INVESTMENT TERMS FOR ENTREPRENEURS When meeting with potential investors, particularly venture capitalists, it is important to have a basic knowledge of the terminology used by the different parties. The enclosed list will help you gain some insight into the investor vocabulary. We have included both terms for private investment as well as selected terms that apply to companies wishing to pursue a public offering. This list is for information only, and should be discussed with your legal counsel for verification. Accredited Investor: An investor in a private offering that meets certain financial guidelines, i.e. high net worth. Small companies that look for seed capital from angel investors usually limit their offering to accredited investors. All Hands Meeting: The full assemblage of a public offering team, including company officers, the company’s SEC counsel, accountant, the underwriter, and underwriter’s counsel. Analyst: Someone who studies certain industries or stocks and advises investors. Angels: Typically refers to high net worth, private investors. (see accredited investor) Best-Efforts Offering: An underwriter’s hedge: they agree to use their “best efforts” to sell your stock in a public offering but are under no obligation to purchase it. Bid and Ask: The bid price is the highest price someone is willing to pay; the ask price is the lowest price someone is willing to sell. Blue Sky: The name applied to state security laws. It’s origin is from the early 1900’s when fraudulent schemes included selling lots in the “blue sky.” It applies since a company that pursues investors in a given state should verify their offering conforms with that state’s securities laws. Capitalization: The total amount of securities issued by a company, which in some circumstances, can include short and long term debt. Comfort Letter: The letters that a company’s accountant issues to the underwriter to assist with the underwriter’s due diligence process. Often these discuss agreed-to procedures, or financial information. Comment Letter: The SEC’s (Securities and Exchange Commission) response to the initial or subsequent filings stating the areas of the registration statement that have been found to be incomplete or require further detail. Dilution: Often refers to the decrease in the percentage of ownership held by original shareholders when additional stock is offered. Due Diligence: A standard of reasonable investigation by a company’s underwriter, lawyer, or accountant. Due diligence is a process used in both private and public offerings, and can also refer to the background research a company may pursue if it is considering a partnership with your firm. Exempt Offering: A securities transaction that requires no registration statement under the 1933 Securities Act. Exercise Price: The price at which equity securities may be purchased in the future through exercise of a stock option or warrant. Firm Commitment: The agreement by an underwriter to buy all of the common stock offered at a fixed price and then resell it to the public. Form SR: The report of the actual usage of proceeds that must be filed with the SEC under the 1933 Act. Green Shoe: See overallotment. Gun Jumping: Excessive market stimulus before a registration statement becomes effective. The SEC may object to or postpone an IPO because of gun jumping. Investment Letter: A statement obtained from the purchaser of an exempt offering affirming that the securities are being bought for investment and not for redistribution. IPO: Initial Public Offering. Refers to offering securities for sale to the general public versus only to private investors such as angels, or venture capitalists. Letter of Intent: Agreement that the underwriter states an intention to sell your offering. (public) It does not obligate the underwriter to bring your shares to market but usually prevents you from dealing with other underwriters for a selected period of time. Lock Up: A contractual handcuff or escrow requirement by underwriters that prevents insiders (i.e. officers of the company for example) from selling their shares on the market for a specified period after going public. Often called “handcuffs”. Market Valuation: This is the total amount of a company’s outstanding shares of common stock multiplied by the current share price. For small private companies, this is often used as a way of asking “ how many shares have been issued, say to the founders, CEO, etc., and what is the price you are asking for the shares in your offering” – if they want the number before the current offering, it is “pre-money” and if they want the current offering included as if it has been completed, then it is a “post-money” quote. For many investors in private deals, the share price is viewed as a negotiation despite the number you may have initially arrived at internally. Changing it requires legal work with your documents. Overallotment: A provision that allows an underwriter to buy up an additional percent of shares issued from the company at the offering price, typically within 30-45 days of the offering date. For “hot IPO’s” where more people wish to buy than shares are available. It is known as the Green Shoe Option because the first company to do this was reportedly called Green Shoe. PE Ratio: The price of a share of common stock divided by its earnings per share. Private Placement: The issuance of securities that are exempt from registration because they are not being offered to the public. (typically small company financings to accredited investors only) The document utilized to do this is often called the PPM, or Private Placement Memorandum, and must be prepared with legal and accounting opinion if you wish to maximize your protection in terms of stating all risks, potentials, etc. Prospectus: The printed document used to sell shares to the public. It provides information to base investment decisions. Red Herring: The preliminary prospectus which is required to have a stamp on the front declaring that the registration statement has not yet become effective. This is what you circulate during the “quiet period” when SEC laws prohibit certain promotion of your company. Road Show: The tour by company officials and the underwriters designed to generate interest in your offering among potential investors during the “quiet period.” Also this term is used as a slang for the pursuit of private financing as well. Securities Act of 1933: Regulates the initial public offering and distribution of securities. Syndicate: Underwriters who form a group to offer your securities. Formed typically by the lead underwriter. Tombstone: Advertisement of your offering during the “quiet period.” It is permitted to state only the issuing company’s name, the title and number of shares being offered, and where the prospectus may be obtained. Underwriter: The underwriter (or investment banker – used interchangeably) with whom you reach an agreement to market your common stock. Window: The appetite and receptivity of the market to an IPO. Called a closed or open window as a result of conditions.
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