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10b-5 representation
A representation that all other representations in an agreement, taken together, do not contain any material misstatement and do not omit to state any material fact necessary in order to prevent the representations from being misleading. This term refers to Rule 10b-5 promulgated under the Exchange Act of 1934, as amended, but may be considered something of a misnomer, in that the breach of the 10b-5 representation as a contractual matter does not require proof of some of the elements necessary to a violation of the regulation.
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acceleration clause
A clause typically included in promissory notes permitting the holder of the note to accelerate the maturity date, and consequently the obligation to pay the note, upon the occurrence of an event of default under the note.
accredited investor
The SEC designation for an individual or entity that meets particular criteria defined in the Securities Act of 1933, as amended. Many investments, particularly ones that wish to qualify for the exemptions from registration provided by Regulation D, are only open to accredited investors. The gist of the definition provides that an accredited investor is one of:
(1) certain banks,
(2) certain private business development companies,
(3) corporations and certain other entities, not formed for the specific purpose of acquiring the securities offered, with a net worth in excess of $5,000,000,
(4) any director, officer, or general partner of the issuer of the securities being offer or sold
(5) any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000
(6) any natural person who had an individual income in excess of $200,000 (or joint income with such person's spouse in excess of $300,000) in each of two most recent years and has a reasonable expectation of the reaching the same income level in the current year
(7) certain trusts with assets in excess of $5,000,000 not formed for the purpose of acquiring the securities, or
(8) an entity all the owners of which are accredited investors.
alternative minimum tax
A set of alternative rules for determining federal income tax owed by a taxpayer. I the AMT exceeds the tax payable under the standard method then the taxpayer must pay the higher . Perhaps most significantly for technology entrepreneurs, the "spread," or the difference between the exercise price of an incentive stock option and its market value on the date it is exercised, is an item of preference for the purpose of calculating the alternative minimum tax, even though it does not count toward determining income tax owed by the standard method. It is up to the taxpayer to determine whether AMT exceeds the standard income tax payable.
amendment and restatement
A document, such as an agreement or a company's corporate charter, that has been both (1) amended as of a certain date and (2) combined into a single unitary document showing the effect of all amendments from the original date of the document.
amortization
In financial accounting, the allocation of the expense of fixed assets, such as plant and equipment, over their useful lives.
In a debt financing, the payment of the principal of a debt instrument over its term, as opposed to a balloon payment due on the maturity date.
angel financing
Financing provided by wealthy individuals, as opposed to professional venture capitalists. Increasingly, some angel investors are behaving more like professional venture capitalists, pooling resources and deal flow, investing as part of a group and insisting on venture capital-like terms in their preferred stock deals.
anti-dilution provision
Provisions contained in the preferred stock terms of a company's corporate charter or, sometimes, included in convertible instruments such as convertible notes and warrants. Anti-dilution protects the holder from the effect of certain actions that the issuer may take. These protections typically cover (1) capital dilution, where the holder's shares constitute a smaller percentage of the issuer's capital because of stock splits, reverse splits, and stock dividends, recapitalizations, mergers and other events, and (2) price dilution, or diminution in the value of the holder's shares reflected by the issuance of common stock, or common stock equivalents such as convertible preferred stock, options or warrants, at effective prices below the conversion price or exercise price of the protected security. Price anti-dilution protection comes in two basic types: full ratchet and weighted average.
arbitrage
A trading technique that is designed to capitalize on market risk or inefficiencies. An arbitrageur might, for example, make simultaneous purchases and sales on different markets of the same or equivalent financial instruments traded on more than one market in order to profit from price or currency differentials, or trade in the shares of two public companies that have announced a merger in order to profit from a gap between the market value of the target company's stock and the merger price.
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basis point
One hundredth of a percentage point (0.01%). Basis points are often used to describe interest rates or changes in or differences between interest rates.
basket
A contractual provision limiting or eliminating liability of an indemnitor under a contract for losses incurred by the indemnitee under a specified amount. Although such a provision can have a variety of features, the two main alternatives are (a) a basket that acts as a deductible - i.e., where the indemnifying party is liable only for losses that exceed the basket amount, as opposed to (b) one that is a mere threshold, i.e., where the indemnifying party must pay "from dollar one" if the liabilities reach or pass the basket amount.
bid and ask
A mechanism to match up offers to buy and sell securities. A bid is an offer to pay a fixed amount that is held open for a period of time, and an ask is an offer to sell for a fixed amount, that is held open for a period of time.
blackline
A copy of a document that has been marked to show changes from a prior version. Sometimes also referred to as "redline."
blanket lien
Also called an "all-assets lien," a lien or security interest granted on all of the assets of the person granting the lien, as opposed to a lien on a single asset or a category of assets such as accounts receivable or inventory.
blue sky laws
Securities laws enacted by the various states and territories of the United States. Since the National Securities Markets Improvement Act, or NSMIA, was passed in 1995, the securities laws and regulations enacted by the U.S. federal government, especially those under Regulation D governing certain private placements, pre-empt some, but not all, state blue sky laws that would otherwise apply to those transaction.
board observer
An individual, usually appointed by a significant investor pursuant to a contractual right held by such investor, who is permitted to attend and participate in meetings of the board of directors, but is not a member of the board and is not entitled to a vote on any matter before the board.
boilerplate
A term used to refer to provisions in contracts, often toward the end, that are thought to be "standard" or relatively uncontroversial or unimportant. Despite the somewhat pejorative connotation, the "boilerplate" sections of an agreement can contain terms that affect the parties' rights significantly.
book value
An enterprise's "book value" is the value of common stockholders' equity as it appears on a balance sheet, equal to total assets less liabilities, preferred stock and intangible assets such as goodwill.
The "book value" of an individual asset on a company's balance sheet is the original cost of the asset less accumulated depreciation.
break-up fee
The price that one party must pay another for terminating a contract before the closing. This provision most commonly appears in public company mergers and acquisitions where the deal is announced well in advance of the closing and the acquiror wants to protect itself from other bidders. Private transactions sometimes, but much less commonly, feature break-up fees.
bridge financing
Interim funding, often in the form of a loan, to provide working capital necessary for a company to continue operations while it completes its next round of equity financing. Typically, principal and interest on the promissory notes issued to bridge investors will convert into shares of the equity security issued in the subsequent financing, sometimes at a discount. What is bridge financing?
bring-down
A representation made at the closing of a transaction renewing representations and warranties as of the date of the closing.
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carried interest
In a venture capital fund limited partnership agreement, the percentage of profits that the limited partner investors agree to distribute to the general partner. It is called "carried interest" because it is not tied to funds invested. Also used sometimes to refer to incentive distributions earmarked for management employees of operating companies that are organized as limited liability companies.
carveout
An exception to a representation, warranty, covenant or other contractual term.
change of control
A contractual term providing that something will happen upon a sale (or other event that results in the current owners no longer controlling the business) of a business. One example is a provision in an option or other compensation arrangement that accelerates option vesting or pays severance upon a sale of the business.
clawback
A term commonly used found in venture capital fund documents and other private equity partnership agreements. To the extent that the general partner of the fund, at the time for final distributions, is found to have received distributions exceeding its allocated share of profits, the clawback provision requires redistribution to the limited partners of the excess amounts. This can happen when, for example, a fund distributes to the general partner its 20% carried interest on the first couple of portfolio investments that the fund liquidates at a profit, and then the fund loses money on the rest of its investments, leaving the general partner with distributions exceeding 20% in the aggregate. When this happens, the individual members of the entity serving as general partner of the fund are usually personally responsible for paying the clawback amount.
closing
The time of completion of a transaction, when, if all of the conditions to the completion of a transaction have been satisfied (or waived), all the closing documents are executed and delivered.
A closing checklist is a list of the documents that have to be signed and the actions that have to take place at or before the closing can occur.
common stock
A share of the equity ownership of a corporation. Generally, common stock is endowed with voting rights and entitles the holder to share in the company's success through dividends (when as and if declared by the board of directors) as well as capital appreciation. In the event of a sale of the company, holders of common stock usually have rights to the company's assets only after the claims of creditors and preferred stockholders have been satisfied.
compounding
The process by which interest income is earned on interest that has previously been earned. The end value of the investment includes both the original amount invested and the reinvested income.
conception
In intellectual property law, the mental realization of a complete and operative invention, usually before the invention is reduced to practice.
covenant
A provision of an agreement that requires or restricts some action by the party agreeing to perform the covenant; e.g., a non-competition clause is commonly regarded as a covenant.
cross-default
A default under one agreement that is treated as a default under another agreement. For example, a loan agreement between a borrower and a bank might provide that a default by the borrower under any other material agreement to which it is a party is also a default under the loan agreement.
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debenture
A long-term debt instrument used by governments and private companies to obtain funds. Shorter-term convertible debentures are also sometimes used as financing instruments by microcap companies and others in PIPE transactions. A debenture is typically not secured by any liens or security interests on specific assets.
debt to equity
A common financial ratio, equal to long- and short-term borrowings divided by equity.
dividend
A distribution of money or property paid by a corporation to shareholders. Stock splits are commonly effected as stock dividends.
drag along right
A right that enables a specified percentage of a company's security holders, typically a majority of a given class or series of preferred stock, to require that other stockholders join in a transaction such as the sale of the company.
due diligence
A process undertaken by a potential investor, underwriter or purchaser to analyze and assess an investment opportunity or acquisition. The extent of due diligence can vary significantly with the size, complexity and perceived risk of the transaction, and can include among other things a review of the financial, legal and operational aspects of the target company and the transaction.
due diligence out
The right of a party to terminate a transaction if the party is not satisfied with the results of its due diligence examination with respect to the transaction.
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earn-out
A term in an acquisition agreement which provides for the payment of additional consideration following the closing of the acquisition based on the performance of the acquired business following the closing. Earn-outs can be useful to bridge a gap between the parties' different pre-closing value assessments, but also can lead to post-closing disputes, because, among other reasons, the seller has an economic stake the performance of the acquired company but no longer controls its operations, and achievement of the earn-out criteria may or may not be consistent with the buyer's overall objectives.
EBITDA
EBITDA is an acronym for Earnings Before Interest Taxes Depreciation and Amortization. It is a widely used measure of financial performance that is intended as a measure of the cash generated by the operations of a business.
EIN
Employer Identification Number, an identification number assigned by the IRS to all businesses with paid employees.
elevator pitch
The brief and concise description, typically to a potential investor, of a product or a business plan, ideally taking no more time than is required for the average trip in its namesake conveyance.
engagement letter
A formal letter written by a professional service provider to a client in advance of starting work for the client. The engagement letter typically defines the type and quantity of work to be performed, fee(s) involved, payment schedule and conditions of final payment and acceptance by the client.
equity
Ownership interest in a company, in the case of a corporation in the form of common stock or preferred stock. The term is also used to describe total assets minus total liabilities, and in this context it is also referred to as stockholders' equity or net worth.
equity line financing
A term that refers to a type of PIPE financing used by some public companies (often small underfunded public companies) pursuant to which they may require investors to purchase their stock from time to time. An equity line financing differs from a typical PIPE transaction in that once the registration statement is effective, the issuer can decide when and how much to draw on the line, whereas in a PIPE deal the issuer receives all of the funds upon executing the agreement and before filing the registration statement.
escrow
Generally, any property held in trust pending the satisfaction of a condition by the grantee. In the mergers and acquisitions context, refers to the portion of merger consideration withheld from the sellers at closing for the purposes of satisfying any claims under the indemnity. The escrow is subject to a specified term, and any proceeds remaining in the escrow at the conclusion of the term are distributed to sellers.
event of default
An event or action by a party to an agreement which is a breach of the terms of the agreement.
exhibits and schedules
Attachments to a document, e.g., a merger agreement. The text of these documents usually forms part of the agreement to which they are attached or otherwise relate.
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fairness opinion
The opinion of an investment bank regarding the fairness to the target's stockholders of the price offered in a merger or acquisition.
FASB
Financial Accounting Standards Board, an independent entity primarily responsible for establishing and interpreting generally accepted accounting principles in the United States, or GAAP.
fiduciary out
A provision in an acquisition agreement that permits the target company's board of directors to terminate a proposed acquisition if a better deal arises with another acquirer.
floating rate
An interest rate that fluctuates according to a specified index or prime rate. Also called "variable rate."
full ratchet
A type of anti-dilution protection in which the conversion price of a convertible security, such as a share of preferred stock, is reduced to any lower price for which the common stock of the company is later issued. It is considered to be a more onerous and less common alternative to weighted average protection, in which a later, lower-priced issuance by the company lowers the conversion price only to the extent that it reduces the weighted average price of all relevant shares issued by the company.
funds flow memorandum
A document describing payments and receipts of funds in connection with a transaction. Also see "sources and uses."
further assurances clause
A term in a contract under which a party agrees to take additional actions after the closing (including executing other documents) as may be necessary to effect the intent of the parties to the contract.
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GAAP
Generally Accepted Accounting Principles.
In the U.S., this term, typically refers to accounting principles generally accepted in the U.S., as developed for the most part by the Financial Accounting Standards Board. "U.S. GAAP" differs in material respects from generally accepted accounting principles of other jurisdictions and from international financial reporting standards.
In a financing transaction or acquisition, the subject company is often required to represent and warrant that, e.g., its financial statements have been prepared in accordance with GAAP. As the application of GAAP is a matter requiring the judgment of management, the parties to these transactions often negotiate as to whether this means "GAAP as the target company has historically applied it" or "GAAP as appropriate in the eyes of the acquiror or investor" -- these can differ.
going concern qualification
An auditor is responsible under Statement on Auditing Standards No. 59 to evaluate whether there is substantial doubt about a subject entity's ability to continue as a going concern for a period not to exceed one year from the date of the financial statements being audited. An auditor who concludes that such substantial doubt does exist, is required to reference its doubt in its report on the company's financial statements.
golden parachute
Compensation paid to top-level management by a target firm if a takeover occurs.
gross margin or gross profit
Revenue less cost of goods sold; often expressed as a percentage of revenue. Gross margin or profit measures the profitability of the company's expenditure of variable costs in producing its products and services, without regard to general, administrative or fixed costs.
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haircut
A reduction in amounts due under an earlier agreement, typically insisted on one party in light of changed circumstances.
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in the black
Profitable.
in the money
Used to describe options or other contracts to purchase shares of stock having an exercise price lower than the then fair market value of the underlying security.
incentive stock option
A type of stock option that meets several requirements of the U.S. Internal Revenue Code, including among others that it (i) is issued pursuant to a stockholder-approved plan, (ii) has an exercise price at least equal to the fair market value of the underlying stock on the date of grant, (iii) has a term of no more than ten years. Different rules apply for executive officers and significant stockholders of the company, and there are overall limitations on the amount of incentive stock options that can become exercisable per year. Also, to maintain incentive stock option status, the holder must hold the underlying stock for at least two years from the date the option is granted and one year from the date the option is exercised. If the holder meets all of the requisite conditions, including the foregoing, then (a) the holder will not realize a taxable event until the sale of the underlying stock and (b) any gain realized upon the sale of the underlying stock will be taxed at favorable long-term capital gains rates (although ISO holders must beware of alternative minimum tax arising on the exercise of ISOs). Different tax rules apply to nonstatutory options.
indemnity or indemnification
An agreement in which one party agrees to hold the other harmless, i.e., to compensate the other party for any loss caused by an event or circumstance covered by the indemnification obligation. Indemnification clauses are frequently included in venture capital financings and merger and acquisition transactions.
initial public offering ("IPO")
The first offering of a company’s common stock in an offering involving general solicitation, as opposed to a private placement. Traditionally, a company’s initial public offering was registered with the SEC on a Form S-1 or similar long-form registration statement, was underwritten by an investment bank on a firm commitment basis and was timed to coincide with the listing of the company’s shares on the Nasdaq Stock Market or another stock exchange. In the past few years, smaller companies have increasingly used other means of going public, including registrations under the 1934 Exchange Act without an underwritten offering, reverse mergers and offerings on exchanges outside the SEC’s regulatory ambit, such as the Alternative Investment Market of the London Stock Exchange.
intellectual property
Intangible property that is the result of creativity, including patents, trademarks, copyrights and trade secrets.
internal rate of return ("IRR")
The discount rate that produces a net present value of zero for a set of cash inflows and cash outflows. IRR is used by financial professionals to help make investment decisions. If the IRR estimated for a project exceeds the investor's cost of capital, or a "hurdle rate" based on the cost of capital, then the investment will be viewed favorably froma financial perspective, but it the IRR is less than the hurdle rate, then by that measure the capital required for the investment will cost more than it will return.
invalidity opinion
A legal opinion, preferably in writing and provided by a competent patent attorney, that a court should find one or more claims of a patent invalid and therefore not infringed.
ipso facto clause
A clause in a contract specifying that one party may terminate the contract or that it automatically terminates if, e.g., other party files for bankruptcy protection, makes an assignment for the benefit of creditors or otherwise becomes insolvent. Such clauses are almost universally found in a wide variety of commercial contracts, but they are not enforceable as a matter of U.S. bankruptcy law should the defaulting party file for protection from creditors in a U.S. bankruptcy court.
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junior debt
Debt that is subordinate to some other financial obligation of the debtor. In the event of a bankruptcy, claims of junior creditors are satisfied only after the satisfaction of claims of senior creditors.
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LBO
An acronym for "leveraged buy out." A takeover transaction in which a large percentage of the money used to buy the target company is borrowed. Most often, the target company's assets serve as security for the loans taken out by the acquiring firm, and the loan is repaid out of the cash flow of the acquired company.
legal opinion
A written statement of legal conclusions provided by one party's lawyer to the other party in the transaction. It is typical for venture investors or buyers in a company acquisition to request that company counsel issue a legal opinion to them regarding certain legal aspects of the transaction.
letter of credit
A document, issued by a bank pursuant instructions by a buyer of goods, authorizing the seller of the goods to draw a specified sum of money under specified terms, usually the receipt by the bank of certain documents within a given time.
letter of intent
A letter summarizing the principal terms of a proposed merger, acquisition or asset sale; in venture capital financings, this preliminary document is generally referred to as a term sheet. A letter of intent typically contains nonbinding terms of the proposed transaction as well as certain terms that are binding on the parties, such as confidentiality, a no shop clause, promises of reasonable cooperation with one or both parties' due diligence review and provisions for terminating the letter of intent if the transaction is not completed within a given period of time.
liquidation event or event of liquidation
One of a number of scenarios, usually defined in the charter of a venture-backed company, that will trigger payment to holders of a liquidation preference. This can include an actual legal liquidation of the company but also includes, and as a practical matter more often occurs under, a sale, merger or change of control of the company. Not to be confused with a liquidity event.
liquidation preference
In its simplest form, the right of a holder of a senior security to receive a specified amount, e.g., the purchase price or a multiple of the purchase price, upon a sale or liquidation of the business before junior holders are paid. Liquidation preferences feature a wide range of terms, such as relative preferences of different classes, multiples of the purchase price, stated dividends that accrue and are paid at liquidation and rights to participate in distributions to junior securities after the senior liquidation preference is satisfied.
liquidity event
An event that enables an investor to cash out or exit the investment by turning the investment into cash or marketable securities. For example, a venture capitalist or angel investor may look to an IPO or acquisition as as a likely exit or liquidity event.
loss carryover or carryforward
Losses that are carried forward from prior years to a later tax period to reduce tax liability. Loss carryforwards can be a valuable assets, but the company’s ability to use them will be limited after a change of control occurs.
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market
A term used to describe whether or not particular deal term is standard in the general marketplace for similar types of deals.
marketable securities
Securities that can be easily sold and be readily converted into cash.
mark-to-market, LIFO and FIFO
Mark-to-market - An accounting measure, referring to one of the methods traders record their positions. The value of an asset is recorded at the end of each trading day at the closing rate or value.
LIFO - An acronym for last in first out. An accounting method for valuing inventories for tax purposes. It assumes that last-acquired inventories (and their cost) are used first in production.
FIFO - An acronym for first in first out. The opposite of LIFO. It assumes that first-acquired inventories (and their cost) are used first in production.
material adverse effect clause ("MAE" or "MAC")
A provision in an agreement describing the type of event or circumstance that would allow a party, such as an acquiror in an m&a transaction, to abandon the deal because of the prospect of significant diminution in the target company’s business, financial condition, results of operations or prospects. After a recent court Delaware Chancery Court case, IBP, Inc. v. Tyson Foods, in which the court construed a MAC clause narrowly to the detriment of the buyer seeking to terminate, parties to m&a transactions have been paying closer attention to the description specific factual circumstances that would constitute a MAC.
merger clause
Also called an "integration clause" or an "entire agreement" clause, a term in a contract stating that the final agreement constitutes the parties’ complete and entire agreement and supersedes all previous agreements, understandings negotiations, etc. A merger clause is intended to prevent claims of misrepresentations made previous to or outside the execution of the contract, but may not inoculate a party against claims of fraudulent inducement and will not negate a claim for rescission under Massachusetts’ blue sky statute.
mezzanine financing
A form of debt financing junior and subordinated to traditional secured bank financing. This type of financing takes greater risk than typical senior debt and requires a higher rate of return. This return is often in the form of a relatively high interest rate coupled with warrants.
micro-cap
A public company with a relatively small capitalization. This term usually used to refer to a company with a market cap under $50 million, although different thresholds are used; e.g., the Advisory Committee on Smaller Public Companies recommended to the SEC that the "microcap" designation be applied to companies with market capitalizations below $100 million. Companies on the smaller end of the microcap range are sometimes referred to as "nanocaps."
milestone
An achievement (e.g., completion of a working prototype, or FDA approval) used to measure a company's progress in executing its business plan. Often used in venture capital financings to establish performance criteria for the company which, when achieved, will "unlock" the next tranche of committed funding.
milestones
Often used in venture agreements to describe a required level of performance which will trigger new obligations.
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NASD
The National Association of Securities Dealers. A self-regulatory organization operating under the supervision of the SEC. Its primary purposes are to regulate the affairs of securities firms (broker/dealers), promote fair and ethical practices in the securities business and enforce fair and equitable rules. It also operated the Nasdaq Stock Market, before Nasdaq became a stock exchange in 2006, and continues to operate the OTC Bulletin Board.
no shop clause
A contractual provision often found in a term sheet or a letter of intent for a financing or an m&a transaction, prohibiting the subject company from solicitating or negotiating competing offers. See also "fiduciary out."
non-infringement opinion
A legal opinion, preferably in writing and provided by a competent patent attorney, that a court should not find that a product or process is encompassed by any claim in a particular patent.
nonstatutory option
A stock option that is not an incentive stock option because it either fails, or is designed not to, meet the requirements of the U.S. Internal Revenue Code for ISOs. Perhaps the most common reason for an option becoming a nonstatutory option is the holder’s failure to hold the underlying stock for at least one year from the date the option is exercised. Typically the holder will be subject to federal income tax upon the exercise of the option, at ordinary income rates on the spread between the exercise price and the value of the issued stock as of the exercise date.
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off-balance sheet
Refers to arrangements, obligations or risks that are not do not appear on a company's balance sheet and so may not be sufficiently transparent to investors; these include guarantees, contingent liabilities, future contractual payments and variable interests, i.e., at-risk investments, in unconsolidated entities. After it became understood that Enron had used multiple special purpose entities to carry off-balance sheet debt and hide risk from investors, both the accounting profession and the SEC promulgated additional rules aimed at requiring more balance-sheet consolidation and better disclosure of these types of arrangements.
option
The right to purchase a given number of shares of stock at a price, usually the fair market price of the stock on the date the option is granted. Usually granted pursuant to the terms of a stock option plan adopted by the company, with a term of 7 to 10 years. Can be incentive stock options or nonstatutory options.
OTC Bulletin Board and Pink Sheets
The OTC Bulletin Board is an automated quotation system operated by the NASD and available for market makers to provide and seek quotes for publicly traded companies, provided among other things that the company is current in its SEC reporting requirements.
The Pink Sheets neither an exchange nor an automated quotation system, but rather a privately owned entity that is regulated as a non-exclusive securities information processor. It is similar to the OTC Bulletin Board in that market makers can issue quotes on the Pink Sheets, even for companies that are not SEC registrants (so long as they meet certain public information and other requirements), but unlike the OTC Bulletin Board market makers can also execute transactions on the Pink Sheets on an automated basis.
overhang
The percentage of a company's stock that is devoted to options or other outstanding obligations to issue stock. In the private placement context, a venture capital investor may derive the proposed per-share price by dividing the company's pre-money valuation by the number of shares outstanding plus the entire potential overhang.
over-the-counter
The trading of shares or commodities which are not listed on a nation securities exchange. OTC stock may be quoted in markets like the OTC Bulletin Board and the Pink Sheets, and transactions in OTC stocks occur over the telephone or through a computer network connecting broker/dealers. OTC stocks are generally issued by smaller companies that do not meet the listing requirements of major securities exchanges.
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paid-in capital and paid-in surplus
Capital of a company that is invested by investors as opposed to being generated by the company’s operations. The amount of paid-in capital in excess of the par value of the shares is referred to as "additional paid-in capital" or "APIC" on the company’s balance sheet.
par value
The stated value of a security. For equity securities, this designation does not indicate the actual value of the stock, and has little practical significance other than for technical matters such as calculation of the state franchise tax and legal prohibitions on issuing stock for less than par value (an issue sometimes faced by microcap companies).
pari passu
Equal in status or priority. This term is often seen in venture capital transactions to describe the rights of different classes of equity that are meant to be treated equally, particularly in the context of a liquidation event.
participation rights
Rights held by existing stockholders to participate in future equity offerings of the company in which they have invested. These are generally set forth in a contractual arrangement executed contemporaneously with a financing round (e.g., an investors' rights agreement).
pass-through
A characteristic of a business entity, such as an S-corporation, limited partnership or limited liability company, that is not obligated to pay federal taxes on its income; rather, each equity holder of the pass-through entity are allocated, and pay taxes on, a share of the entity's income, typically in amounts proportional to the holder's percentage ownership.
patent assignment
A transfer of all personal property rights provided by a patent, or an undivided fraction of all of the rights. Patent assignments should be recorded with the U.S. Patent and Trademark Office to protect the owner against challenges by successive purported assignees.
patent license
A transfer of rights (e.g. the rights to make, use and/or sell) from a patent owner to an entity commercializing the patent claimed invention. Patent licenses can be non-exclusive or exclusive and exclusive licenses can be limited as to field of use.
payment in kind ("PIK")
The use of goods or services (or, in some cases, securities) as payment in lieu of cash. In venture capital financings, a "PIK dividend" accrues and is paid in the form of shares of the security paying the dividend.
PCAOB
The Public Company Accounting Oversight Board.
The PCAOB sets standards for and oversees the firms and individuals that audit publicly traded companies. It is charged with maintaining the integrity of the public company audit process and ensuring that auditors and audit firms are independent.
PIPE
An acronym for Private Investment in Public Equity. A very popular type of financing for public companies involving a private placement of stock (or other securities) to an investor and then the facilitation -- usually through registration with the SEC -- of the resale by those investors of the privately placed shares.
preferred stock
A class of stock that provides for rights preferential to those of common stock. Rights might include, in a typical venture capital transaction, an accruing dividend at a specified percentage of the initial investment amount (similar to interest), a liquidation preference and preferential voting rights (such as the right to elect directors separately from the common stock and approval rights for certain types of corporate actions).
pre-money valuation
The value of a company before giving effect to the investment proposed to be made by an angel investor or venture capital fund. Although the process of determining pre-money valuation can seem to technology entrepreneurs to be entirely fanciful, there are metrics, such as expected cash flows and recent acquisitions of companies that had achieved market success similar to that projected for the subject company, that can form the basis for the determination. Pre-mone