INVESTMENT TERMS FOR ENTREPRENEURS When meeting with potential investors particularly venture capitalists it is important to have a basic knowledge of the t by Richard_Cataman


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									               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
                                     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

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
                            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

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

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

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