A-Z Glossary: Private Equity And Venture Capital

For those new to private equity and venture capital backed investments and legal documents, the terminology and jargon used can be confusing. The Private Equity and Venture Capital Team at Gowling WLG has produced this A to Z glossary to explain.

A

Advance assurance

Confirmation from HM Revenue & Customs that a company meets the qualifying criteria required by a company to receive investment from investors seeking to participate in tax efficient investment schemes such as EIS and SEIS.

Alternate director

A person appointed by a director to act in his place (as a director) when he is absent.

Angel

An individual who invests into early-stage companies by providing smaller amounts of finance than many private equity firms are able to invest. Angel investors normally invest under a financing round where many angels invest at the same time.

Anti-dilution

A mechanism that protects investors' shareholdings from dilution when shares are issued in future fundraising rounds below the price per share paid by the investor, normally by issuing additional bonus shares or changing the price at which an investor's convertible securities convert. See full ratchet, narrow based weighted average ratchet or broad based weighted average for the most common mechanisms.

Arrears

Unpaid dividends on the shares, such as unpaid fixed cumulative dividends accruing on preferred shares at a set rate per annum.

Articles of association

The document setting out the constitution and organisation of the company, with provisions relating to the classes of shares, directors, shareholders and other mechanisms described in this glossary, together with other boilerplate. A publicly visible document.

Attorney

A person appointed under a power of attorney and authorised to take certain actions on behalf of a party in default. For example, an attorney may be authorised to sign share transfers on behalf of a departing employee shareholder who is refusing to abide by compulsory share transfer provisions.

Audit committee

A committee set up by the board of directors with oversight of the internal and external audit function and financial reporting, its remit and composition being set out in terms of reference.

Bad leaver

A departing employee shareholder who leaves in circumstances that normally result in a reduced price payable for any shares that they are obliged to transfer. The precise definition is a matter for negotiation, but examples would include fraud, gross misconduct, and often voluntary resignation. Contrast to a good leaver (and other negotiated types of leaver, such as an intermediate leaver or early leaver).

BIMBO

A buy-in management buy-out, a form of private equity backed buyout where a combination of both existing and external management decide to participate in the buyout.

Boilerplate

Standard provisions in the legal documents that are important but unlikely to be subject to commercial negotiation.

Bolt-on

The acquisition by a fund of a company to add on to an existing portfolio company.

Bridge financing

Interim financing provided as a 'bridge' to a company until it can raise funds by way, for example, of private equity, share subscriptions or flotations.

Broad based weighted average ratchet

An anti-dilution mechanism that issues bonus shares to an investor following a down round so the investor holds the total number of shares it would have had it originally invested at a lower price. The lower price is based on the price across the funding rounds and takes account of how many shares are actually sold at the down round price compared to the total number of shares in issue together with all outstanding options, warrants and other securities on a fully diluted basis.

BVCA

The British Venture Capital Association, an industry body and the publisher of model investment documentation that is often adopted for early stage venture capital investments.

Business sale

A method of exiting a company, also known as an asset sale, where the business and assets of a company are sold (or a subsidiary is sold) rather than the shares. The sale proceeds are then returned to the shareholders through a dividend or distribution following or followed-by the winding-up of the company that previously held the business and assets.

C

Cap table

A table showing the share capital of a company (normally with separate cells showing any unexercised share options, warrants and securities convertible into shares), used to understand the shareholdings and economic, voting and ownership percentages of a particular company.

Carry

The share of the profits that the general partner receives from the fund in return for managing the fund. Usually a fund must return the capital invested in it by limited partners plus any preferential rate of return before the general partner can participate in the profits of the fund. The general partner will then receive its carry (in addition to any management fee to which it may be entitled), which is usually 20% of the fund's profits, but in some venture funds it can be up to 30%. Also known as carried interest.

Catch-up right

In circumstances where new shares or securities need to be issued in an emergency (i.e. to prevent a company defaulting on its finance facilities), without going through the pre-emption procedure, a right for shareholders not participating in that emergency issue to retrospectively participate (either through a transfer or additional issue) in their pro rata proportions to avoid dilution.

Claims basket

In relation to warranty claims, a negotiated financial loss hurdle that needs to be reached before the warrantors can be pursued for a claim. Variations include a tipping basket, where upon the hurdle being reached the whole financial loss can be claimed, and a deductible basket, where the claim can only be made for amounts exceeding the hurdle.

Claims cap

In relation to warranty claims, the negotiated maximum financial liability of the warrantor.

Claims de minimis

In relation to warranty claims, the minimum amount of financial loss arising from a particular warranty claim that needs to be realised before a claim can be made. Only claims above the de minimis threshold will be factored into the claims basket hurdle.

Class rights

Where the shares are split into different classes, each class of share will have class rights that require the consent of the holders of shares in that class before making a particular decision (such as varying the rights attaching to that class of share).

Common stock

The term used in the United States, and by US investors, to refer to ordinary shares.

Compulsory transfer

A circumstance giving rise to a compulsory transfer of shares by a shareholder, such as an employee shareholder ceasing to be an employee.

Conversion

The process by which a convertible security converts into a different security, such as a loan converting into shares, or preferred shares converting into ordinary shares. Securities carrying the right to convert are intended to enable the holder to participate in a higher return (if available) on the other type of security, but until exercised the existing security often has some form of benefit such as a preferred (higher ranking) return.

Co-sale right

A provision that says if one shareholder has an opportunity to sell some shares, the other shareholders are also given that opportunity on a proportional basis. Similar to a proportional tag-along right.

Cumulative dividend

A dividend that has to be paid on classes of preferred shares, even if the company does not have the reserves to pay the dividend on the date the dividend is due. If unpaid, the dividend is treated as an arrear and arrears will usually rank highly in the liquidation preference. Conversely, there is no right to receive a non-cumulative dividend if the company is unable to pay it on the due date.

D

Deed of adherence

A legal document where a party agrees to be bound by an existing agreement that they were not originally party to, such as a new member of a management team agreeing to be bound by an existing shareholders agreement relating to the company.

Deferred shares

A class of share normally carrying no economic or voting rights...