INVESTMENT TERMS FOR
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
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
All Hands Meeting: The full assemblage of a public offering team, including
officers, the company’s SEC counsel, accountant, the
and underwriter’s counsel.
Analyst: Someone who studies certain industries or stocks and
Angels: Typically refers to high net worth, private investors. (see
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
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
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
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
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