Glossary of Terms

Accredited Investor

An investor, granted the right to invest under securities regulations, based on certain income criteria. See the definition under the Securities (Crowdfunding) Rules of the ECSRC.

Angel Investor

A wealthy individual who provides funding to a start-up company from their own resources, in exchange for a percentage ownership in the company (shares), or convertible debt (see below).

Campaign

An online presentation on the company to the public i.e. prospective investors via a crowdfunding platform.  The presentation includes the offering document (see below), a pitch document, video, and other materials that will tell the company’s “story”.

Capitalization Table

This table provides a picture of the share ownership in a company – Founders, employees and investors.  The Table is a “live” document, which is updated with each equity investment round for the company.

Common Stock

A security representing ownership in a company.  In an equity investment context, common stock is generally only owned by the Founder and present and future company employees.  In the event of a company sale or liquidation, common stock holders are “last in line” to receive payment for their investment.

Convertible Debt or Convertible Note

A loan to a start-up or early stage company that converts to a percentage equity ownership at a certain point, i.e. a “trigger event”, usually when the company raises its first round of investing (usually an angel investment).  The loan converts at the same share price as the first investment round.

Crowdfunding

Financing a project or start-up/early-stage company by raising small contributions, through an online campaign, from many individuals (the public), using a crowdfunding platform acting as a financial intermediary.  The contributions can either be a donation, a loan, or an equity investment.  Contributions can also be made in exchange for a reward.

Crowdfunding Intermediary (Financial Intermediary)

The crowdfunding platform that hosts campaigns for an individual or a company in exchange for a fee. 

Curation

The screening process used by equity crowdfunding platforms to determine which companies will be eligible to host their campaigns on the platform.

Dilution and Anti-dilution

Dilution is the percentage ownership given up by Founders to equity investors.  Founder ownership is diluted with each equity investment fundraising round.  First round investors equity ownership will be diluted as well with each round, unless anti-dilution provisions for investors are included in the Term Sheet. Anti-dilution provisions also essentially protect the conversion value of the preferred stock of first round investors, if there is a down round.

Down Round

An equity investment round in which investors value the company at a lower pre-money valuation than the previous round – a sign that the company is not meeting its milestones as projected.  Essentially, the cost of the company’s shares  in a down round will be less than what the earlier investors paid.

Drag-along rights

This is a provision that forces minority shareholders in a company to accept  the same sale terms as the majority shareholder(s), in event that the company is sold.

Due Diligence

A detailed and comprehensive assessment of an investee company by a potential investor to determine whether to invest.

Equity Crowdfunding

The raising of funds by small businesses from the public via an online platform (crowdfunding intermediary).  The platform provides management services to these investors on behalf of the businesses, for a fee.

Exits – acquisition, IPO, liquidation

How an equity investor ends an investment in an investee company, and retrieves their original investment and a profit.  This is done when a company gets acquired by another company, or the company goes “public” through an IPO, or it is liquidated and the assets sold.

Initial Public Offering (IPO)

Sale of the shares of a privately held company to the public via the stock exchange.

Internal Rate of Return (IRR)

This is a metric used to calculate the profitability of an investment. It is the rate of return on the investment required for the net present value  (NPV) of the investment to be equal to zero.  The NPV is the difference between the market value of an investment and its cost. Generally, the higher the IRR, the more attractive the investment.

Issuer

A corporation or government that sells securities  – stocks or bonds to fund its operations.

Liquidation Preference

This means that owners of preferred stock i.e. equity investors, get paid back first when the investee company is sold or liquidated.  The Liquidation Preference is a key component of the Term Sheet.

Lock Up

This is a provision in the Term Sheet where shareholders are prevented from selling or transferring their shares within a certain timeframe.  This arrangement is most often found in an IPO situation, where private investors cannot sell their shares in the company for a certain period of time once it goes public.

Mezzanine Financing

This is a hybrid debt financing vehicle that converts the loan into equity ownership in the company in case of a default.  This is not suitable for companies in the start-up or early stages of the business cycle.  The risk level falls midway between a conventional loan from a bank, and an equity investment.

Non-participating Preferred Stock

The stockholder is only entitled to recoup their investment, but not to participate with the common stockholders in the payout in the event of a company liquidation.

Offering Document

A document produced by a corporation for prospective equity crowdfunding investors providing a complete profile of the company, the terms of the investment, the number of shares being issued, the funding being requested and the share ownership being offered.  The offering document should be accompanied by a pitch document, a short video and detailed financials, including projections.

Option Pool

This is a stock option structure – shares of stock reserved for future employees in an early stage investee company, to be allocated if the company goes public in an IPO.  This is often required by VC investors.

Participating Preferred Stock

The stockholder is entitled to recoup their investment and then to participate in the payout along with common stockholders if the company is liquidated.

 

Post-money valuation

The value of the company after the equity investment.

Pre-Money Valuation

The value of the company before the equity investment.  This valuation is important for both Company Owner and Investor.

 

Preferred Stock

Company shares issued to equity investors which have superior rights to holders of common shares, in that preferred shareholders get paid back first if the company is liquidated.

Primary Market

New stocks or bonds are being sold to investors by issuers for the first time.

Rate of Return

The gain or loss of an investment over time – usually a year – expressed as a percentage.

 

Representations and Warranties

A provision in the Term Sheet for an equity investment that both the Founder and the Investor are relying on each other to provide true and accurate information to close the investment deal.

 

Return on Investment (ROI)

The profit received from an investment divided by the cost of that investment.  So if you invest $2000 and receive a profit of $200, then the ROI is 10%.

 

Secondary Market

Investors buy and sell stock they already own, after these stocks have been issued for the first time.

 

Stock Options

An agreement giving company employees the right to by shares in the company at a fixed price.  This is often a benefit given to senior executives.

Stock Purchase Agreement

Contract for the company to issue new shares amounting to a percentage ownership of the company to the Investor, including the number of shares to be allotted to the Investor at a specific price.

Venture Capital

Equity investment, usually through a Fund, which pools resources from individuals and institutions – foundations, pension funds etc.  — to finance early-stage and more established companies, in exchange for a percentage ownership in the company.

Waterfall Analysis

A chart which describes the payout to Investors, Employees and Founders when the company is sold, based on the level of share ownership.  The analysis shows payouts under different sale price scenarios.