The ABC of venture capital (corporate law)

Accelerator: Institution that helps young companies to develop quickly through intensive coaching.

Added value: Value growth achieved through the contribution of management expertise and support from the investment company.

Add-on: Acquisition of companies to expand/strengthen the original company

Adjusted present value method: Special discount cash flow method for determining the company value.

Enterprise Value: total enterprise value

Premium: Premium paid on top of the nominal value of the company shares in the case of an investment. The premium plus the nominal value equals the issue price.

Anti-dilution protection: in order to ensure that the venture capital company does not lose its influence, anti-dilution protection can be agreed in the event of subsequent financing through a capital increase, which guarantees the fund a proportional increase in relation to the current shareholding.

Asset deal: Acquisition of the individual assets (assets and liabilities) of a company (instead of the shares).

Asset sales deal: Takeover transaction in which a large part of the purchase price is realized through the sale of assets of the acquired company. The sale of non-operating assets leads to a reduction in debt service.

Asset stripping: Breaking up an acquired company by selling parts of it or individual assets.

Auction procedure: Procedure for determining the issue value of a share in an IPO in which only the minimum price is set; procedure for determining the takeover or transaction price of a buy-out in which several competing investment companies bid for the target company

Balanced fund: Fund without a specific focus, whose strategy covers the full breadth of the investment business.

Beauty contest or beauty parade: Presentation of various providers of equity capital and know-how or various banks prior to the IPO.

Benchmark: Comparison with other companies in the market, outstanding points in the company’s development.

Bimbo: Combination of MBI and MBO

MBI (Management Buy In): Acquisition of shares in a company from external management

MBO (Management Buy Out): Takeover of the remaining shares by the previous management

Management: Management level of a company

Break-even point: indicates the sales volume at which the revenues just cover the fixed and variable costs, i.e. a company is neither operating at a profit nor a loss.

Bridge financing: Financial resources made available to a company in preparation for an IPO, primarily with the aim of improving the equity ratio.

Buffer: Expression for unused credit lines or cash reserves

Credit line: upper limit of a fixed loan for the borrower

Burn-out turnaround: Also known as a restart: drastic reorganization or restructuring of a company that has major economic problems. New company capital is brought in from third parties. The shares of the existing shareholders are diluted.

Share capital: Equity capital that must be contributed by the shareholders of a GmbH or UG at the time of formation

Company: an association of different persons established by legal transactions for the pursuit of a common purpose

Shareholder: Partner in a commercial enterprise

Burn rate: the period in which the capital made available to a company is used up.

Business angel: Wealthy private individual who participates in a business idea or company with active support (know-how, business contacts) and/or capital. In return, a business angel receives capital shares in the company. Seed capital financing is particularly widespread in the Anglo-American region.

Seed capital: Financing funds which are used to cover capital requirements in the early phase of a company’s development (seed phase).

Business plan: A company’s business plan in which the plans, objectives and ways of achieving them are listed and quantified.

Buy and build strategy: Acquisition of several companies in order to create a larger group/holding company.

Buy back: Exit variant in which the shares are bought back by the existing shareholders.

Buy Out: Company takeover by equity investors and management.

Equity investment: investment buys assets in a company (you get a share of the profit of the funded company)

Debt investment: Company borrows money as a loan and must repay this loan regardless of whether the company fails or not

Capital gain: Capital gain from the sale of company shares.

Capital gain: Difference between the acquisition or book value of an item and the proceeds from its sale, plus any costs incurred on the sale.

Capital under: Fund volume, total of a company’s capital available for management participation.

Capital Fund: Fund that is part of or belongs to a larger financial institution (contrast: Independent Fund)

Carried interest: Profit participation of the management company and its managers in the success of the managed funds. For example, 20% for the management company and 80% for investors. A hurdle rate is usually built in.

Case scenarios: Various case studies are carried out in connection with the review of a potential investment: A “pessimistic/worst case scenario” stands for a negative development, an “optimistic/best case scenario” for the more favorable development and a “most likely scenario” for a development considered most probable.

Cash flow deal: Traditional form of MBO that is largely financed on the basis of the cash generated by a company. The key figure is the cash flow from which the repayment of the borrowed capital and the interest burden for financing a buy-out must be borne.

Debt: opposite of equity: a company’s debts, liabilities and provisions 

Chinese walls: Information barriers that exist within a financial institution so that different departments are unaware of each other’s activities, or that are erected to avoid conflicts of interest, for example.

Closing: Partial or complete completion of a transaction or a fund.

Commitment: Obligation to pay the agreed amount into a fund by an investor.

Convertible debt: Bonds or debentures of a company that can be converted into shares or units.

Corporate venture capital: equity financing by industrial companies or their own investment company, which pursue strategic group interests in addition to high returns.

Co-venturing syndication: Investment in a company by several investors, one of whom acts as lead investor.

Cram Down: Entrepreneur must give more shares to investors in exchange for less money

Deal flow: Investment opportunities that are offered to an investment company.

Debt: Debt financing, usually via secured bank loans.

Delisting: Taking a company off the stock exchange (going private).

Development capital: Capital to finance the business development of mature medium-sized companies (expansion financing).

Direct participation: Contribution of additional share capital to a corporation, investor becomes co-shareholder.

Disbursements: Payment of capital on the occasion of an investment.

Discounted cash flow: Probably the most common method for determining the value of a company Discounting models:

Discounted EBIT: Method for determining the company value on the basis of EBIT.

Discounting models: Valuation models that discount future earnings expectations to a defined point in time and thus determine the value of the investment at that time.

Divestment: partial or complete sale of shares or assets in a company by an investment company (exit)

Down round: Financing round in which the valuation of a company, and thus its financing, is lowered and the investor’s stake is thus increased.

Drag-along: Also known as bring-along or come-along: Obligation to sell; contractual agreement in shareholding and/or partnership agreements that impose an obligation on one or more investors to their own shares on the same terms in the event of the sale of shares in the company by a shareholder/group of shareholders, in order to enable the buyer to acquire all or at least a controlling majority of the shares.

Due diligence: detailed investigation, examination and evaluation of a potential investment company as a basis for the investment decision.

Early Stage Financing: Financing the early stage development of a company, starting from the financing of the concept to the start of production and marketing (seed and start-up).

EBIT: Earnings Before Interest and Taxes: a benchmark used in the valuation of companies on a debt-free basis.

EBITDA: Ordinary operating result before interest, taxes, depreciation and amortization, including amortization of good will.

Equity: Equity capital.

Equity kicker: Possibility for lenders or mezzanine capital providers to acquire shares in the partnership or corporation to be financed at special conditions.

Evergreen fund: Fund of an equity investor that does not have a limited term and is provided with additional capital by the shareholder(s) as required.

Exit: Exit of an investor from an investment by selling his share by way of: Buy Back, Trade Sale, Secondary Purchase, Going Public.

Expansion Financing: Growth and expansion financing: the company in question has reached the break-even point or is generating profits; the funds are used to finance additional production capacity, product diversification or market expansion and/or for further working capital.

Feasibility study: Analysis of the technical and economic feasibility of a project.

First Round: First financing round for a company that receives external equity for the first time.

Flip: Short-term investment where the exit is already determined before the deal is closed.

Fund-of-fund: Investments from a fund of funds in various VC/PE funds, i.e. RITA does not invest directly in companies.

Fund raising: Start-up phase of a fund of equity investors in which institutional, industrial or private investors are to be persuaded to subscribe to fund shares.

Profit participation right: Form of mezzanine capital: Asset right that is securitized in the form of a profit participation certificate and entitles the holder to participate in the profit and/or liquidation proceeds of a company.

Going private: Repurchase of a company from the stock exchange into private ownership.

Going public: A company’s flotation on the stock exchange.

Growth capital: Another term for growth or expansion capital.

Hands off: After providing equity capital, the company is allowed to operate without direct intervention until the exit; rather passive support through participation in advisory boards, supervisory boards, etc.

Hands on: Active support: the investor aims to increase value by actively supporting the management (activities that go beyond participation in advisory boards, supervisory boards, etc.).

High flyer: Term for shares or company investments with an extreme increase in value and a price/earnings ratio well below average, as opposed to flop.

Holding period: Time during which an investment remains in the portfolio.

Hurdle rate: Before the profit participation of the management company or its management becomes effective, the investors initially receive a basic remuneration.

Incubator: Facility in which young companies, primarily from the information and communication technology sector, are intensively supported and developed.

Independent fund: Independent fund or investment company that is not controlled by a specific financial group and engages in fund raising: Contrary to captive fund.

Institutional: Large institutions, e.g. credit institutions.

Investment proposal: Proposal to potential investors for an investment by the VC/PE company.

IPO: Initial Public Offering: In the Anglo-American world, a term for the first public issue of shares in young and medium-sized companies.

IRR: Internal rate of return. Financial mathematical method for calculating the return on an investment.

Later Stage Financing: Financing of expansions, takeovers, bridging, etc. for small and medium-sized companies.

Lead investor: in a syndicate of investment companies, the investor – usually with the largest share – who takes over both the organization of the financing and the hands-on support.

Legal due diligence: Legal examination of all existing contracts as part of the review process prior to an investment.

Letter of Intent LOI: Written, usually non-binding declaration of intent by an investor, which contains the key data of the intended investment.

LBO: Leveraged buy-out: Predominantly debt-financed company acquisition.

Liquidation preference: provision in venture capital financing that enables a VC/PE company to receive a paid-in premium back on exit before the remaining profit is distributed equally among the shareholders; in this case, the premium is treated as a loan.

Listing: Listing of a company on the stock exchange.

Living Dead: A perfectly viable company that is not achieving the targets set by the investment company and may therefore be dropped.

MBI: Management buy-in: Takeover of a company by external management with the (financial) support of equity investors.

MBO: Management buy-out: Takeover of a company by the existing management, usually with the help of equity investors.

Mezzanine money: means of financing that fill the financing gap between debt and equity in the capital structure, particularly in the case of MBOs/MBIs; common forms in Germany are subordinated debt, profit-participating loans, shareholder loans, preference shares, profit participation certificates, silent partnerships, seller’s notes

Milestone: Firmly agreed targets, upon achievement of which, for example, further capital flows.

Newco: Acquiring company: temporary company for the acquisition of a company as part of an MBO/LBO.

Open participation: Direct participation in a company through the acquisition of company shares.

Profit-participating loan: Form of mezzanine capital; loan that gives the lender a say.

Pay Back: Invested amount plus capital gain, realized on exit.

PIPE: Private Investment in Public Equity; investment by an investment company in a listed company.

Placement agent: Company that professionally handles fund raising for VC/PE companies for a fee.

Portfolio: Total capital invested in equity investments by an equity investment company, spread across commitments in various financing phases and sectors with the aim of distributing risk; investment portfolio on the books.

Post Money Valuation: Value of a company after a financing round.

PRE IPO: Equity financing prior to an IPO Bridge Financing.

Pre-money valuation: Value of a company before a financing round.

Private debt: Debt that is primarily provided by institutional investors, usually outside the banking sector, in the course of a private placement.

Private equity: generic term for all forms of equity investment: Venture capital, buy-outs and mezzanine – equity capital in the broadest sense

Private High Yield Bond: privately placed high yield bond

Private Placement Private: Placement of shares without recourse to the stock exchange, in contrast to a public offering.

Protective provisions: catalog of measures for which a company requires the approval of investors.

Public offering: Public offering of shares on the stock exchange as opposed to private placement.

Quick ratio: Measurement of company liquidity to assess the creditworthiness of a company (total assets, total liabilities).

Subordination: Declaration by a lender in the event of insolvency to subordinate its claim to all other creditors in the distribution of the insolvency estate and to be taken into account at shareholder level (simple/qualified subordination).

Ratchet/sliding scale: Bonus and/or malus agreement under which equity shares can be acquired from the seller (bonus) or buyer (malus) at preferential conditions depending on the company’s target achievement.

Replacement capital: Purchase of company shares from shareholders who wish to leave the company.

Restart turnaround: due to the poor situation of a company, a new corporate concept is created; if necessary, the company is to be restarted with new management and a modified product range.

ROI: Return on Investment: Profit from distributions and the sale of an investment:

Second Round: Second financing round for a FINANCING company that has already received equity capital in a first round.

Secondary buy-out: an MBO, i.e. the MBO managers sell to the next generation of managers.

Secondary purchase: Exit variant; a private equity company sells its shares in a company to another private equity company or a financially interested partner.

Secondary venture: Investor who uses his fund to buy parts of CAPITAL portfolios or entire portfolios from VC/PE companies in order to further develop and sell them.

Seed capital: Financing the maturation and implementation of an idea into usable results up to the prototype, on the basis of which a business concept is created for a company to be founded.

ROI: Return on investment: Profit from distributions and the sale of an investment.

Seller’s note: Purchase price deferral “left standing” by the seller, quasi a seller’s loan (possibly linked to the degree of target achievement).

Senior debt: Bank loan that is serviced before equity and mezzanine in the event of failure.

Serial: Entrepreneur who has already founded, built up and sold one or more entrepreneurial companies.

Share deal: Purchase of shares in a company.

Smart money: Additional benefit that the investment company grants the company through immaterial support.

Spin-off: spin-off and independence of a department or part of a company from a company/group; spin-offs offer companies the opportunity to obtain capital in the short term by converting part of a company into an investment; spin-offs can also be the first step towards a complete sale of part of a company.

Squeeze-out: A provision of stock corporation law that regulates the compulsory departure of minority shareholders in return for cash compensation if a shareholder holds at least 95% of the voting rights.

Star: Company with an extreme increase in value that brings equity investors very high returns.

Start-up financing: The company in question is in the start-up phase, in development or has recently started trading and has not yet marketed its products or has not marketed them on a large scale.

Silent partnership: Silent partnership, usually with a fixed term, fixed interest and a fixed performance-related component; the participation can remain anonymous and is not entered in the commercial register (silent); the typical silent partnership participates in the profit and, if applicable, the loss of the company; an atypical silent partnership exists if the shareholder not only participates in the profit and loss, but also in the total business assets and thus in the increase in assets (hidden reserves).

Stock options: Form of employee participation through the transfer of shares in the company or the granting of rights to purchase shares or an increase in the value of shares to employees; form of motivation of employees by the company or shareholders.

Subordinated debt: Subordinated loan: A subordinated loan is subordinated in relation to other creditors. A declaration of subordination for the loan (subordination) has the effect that the claims of creditors are subordinated to the claims of some or all other creditors in the event of liquidation, insolvency or composition proceedings during the term of the loan. Due to the lack of or insufficient collateralization and the subordination to other creditors, the providers of subordinated loans generally demand a profit-related risk premium for the provision of capital in addition to a fixed remuneration.

Succession problem: Succession problems in family-run medium-sized companies, which are often solved by buy-outs.

Sweet equity: Incentive remuneration for founders/management by the investor.

Syndication: Co-investments: several equity investors join forces to finance larger investments with high risk.

Tag Along: Also known as pull along or take along: Right to sell, contractual agreement that allows investors to sell part or all of their minority shareholding on the same terms as the majority shareholders.

Target: Target company for a company takeover or equity investment.

Tax due diligence: Examination of the tax risks of a company in the course of the audit process prior to an investment due diligence

Term sheet: financial and other key data of a transaction on which the parties have agreed.

Track record: History of success and experience of an investment company, a company or a manager/entrepreneur.

Trade sale: Sale of company shares to an industrial investor.

Turnaround financing: Financing of a company that is to recover after overcoming difficulties (e.g. sales problems).

Vendor: Seller of a company or shares in a company.

Venture capital: Includes early stage, expansion, later stage – but not buy-outs and mezzanine.

Venture Catalyst: Institution as an intermediary between young technology companies and equity investors, screens, reviews and improves business plans and searches for suitable investors.

Venture leasing: Venture capital financed by fixed assets for start-ups and young companies in return for leasing fees.

Vintage year: Year in which a particular fund was created and the first capital investment was made.

“Vulture” Capitalist: “vulture”, ironic-satirical term for financial investors whose aim is to make a “quick buck” using dubious methods.

Window on Technology: Preferred interest of an industrial group that wants to gain access to new technologies through equity investments.

Write off: Total loss of an investment, i.e. total write-off of the invested funds.

Yield: rate of return for bonds/result from a capital investment

Zero bonds: Bonds without securitized interest; the yield comes from the difference between the purchase price and the redemption amount.