rights, Drag Along Rights, etc.

Tag Along rights are a Preference Shareholder’s right to participate in or “tag along” to an Ordinary Shareholder’s sale of the Ordinary Shareholder’s shares.

Term Sheet is an investor’s written investment proposal to a Start-Up Company, setting out in detail the terms of investment proposed by the investor, including the rights to attached to Preference Shares, and other matters.

Trade Sale occurs when either

  1. a Start-Up Company sells all of its assets, which is usually followed by Liquidation and the distribution of the proceeds of sale amongst the shareholders, or

  2. all the shareholders sell all of their shares to the same buyer.


Tranche is an instalment of a part of a Round, the payment of which is usually triggered by a Milestone taking place. See also Capitalisation Table.

An Up Round is a Round of Investment where the price per share is higher than in the previous Round. Compare Down Round.

Venture Capital Investor is a fund manager, managing a fund that is set up to make venture capital investments into start-up companies, managing those investments, and then seeking Exits.

Vesting refers to the progressive accumulation or “vesting” of shares under a Share Plan or an Option Plan. For example, a staff member is allocated 100,000 Ordinary Shares, with 20,000 of them “vesting” each year. If the staff member resigns after 2 years, the staff member in fact only has 40,000 shares, not 100,000. “Vesting” occurs when the condition that attaches to the staff member’s ownership of shares takes place. It could be by reference to a period of service, or the achievement of a Milestone.

Voting on an “as converted basis” refers to a Preference Shareholder calculating the number of Ordinary Shares that the Preference Shareholder would have if it Converted its Preference Shares into Ordinary Shares on the date of the company’s general meeting, taking into account for example, an Anti-Dilution clause, such as a Full Ratchet or a Weighted Average Ratchet, and then voting on any question at the general meeting with the number of votes equal to the number of Ordinary Shares it has calculated, instead of the number of votes equal to the number of Preference Shares it actually holds, if the former results in a higher number than the latter.

Weighted Average Ratchet is an Anti-Dilution provision where the rate of Conversion is calculated by reference to an average price for which shares are issued in all Down Rounds, as well as by reference to the extent of capital raised in each of those Down Rounds. Compare Full Ratchet.

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