The Book of Jargon®

Acronym for Venture Capital or Venture Capitalist, as the case may be.

Acronym for Venture Capital Operating Company.

The value of a company. This value can refer to either Enterprise Value or Equity Value, which is often the same for Early Stage Startups with little cash and no Debt. A VC discussing Valuation is almost certainly referring to Equity Value.

A term that could be negotiated for in a Convertible Debt Financing, which essentially means that when the Convertible Promissory Notes convert in a future Preferred Stock Financing there is a cap/limit on the Pre-Money Valuation that will be used to determine the conversion (essentially providing protection for those Investors who were willing to come in early). As an example, if there is a US$10 million Valuation Cap in a Convertible Note Financing and the Financing Round that will trigger the conversion has a Pre-Money Valuation of US$20 million, the holders of the Convertible Promissory Notes would convert into Preferred Stock at the lower US$10 million Valuation because of the Valuation Cap (which, in this example, means they enjoy a 50% discount off the price paid by the new Investors in the Preferred Stock Financing and therefore receive twice as many Shares than they would have received at the US$20 million Pre-Money Valuation).

Risk capital in the form of Equity (or sometimes Debt) that an investment institution provides to back a business, typically a Startup, which is expected to grow quickly in value. Compare to Private Equity.

A Preferred Stock Financing led by Venture Capitalists.

The source of a Venture Capitalist’s investment funds. Venture Capitalists typically form Venture Capital Funds pursuant to existing law and then draw from this fund in order to make investments in Portfolio Companies.

A type of operating company that satisfies certain requirements, including, among others, that at least 50% of fund assets be invested in operating companies in which the fund has direct contractual “management rights” in order to be deemed not to hold plan assets subject to (ERISA). VCOC’s typically require a Management Rights Letter be executed in connection with all of its portfolio investments in order to help maintain the VCOC classification.

Person or investment firm that provides Early Stage funding to a company in return for an Equity interest. Often Venture Capitalists will bring technical or other expertise to the company. Most Startups spend weeks, months or even years trying to network and get meetings with VCs in order to Pitch their company in hopes of receiving an investment. VCs are irreverently referred to sometimes as vulture capitalists because they may take a large Equity position for a relatively low price. See also Angel Investor and VC.

Increasingly popular form of funding for Startup. There are specific banks who play in this space.

A technique commonly used in relation to Options or Restricted Stock granted to Employees and other service providers in Startups, whereby the rights to exercise the Option or the ability to hold the Restricted Stock free from the risk of Forfeiture/Repurchase Provisions are released to the holder in a staggered manner, becoming exercisable or held clear of restrictions at certain points over a specified time frame or upon the occurrence of specified Milestones. Vesting is viewed by VCs as the way to ensure that the very Founders these VCs are investing in have skin in the game. As a result, while many Founders may not want to apply Vesting on their shares, it is generally smart to put Vesting in from the beginning, not only to make the company more attractive to potential Investors, but also to minimize the risk of having to amend equity grant documentation at the time of a Financing to add Vesting (which would likely be on much less Founder-favorable terms). In addition, while all Founders think they are the perfect team when they start out, sometimes things don’t work out as planned. If there is no Vesting in place, then the Founder who leaves the company gets to keep all of his/her shares even though he/she is no longer working at the company — essentially getting a “free ride.” By contrast, if Vesting is applied to the Founder Shares, Vesting serves to protect the Founders who stay against the “free rider” problem.

The date from which the Vesting Schedule starts. For Employees, the Vesting Commencement Date is most commonly the first date of employment. By contrast, for Founders, this date is often a prior date, representing the time at which the Founders began working on the Startup (which can even be a date prior to Incorporation in order to give Founders credit for work done in advance of Incorporation).

The schedule provided in the applicable equity grant documentation (typically either an Option Agreement or Restricted Stock Purchase Agreement (RSPA)) that sets forth the Vesting terms for the grant. A typical Vesting Schedule provided to Employees in a Startup is four years, with Cliff Vesting for the first year and monthly Straight-Line Vesting thereafter (i.e., 25% of the total Shares vest after year one and monthly Vesting then occurs during years two through four, so that if you leave the company at the end of year two, you will have only earned half of your Shares).

An agreement that a company typically enters into when it issues Preferred Stock to Investors in a VC Financing, which sets out, among other things, the rights of various parties to designate Directors to the Board and includes the Drag Along provisions.

Generally, a Stockholder’s right to vote on certain matters pertaining to the company.