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Similar to an Incubator, but typically focused on shorter time frames with the goal of quickly determining whether a business will be a success or failure in order to minimize the loss involved.
- Accredited Investor
Defined under SEC Rule 501 of Regulation D or Reg D, covers the people and entities that may be offered and sold Securities in a Private Placement without burdensome disclosure requirements (Non-Accredited Investor technically may also participate but the requirements to do so usually outweigh the benefit of allowing it, so this participation is rare). The term covers virtually all types of institutions that are participants in the private placement market (such as Angel Investors, Institutional Investors, Strategic Investors and VCs), and also includes people who either have high net worth or income or are sophisticated. See, by contrast, Crowdfunding.
- Accredited Investor Questionnaire
A questionnaire a company uses to solicit enough information to determine if a potential Investor would qualify as an Accredited Investor.
- Accrued Interest
The amount of Interest that has accrued and has not yet been paid on an obligation, such as a Convertible Promissory Note or other debt obligation.
- Accruing Dividend
A Dividend that automatically accrues without any Board action. However, the Accruing Dividend may still only be paid if and when the Board declares a Dividend or upon a Deemed Liquidation Event. For example, if a party has a US$100 investment and an 8% Accruing Dividend, then after year one the party would have an Accrued Dividend of US$8 that would need to be paid if and when the Board pays any other Dividend or when the corporation liquidates (for example, upon a sale of the corporation). An Accrued Dividend is similar to Accrued Interest, but for Equity. It may also have a compounding feature. An Accruing Dividend is sometimes used as a way to provide a minimum annual Return on Investment (ROI), but is not a very common term for an Early Stage Startup. Also called a Cumulative Dividend.
Another name for Buyer or Purchaser.
Generally, either the purchase or sale of a company.
- Acquisition Agreement
A generic name for any type of definitive agreement that accomplishes a Business Combination or an Acquisition of Securities or assets of another party.
In Early Stage companies, generally people who are not Directors, Employees or Officers, but might be useful to the company for strategic advice, introductions to Investors or other third parties (such as customers or vendors). Advisors often serve under an Advisor Agreement with some type of equity grant that will Vest over the period of time the individual serves as an Advisor. Advisors are generally expected to be available when called upon (which may be sporadic or may be a few hours a month) to provide general advice to the CEO and/or Board as needed.
- Advisor Agreement
An agreement under which an Advisor serves, which generally includes an equity grant with Vesting (typically Straight-Line Vesting, such as monthly over two years), and provisions providing certain obligations such as confidentiality and the Assignment of Intellectual Property.
- Advisory Board
If a company has multiple Advisors it sometimes forms an Advisory Board that includes all Advisors. This Advisory Board doesn’t usually meet, and is mostly in name only.
Defined slightly differently in different types of agreements, but generally refers to a Subsidiary, corporation, Partnership or other person controlling, controlled by or under common control with another entity. The official securities law definition is found in SEC Rule 144 and Rule 405.
- Affirmative Covenants
An agreement to affirmatively do something (think of these as the “Thou Shalt” covenants). These contractual provisions are often found in an Investor Rights Agreement that itemize certain actions the Issuer must take after an investment, such as paying taxes, providing financial and other information, complying with rules of special interest to an Investor (such as Qualified Small Business Stock (QSBS), or sometimes environmental rules and the like). Compare Negative Covenants.
In the context of a Financing Round, the amount an Investor will be able to invest in that round. As an example, if there are three Investors and each one is able to invest up to 33% of the deal, each allocation would be 33%, or US$3 million on a US$9 million offering.
- Angel Financing
Generally, a Financing Round where the Investors are Angel Investors and the investment is typically in a pre-product first or second round Startup based on an idea or minimally viable product.
- Angel Investor
Affluent individuals (as opposed to institutions) who invest in Early Stage companies in amounts typically ranging from as little as US$10,000 or US$25,000 up to about US$1 million. These Investors help bridge the gap between Friends and Family Rounds and institutional money. Angels sometimes invest together in groups to share investment ideas and resources.
- Anti-Dilution Adjustment
An economic adjustment to existing Securities that is triggered if a company sells Equity in a future Financing at a price below the Per Share Price an Investor paid for such Securities in a preceding Financing Round (see Down Round).
- Anti-Dilution Protection
See Anti-Dilution Provisions.
- Anti-Dilution Provisions
The provisions that affect the Anti-Dilution Adjustment. These provisions typically provide for an adjustment to the Conversion Ratio of Preferred Stock, so for example, instead of a share of Preferred Stock being converted to a single share of Common Stock (the typical starting Conversion Ratio), an adjustment might instead result in a share of Preferred Stock being converted to two shares of Common Stock. This adjustment allows the basic economics of a Preferred Stock investment (such as the Liquidation Preference) to remain the same, while giving the Preferred Stock a higher proportion of the corporation’s Fully Diluted Capitalization to make up for the Down Round. The overwhelmingly most common type of Anti-Dilution Provision in Venture Capital Financings is the Weighted Average Anti-Dilution Protection, which could be broad-based or narrow-based. More rarely, there is also Full Ratchet Anti-Dilution Protection.
The transfer of rights and obligations under an agreement to a new party. This transfer of rights commonly occurs when a Stockholder transfers Shares and needs to assign the rights and obligations attached to those Shares to the recipient. In most cases, the agreements that provide for these Stockholder rights have provisions that dictate whether Assignment is permissible and if the Issuer’s prior consent is required.