Description
In this particular brief elucidation around entrepreneurs dictionary a guide to start up business terms for non mbas.
The
CompanyCrafters
Entrepreneur’s Dictionary
A Guide to Start-up Business Terms for Non-MBAs
www.CompanyCrafters.com
"The CompanyCrafters Entrepreneur’s Dictionary" www.companycrafters.com
Copyright © 2004-2006 CompanyCrafters LLC page 2 of 46
About CompanyCrafters
CompanyCrafters is a management consulting firm that helps Fortune 2000 corporations and leading
research institutions to craft and launch new businesses into new markets. Based in Ann Arbor, Michigan
and led by veteran executives with successful track records as technology company entrepreneurs and
CEOs, the firm specializes in creating and growing high tech business ventures.
At CompanyCrafters, we:
• Work with corporations, research institutions, venture capital firms and select start-ups to
plan and launch new businesses;
• Structure corporate and university spinouts; l
• Develop and execute go-to-market strategies for high technology businesses;
• Take on interim executive assignments in new venture and spinout teams;
• Educate executives in the science of starting and launching new businesses .
CompanyCrafters applies an experienced entrepreneur’s mind set to crafting and growing new
businesses.
CompanyCrafters applies an experienced entrepreneur’s mindset to crafting and growing new
businesses, bringing to bear a proven proprietary approach through a range of high-value tools and
methodologies, that focus on launching and scaling new ventures more rapidly and efficiently while
significantly improving the startup's chances of success.
To learn more about CompanyCrafters, visit our website at www.companycrafters.com.
Publication Date: August 15, 2006
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Copyright © 2004-2006 CompanyCrafters LLC page 3 of 46
Legal Notices & Disclaimers
Copyright © 2004-2006 by CompanyCrafters Solutions LLC. All rights reserved.
Reproduction of this documented in whole is permitted for personal use.
The following are trademarks of CompanyCrafters LLC: CompanyCrafters; the CompanyCrafters logo;
Est. Now; You inc, therefore you are; Inc. globally; Venture Value Chain; Venture Communication
Pyramid; Venture Quotient VQ.
This document provides lay definitions of terms intended to provide business people with practical advice
and informal guidance and education. Readers should note that many of the terms presented in this
document may have explicit legal and/or accounting meanings or definitions, and that this document is
NOT intended to provide formal legal or accounting definitions. Nothing in this document should
be construed in any way as providing legal or accounting advice.
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Preface
We've all noticed it: every profession, every field of endeavor, every industry seems to have its own
unique language, its own special vocabulary. And if you're not from that particular field or haven't been
trained in that discipline, you find yourself on the outside looking in. You know the feeling: even though
everyone else in the room is speaking English, the strange words make it sound like a foreign language –
as if they're communicating in code, and you're the only one in the room who wasn't issued the secret
decoder ring. We think of this phenomenon as Secret Code Syndrome (SCS) – don't worry, it's not fatal.
We encounter Secret Code Syndrome in fields ranging from medicine to the military, from journalism to
jazz, from insurance to information technology. But one of the worst culprits of all is the field of business,
and in particular entrepreneurship – that is, starting new businesses from scratch.
At CompanyCrafters, we thi nk that's silly. We understand that the vast majority of new businesses are
launched by people who have deep expertise in and a passion for their particular field – say, wireless
networking, or construction materials, or healthcare software, or graphics design – while 99 percent of
those founders do not come equipped with an MBA degree or years of previous startup experience.
As serial entrepreneurs ourselves, we've already been through the drill and picked up the "secret code" of
startup businesses. And, because our mission in life at CompanyCrafters is to apply our "useful scar
tissue" to help others plan and launch great new businesses – whether from under the corporate umbrella
or as stand-alone ventures – we thought we'd clear the air. So we created The CompanyCrafters
Entrepreneur’s Dictionary to lay out a guide to business terminology for everyone in the startup game:
entrepreneurs, startup executives, service providers, corporate new-business-development specialists,
university tech-transfer professionals, inventors and anyone else considering launching a new venture.
So congratulations: You've just been issued your entrepreneurship "secret decoder ring." Here's to
successful venturing!
James D. Price
Founding Partner, CompanyCrafters
and
Adjunct Lecturer of Entrepreneurial Studies
Ross School of Business, University of Michigan
Ann Arbor, Michigan, 2006
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A
ASP – n : (see application service provider)
accounting – n : the process of identifying, recording, summarizing, formatting, and reporting financial or
economic results or information.
accrue – v : a finance term; to accumulate. For example, interest on debt, or dividends on preferred
stock accrue or accumulate over time, though payments or the maturity are on specific dates. Founders
in startups often accrue some or all of their salary until their company can afford to pay them.
accounts payable – n : finance/accounting term; often referred to simply as “payables” or “A/P”;
amounts of money that a business currently owes to suppliers but has yet to pay. Simply, A/P is what you
currently owe your suppliers of goods or services in the ordinary course of business.
accounts receivable – n : finance/accounting term; often referred to simply as “receivables” or “A/R”;
amounts of money that a business is currently owed by customers but has yet to receive. Simply, A/R is
how much money your customers currently owe you in the ordinary course of business.
accredited investor – n : This is a legal distinction of a type of investor who is eligible to buy equity,
mezzanine, or debt securities in companies that are marketed privately (private placement), are not
registered with the SEC, and do not trade on a public market such as the NASDAQ or NYSE. Accredited
investors must be knowledgeable and sophisticated individuals or institutions and must meet required
minimum levels for assets under management or net worth, which are different for individuals and
institutions. The current standard states that for an individual to qualify as an accredited investor, she/he
must have a net worth of at least $1.0 million and/or an average income of $200,000 over the past three
years. Consult an attorney prior to and during the fundraising process to ensure that your company
conforms to SEC regulations.
addressable market – n : the total potential market for a product or service, measured in dollars of
revenue per year. In other words, your business’s addressable market can be calculated by identifying
the maximum number of customers who could theoretically buy your category of product or service each
year, and multiplying that number times your average selling price per unit. Note that the addressable
market includes your product sales plus those of all your direct competitors (i.e., 100 percent market
share). [NOTE: This is a crucial piece of data that every venture investor will want to know about your
business, so it’s worth putting serious analytical thought into it.]
advisory board – n: a group of advisors formed by a company to provide sounding-board advice,
typically regarding the company’s strategic direction and product plans; some companies form separate,
discrete advisory boards to provide science and technology input vs. business advice. A strong advi sory
board not only provides useful advice to a startup team, but also enhances the young company’s
credibility.
affiliated company – n : finance/accounting term; if "Company A" owns between 20% and 50% of the
voting equity shares of "Company B," then "B" is considered an affiliated company of "A" for accounting
and financial reporting purposes.
after-tax income/loss – n : (see net income/loss)
aggressive case – n: (see upside case).
amortize – v: to allocate a large expense, such as research and development or closing fees paid to
lenders, over the period of time that that expense benefits the company. When a business amortizes an
expense, that amortized expense is recorded on the company’s income statement not when the cash
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expense is incurred, but rather as a series of amortization expenses spread out over the amortization
period.
amortization – n: the act of amortizing an expense over the useful life of the expense item.
amortization period – n: the period of time over which a large expense item is amortized on the
company’s income statement. The amortization period for a given expense item it typically determined
based on that item’s useful life; tax authorities such as the IRS and/or accounting bodies such as FASB
will often stipulate the maximum allowable useful life over which a given category of expense can be
legally amortized or spread out.
angel – n: typically a high-net-worth individual (wealthy individual or family) who invests in one or more
early-stage startup companies; angels (a.k.a. angel investors) typically make equity (stock) investments,
although variations occur. An angel can be thought of as an individual who makes very early-stage
venture capital investments, often before the business has developed to the point at which institutional
venture capital investors are interested in investing. Because of the extraordinary risk associated with
such early-stage investments, angels will usually look for a low valuation – that is, a large ownership
share given the amount of their investment. (See also accredited investor.)
angel investor – n : (see angel)
application service provider – n : often referred to by the shorthand ASP; a company that provides its
customers with access to a software application or applications through the Internet, usually via a web-
browser interface; ASP's host the software on their servers rather than having the customers install the
software on their computers. Synonyms: software-as-a-service (SAS) or hosted solution provider.
articles of incorporation – n: document filed with a state government by a corporation's founders that
describes the purpose, place of business, and other details of a corporation; also known as charter or
charter of incorporation.
asset – n: finance/accounting term; an ec onomic resource that is expected to help generate cash inflows
or reduce cash outflows. For example: Laboratory equipment is an asset for biotechnology companies;
such companies expect that the laboratory equipment will help company scientists create products to sell,
thereby generating cash. Accounts receivable (A/R) is also an asset; if customers owe your company
money for goods or services delivered, you expect that they will pay you the money owed, thereby
generating cash.
authorized shares – n : the total number of shares of stock that a company is legally allowed to issue
under its articles of incorporation; this is a number that is determined by state law based on the
company’s filing in the state in which it is incorporated or registered.
B
B2B – adj: (see business-to-business)
B2C – adj: (see business to consumer)
back-office operations – n : administrative operations that support the primary business of the company.
Example: Customer service call-centers, transaction accounting (A/P and A/R), record-keeping,
contract administration, statement generation, and general bookkeeping are all back-office
operations. Outsourcing and offshoring of back-office operations is a current business trend that
can potentially help reduce costs.
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balance sheet – n : finance/accounting term; a financial statement that delineates a business’s assets,
liabilities, and shareholders’ equity. This can be thought of as the statement of the net worth of a
business. A business’s assets minus its liabilities equal its shareholders’ equity (i.e., net worth).
bank – n: (see commercial bank )
bankruptcy – n : legal term, popularly defined as insolvency. Technically, bankruptcy is a legal process
put in place to insure fair and equal treatment of creditors of an insolvent company, and also to protect
the insolvent debtor to get started again by retaining assets that are protected from liability. Chapter 11
bankruptcy is voluntary, meaning that the debtor chooses to reorganize and restructure in order to repay
debts. Chapter 7, or involuntary bankruptcy, involves the shutting down and liquidation of a business in
order to repay creditors.
base case – n : in reference to a financial model, or financial projections. The expected case of the
model using the assumptions that management deems most likely to occur. The financial results for your
base case should be better than those for your conservative case but worse than those for your
aggressive, or upside case.
board – n : (see board of directors)
board of directors – n : the governing body of a corporation, responsible from a legal and fiduciary
perspective for overseeing the activities and behavior of the CEO and other corporate officers on behalf
of the company’s shareholders. Typically comprised of several individuals (“directors”), commonly
including the CEO, perhaps one other employee/founder, as well as multiple outside directors (non-
employees) to represent investor shareholders and/or to provide industry knowledge and connections
and/or general business experience to the company’s executive team. Boards are commonly comprised
of an odd number of members in order to avoid the potential for tie votes. Often simply referred to as the
board; sometimes abbreviated as BOD or BoD.
board meeting – n : a formal meeting of a company’s board of directors, typically scheduled periodically
at a frequency ranging from quarterly to monthly.
board resolution – n : legal term; a formal, written decision of a company’s board of directors. A
company’s bylaws will stipulate the types of major corporate decisions that require a board resolution,
which typically calls for a formal board vote and majority approval to be enacted.
BoD – n : also BOD (see board of directors)
bond – n: finance/accounting term; a formal debt certificates that include a promise to pay interest (in
cash or accrued interest) at a specified annual interest rate and a promise to repay the principal amount,
or face value, at a specific maturity date.
book value – n : finance/accounting term; the balance of an account, such as the property, plant and
equipment, or equity accounts, shown on the accounting books of a company. For example, the book
value of equity equals the amount of equity contributed to a company, through purchases of common or
preferred stock, plus the accumulated net income (or loss) of the company. The startup manager should
note that book value of equity is not necessarily an accurate measure of the valuation of your company.
bootstrap – v : launch and build a startup business without using outside funding (particularly equity
financing) – i.e., funding the business solely with the founders’ resources, operating cash flow and/or debt
from banks, suppliers or credit cards. On the one hand, founders of bootstrapped startup companies own
100 percent of their business since they have not diluted their ownership stake by selling stock to
investors. On the other hand, bootstrapped startups may compromise their chances of success and/or
prospects for optimal growth and expansion due to capital constraints (i.e., inadequate supply of money
to start, operate and grow the business).
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burn rate – n: the rate of net cash outflow, or the rate (monthly, quarterly, or yearly) at which a company’s
cash outflows exceed the company’s cash inflows; in other words, the rate at which a startup business is
using up, or “burning through,” its cash.
brand – n : The distinctive identity of a company or its product. Narrowly defined, a brand is comprised
of the company’s (or product’s) name, tag line and logo. However, many marketing experts use a
broader definition of brand, connoting the narrower meaning plus the company’s or product’s overall
image to its target customers.
Examples: Narrowly, Dell Computer’s brand includes the Dell name, logo and tagline (“Dude,
you’re getting a Dell!”). More broadly, Dell’s brand also connotes high-quality, well-engineered,
reasonably-priced computers configured uniquely for each customer and delivered and serviced
in a convenient, fast and hassle-free manner. Abercrombie & Fitch’s broader brand image goes
beyond serviceable casual clothes to connote youthful beauty and a sexy, hip lifestyle for teens
and young adults.
brand awareness – n : how well your brand is known, specifically in your target market or customer set.
brokerage house – n : Wall Street term; a firm engaged in the business of brokering (buying, selling,
trading and underwriting) securities (financial instruments such as stocks and bonds).
business development – n : business function focused on strategy, creating strategic partnerships and
long-term relationships with suppliers and customers. The business development function within a
business can be thought of as a jack-of-all -trades position focused on strategic deal -making with an eye
toward increasing sales and expanding the company’s long-term business success or scope.
business model – n : the method or process by which a business makes money, or the way a business
extracts economic value for its products or services. A company’s business model includes how it
charges for its offerings and the context in which those products or services are offered for sale to end-
user customers (i.e., its distribution channels).
Examples: eBay’s primary business model entails charging sellers a percentage “success fee”
for any item sold on its auction website. The business model for some websites and e-
newsletters is to charge a subscription fee for access to premium content, while others provide
content at no charge and make their money by selling advertising and sponsorships; some
employ a business model that entails a blend of these two ways of making money. Meanwhile, in
the software business, some companies charge a monthly or annual license fee (essentially
leasing or renting the software), whereas others charge a single, one-time license fee; some
charge full-price for an upgrade, while others offer a credit to purchasers of the previous version.
Some online music services charge a per-tune download fee, while others charge a flat monthly
subscription fee for unlimited listening or downloads. To look at an example of a personal
services business, some executive recruiters charge a finder’s fee calculated as a percentage of
the candidate’s first-year salary, while others charge a flat dollar amount for all recruiting tasks.
business plan – n : : a document that tells the story of your company; audiences include prospective
investors, bankers, key hires and strategic partners. It should be a concise, organized, visually-impactful
and easily-navigable document that is consistent with all other forms of communication used by your
company to sell its message to both the outside world, and to employees and current investors in the
company. A typical business plan includes: a concise company description including current status of
company development (when founded, stage of development or growth, etc.); an analysis of the industry
and the market; a description of the target end-user customers and the nature and extent of their unmet
need; your business’s solution (product and/or service) to the customers’ unmet need and how it’s notably
better/differentiated form current competitive offerings; an execution plan (how you are going to do what
you do, including high-level tasks and key milestones and dates); a description of key managers and
advisors; and a set of financial projections (typically 5 years).
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business-to-business – adj : also referred to by the shorthand B2B; describes marketing and selling a
company’s products or services to other businesses (as opposed to individual consumers). For example,
Cisco Systems is primarily a B2B company in that it sells most of its Internet routers and other networking
equipment to other businesses rather than to consumers.
business-to-consumer – adj : also referred to by the shorthand B2C; describes marketing and selling a
company’s products or services to individual consumers (as opposed to other businesses). For example,
Amazon.com is a B2C company; that is, they sell products, ranging from books to tools to appliances,
directly to individuals.
business unit – n : a.k.a. strategic business unit or P&L; a stand-alone business that operates within a
larger company – in effect, a company within a company – with its own independent management team,
and financially measured or tracked as a separate entity (referred to by accountants as a separate profit
and loss center, or P&L).
bylaws – n : also referred to as corporate bylaws, a document that serves as the legal foundation
describing a corporation; this document serves the same function for a corporation that the operating
agreement does for an LLC.
C
“C” corporation – n : the most common legal form of organization for a company. Virtually all
established companies of any meaningful size, as well virtually all startups that seek outside investment
capital (venture capital), take this form (as opposed to other legal forms such as an “S” corporation, LLC
or LP). Though the income of “C” corporations is subject to double taxation (federal and state
governments tax a corporation’s earnings as well as dividends distributed by the corporations to
shareholders ), many venture-fundable companies chose this structure because it is advantageous from a
long-term capital gains perspective for tax purposes.
CAGR – n : (see compound annual growth rate)
COGS – n : (see cost of goods sold)
cap table – n : (see capitalization table)
capital – n : finance/accounting term; money. Specifically refers to funds contributed by investors or
lenders to a company for the purpose of funding (capitalizing) the infrastructure and growth needs of the
business.
capital structure – n : finance/accounting term; a.k.a. cap structure; owners’ equity plus long term debt;
how a company is financed; shown on the assets side of the company’s balance sheet.
capital structure explained: A typical company’s capital structure would include various pieces,
or tranches, of debt and equity. The make-up of a capital structure is typically represented either
in a capitalization table, where each instrument is laid out with the corresponding dollar amount s
and owners, or is represented by ratios, such as the debt-to-equity ratio, or the debt-to-total-
capitalization ratio, or percentages (e.g., 30% debt/70% equity). A typical start-up company is
financed primarily with equity, so that its capital structure is comprised nearly 100% of equity.
capital call – n: the legal right of a firm to call, or demand, a portion of the money committed to it by an
investor under a previous capital commitment ; the act of making such a call. For example, when a
venture capital firm (general partner, or G.P.) has received capital commitments from its limited partner
(L.P.) investors for a venture capital fund, and decides to invest in a portfolio company, the VC makes a
capital call to its L.P. investors in order to fund the new portfolio investment.
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capital commitment – n: a contractual agreement between an investor and a company or venture
capital firm wherein the investor commits to provide up to a specified amount of capital (money), or any
portion thereof, over an agreed-upon period of time.
Example: If an institutional investor (“limited partner”) agrees to invest $10 million in a venture
capital fund, that investor does not simply send the VC a check for $10 million. Rather, the
limited partner makes a capital commitment to the VC for the life of the fund (or the defined
investment period of the fund). When the VC wants to make an investment in a portfolio
company, it makes a capital call to the limited partner for some portion of the investor’s total
capital commitment – typically its pro rata share of the investment. When a capital call occurs,
the investor is contractually obligated to provide the funds requested.
capitalization – n : (see capital structure, also referred to as capitalization structure)
capitalization table – n : finance/accounting term; a.k.a. cap table; a chart or table that displays the
specific make-up of a company’s capital structure. A capitalization table lays out line-by-line the debt and
equity instruments on a company’s balance sheet, and who owns such instruments. In the start-up world,
as most start-ups are financed with 100% equity, the capitalization table shows who owns how much of
the company, and in which round or tranche each owner has invested, thus outlining the equity ownership
of the company.
capitalize – v : to fund or finance a business; provide capital to enable the business to fund initial startup,
ongoing operations and/or growth.
cash burn rate – n: (see burn rate)
cash equity – n: also referred contributed equity or invested equity, cash equity denotes the cumulative
total of all cash invested in a company through equity (as opposed to debt, or borrowing) instruments over
all of the company’s financing rounds.
cash flow – n: finance/accounting term referring to the amount of cash that “flows” in and out of a
business over a period of time. Cash flow means exactly what it sounds like: if your business is “cash
flow negative,” you are spending more cash in a given time period (typically per month or quarter) than
you are taking in; conversely, if your business is “cash flow positive,” you are taking in more cash than
you are spending.
cash flow statement – n: also statement of cash flows ; a standard finance/accounting statement that
shows the amounts of cash that are spent by a business (cash outflows) and collected by that business
(cash inflows ) over a specified period of time, typically a quarter or year.
channel – n : (see distribution channel )
chart of accounts – n : finance/accounting term; a numbered or coded list of all accounts (categories
and subcategories of expenses and revenues) for a company. The chart of accounts is the basic
bookkeeping or accounting tool of companies.
charter – n: (see articles of incorporation)
charter of incorporation – n: (see articles of incorporation)
chasm – n: a term coined by Geoffrey A. Moore in his seminal work on marketing for technology startups,
“Crossing the Chasm”; refers to the dramatic differences between the characteristics of and the ways a
business markets to: a) on the one hand, the initial customers for a technology-based product or service,
called innovators and early adopters; versus b) on the other hand, the bulk of the business’s potential
customers, referred to as pragmatists, or the early majority and late majority.
closely-held – adj : describing a company that is owned by one or a small number of shareholders.
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cofounder – n : also co-founder; an individual who starts a new business jointly with another person or
persons (fellow cofounder or cofounders). (see founder)
commercial bank – n: banking services provided to commercial organizations (corporations and
partnerships) and individuals; typically refers to traditional banking services, such as checking and
savings bank accounts, cash management accounts, interest bearing accounts, and loans.
committed capital – n: (see capital commitment)
common stock – n: finance/accounting term; equity or stock ownership of a company representing
owners who have the lowest-priority, or a “residual,” interest in the company. In other words, in a liquidity
event such as the sale of a company of all of its assets, common stockholders get paid last, only after the
principal amounts owed senior debt-holders, subordinated debt-holders, and preferred stockholders are
paid.
company backgrounder – n : a standard, one- or two-paragraph description of a company used to
describe your business to your various target audiences – customers, prospects, industry analysts,
investors, journalists and/or the general public – on your website, in press releases, and/or in brochures
and pamphlets about your company or your company’s products.
CompanyCrafters – n : a management consulting firm that specializes in new-venture launch and
corporate spin-outs. Based in Ann Arbor, Michigan and led by veteran executives with successful track
records as technology company entrepreneurs and CEOs, the firm specializes in creating and growing
high tech business ventures. For more information see: www.companycrafters.com.
comparable – n : also comp or comps, a company in the same or a similar industry, and/or at the same
or similar stage of development, to which a startup can compare itself regarding various key operating
ratios and valuation metrics. Comparables are useful for planning startup costs and common operating
ratios by providing entrepreneurs examples of the financial performance experienced by established
companies in the same or similar lines of business. Comparables are also used to derive valuations of
private and public companies by performing a comparable companies analysis.
comparable companies analysis – n : an analysis of several comparables by a business, or a
consulting or banking firm hired by that company, to derive valuation as well as to compare and
benchmark financial and operating multiples and metrics.
competitive analysis – n : the art of analyzing an industry, sector or niche to determine the identity,
size, market share, growth rates and competitive dynamics of all the businesses competing in that space.
The key to valuable competitive analysis is to determine not only the numerical facts, but more
importantly, to understand the competitive dynamics of the industry in question: What is the basis of
competition (e.g., features, price, shelf-space, channels, brand image)? How does profitability vary
among the various competitors and why? A comprehensive competitive analysis looks at each
company’s competitive positioning and what each company’s competitive differentiation is within its
sector. Many schools of thought exist regarding competitive analysis, and several different courses in
each major MBA program focus on the topic.
competitive differentiation – n : the ways a business differentiates itself from its competition.
Competitive differentiation can take many forms, though the focus of competitive differentiation is to set
your company apart from the competition, or potential competition if you are a startup company. As a
startup company, it’s important to determine what makes your offerings different, faster, cheaper, and/or
better than your competition. (see also: competitive positioning)
competitive positioning – n : how a company positions itself relative to its competitors in the minds of
customers. Companies need to position themselves effectively to address the question: How is your
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product or service demonstrably better, faster, cheaper or otherwise more appealing than those of your
competitors? (see also: competitive differentiation)
compound annual growth rate – n : often referred to by abbreviation CAGR; the annual growth in
revenues – of a company, a market niche or an industry – factoring in annual compounding (similar to the
concept of compound interest).
Example: If market niche has aggregate revenues of $100 million in the year 2001, and then
experiences a CAGR of exactly 20% over the next three years, then its 2002 revenues are (1.20
x $100,000,000 = $120,000,000); its 2003 revenues are (1.20 x $120,000,000 = $144,000,000);
and its revenues in 2004 are (1.20 x $144,000,000 = $172,800,000). In other words,
compounding means that the interest rate is applied to previous period’s numbers.
compound interest – n: finance/accounting term; in the case of a loan or bond where interest accrues
but is not paid, the interest accrued is added to the principal amount of the loan or bond. This increases
the principal amount, and interest now accrues on the new higher amount. Simply put, compound
interest is interest you pay on interest you have been charged. For the startup manager, you may see
this concept in the form of compounding dividends on preferred stock that has a set dividend rate.
compounding dividends – n: finance/accounting term; (see compound interest).
confidential disclosure agreement – n : (see non-disclosure agreement)
confidentiality agreement – n : (see non-disclosure agreement ).
conservative case – n : in reference to a financial model, or financial projections; the downside, or low
case of a business’s projections using the most conservative set of assumptions. The financial results for
your conservative case should be worse than those for your base case (most likely assumptions) or your
aggressive, or upside case (using the most optimistic assumptions).
consolidated financial statements – n : finance/accounting term; combined financial statements of a
parent company with those of all subsidiaries of the parent company as if the parent company and all its
subsidiaries were one entity. If you look at the financial reports publicly issued by Fortune 500
companies, they are all consolidated financial statements representing all of the businesses and
subsidiaries of the parent company.
continuous innovation – n : modest, gradational, ongoing upgrades or enhancements of existing
technologies or products; continuous innovation generally does not fundamentally change the dynamics
of an industry, nor does it typically require end users to change behavior. The opposite of continuous
innovation is discontinuous innovation, also known as disruptive innovation.
Examples: In the television industry, continuous innovation occurred for years with the steady,
gradational enhancements in, and improvements in pricing and programming for, standard color
televisions. By contrast, in recent years, this industry has begun to experience two types of
discontinuous innovation, with the introduction of flat-panel, digital TVs, on the one hand, and the
related phenomenon of high-definition (HD) programming – phenomena that together are
dramatically and rapidly changing the size and growth rate of the industry, competitive dynamics,
pricing, etc. and are suddenly compelling many consumers to expensively upgrade their TV sets
and services for the first time in decades.
In the restaurant industry, menu changes or the emergence of new restaurants and chains
represent continuous innovation, whereas the emergence of McDonald’s and the fast-food
phenomenon in the 1950’s constituted a discontinuous innovation, completely changing industry
growth rates, pricing assumptions, consumer perceptions of service and value, etc.
The telephone industry experienced only very modest continuous innovation for decades (e.g.,
changes in call plans, the advent of the touch-tone phone to replace the rotary-dial phone, etc.).
Then the industry experienced a dramatic in the 1990’s with the emergence of cellular phones
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with their associated dramatic changes in mobility and convenience. Currently, the industry is
experiencing yet another discontinuous innovation with the emergence of VOIP (voice over
Internet protocol), or Internet telephony, which is suddenly and dramatically changing cost and
pricing paradigms and competitive dynamics in the industry.
contributed equity – n : (see cash equity)
convertible bond – n : a bond or debt instrument with a provision allowing the holder or the issuer to
convert the security from a debt (borrowing) instrument to an equity instrument (common stock or other
equity security) of the issuing corporation; such conversions typically occur at a predetermined exchange
ratio stipulated in the convertible bond.
convertible preferred stock – n : a preferred stock issuance that is convertible to common stock of the
issuing corporation at a set per-share price known as the exchange ratio.
copyright – n : the legal protection of the works of authors or artists which gives the originators the
exclusive right to publish or benefit from their works, or to determine who else may do so. In the U.S.,
copyright law is administered by the federal government’s U.S. Patent and Trademark Office (PTO).
corporate bylaws – n : the legal foundation document for a corporation (either “S” corporation or “C”
corporation); serves the same purpose for a corporation that an operating agreement serves for an LLC.
corporate governance – n : the rules dictating how various rights and responsibilities are shared
between the various stakeholders in corporations, primarily management team members, directors,
shareholders, and other financial stakeholders.
corporation – n : a legal form of business organization that shields its individual principals (shareholders)
from personal liability. Two types of corporation are available to businesses, the “C” corporation, which is
a taxable entity; and the “S” corporation (a form commonly used only by small, closely-held companies),
which is a pass-through entity for tax purposes.
cost of goods sold – n : finance/accounting term (often abbreviated COGS); the incremental, direct cost
of producing each product or service unit that is sold to customers; sometimes also referred to as variable
cost. The selling price (revenue derived from selling an individual product or service unit) minus the
COGS equals the gross margin or gross profit.
coupon – n : finance/accounting term; also known as coupon rate; the interest rate paid on a bond or
other debt instrument.
coupon rate – n : (see coupon)
covenants – n: legal term for the terms of a contractual agreement or contract that restrict the actions of
one party. Restrictive covenants are typically written into financing agreements, such as loan or bond
documents.
credit – n : finance term; the capacity to borrow (as in, “The company has a line of credit of $50,000…”;
the act of borrowing (as in, “We purchased the item on credit…”).
credit risk – n : finance term; from a lender’s perspective, the degree of risk (i.e., the likelihood, or
probability) that a borrower will fail to repay the principal and interest of his/her loan according to the
schedule stipulated in the loan agreement. Also used to refer to the borrower itself from a creditor’s
(lender’s) perspective (as in, “ABC Corp. is a good credit risk…” or, “Acme Corp. is a poor credit risk…”
creditor – n: finance/accounting and/or legal term; a person or entity who is owed money; lender.
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critical success factor – n: a factor that must be addressed by a business in order to succeed. Startup
businesses that clearly identify and address all their critical success factors have a much higher likelihood
of surviving and prospering in the long run.
crossing the chasm – v : a term coined by Geoffrey A. Moore in his seminal work on marketing for
technology startups, “Crossing the Chasm”; a phrase referring to the challenging strategic and marketing
process by which technology startups transition from selling their products and/or services to innovators
and early adopters to selling to the early majority, a.k.a. pragmatists; this transition (“crossing the chasm”)
entails a dramatic shift in mentality for the startup, best understood by reviewing Moore’s book.
current assets – n : finance/accounting term; cash and other assets that are expected to be converted
to cash or sold or consumed within one year in the ordinary course of business. Accounts receivable and
cash are two types or classes of current assets.
current liabilities – n : finance/accounting term; liabilities such as debts that are expected to repaid
within one year in the ordinary course of business. Accounts payable are a type current liability.
customer funding – n : a business arrangement between a vendor and its customer wherein the
customer agrees to provide the vendor with some level of up-front funding in advance of delivery of the
product or service. The intention of such arrangements is usually to partially or wholly fund a vendor’s
product development. The vendor benefits by receiving earlier cash flow that can help fund product
development and obviate the need for as much external funding (reducing shareholder dilution). The
customer, on the other hand, often benefits from such arrangements by getting an early look at a new
product or technology, experiencing the ultimate benefits of the product sooner than it otherwise would,
having disproportionate influence over the product’s features and delivery schedule, and possibly special
discounts off the eventual list price.
D
D&O insurance – n : (see directors’ and officers’ insurance)
debt – n : borrowed funds; money, goods or services owed by one person or organization to another.
From a finance/accounting standpoint, debt is money owed to another party (known as a creditor),
whether that party is a bank (in which case the debt is a loan), an institutional investor (bonds or notes),
or a supplier (supplier-extended credit terms). Accounts payable (A/P) (i.e., outstanding bills, or money
owed for goods or services rendered) are not considered debt in accounting parlance. Debt can take the
form of loans, bonds, notes, credit cards, equipment financing, and a number of other instruments.
debt-to-equity ratio – n : finance term, sometimes referred to by shorthand D/E; the ratio of debt to
shareholders’ equity on a company’s balance sheet. D/E is calculated by dividing the sum of the debt on
a company’s balance sheet (bank loans, notes, etc.) by the sum of the shareholders’ equity. The debt-to-
equity ratio is a commonly-used measure of the strength of the capital structure of a business –
answering the important question, “How strong is the company’s balance sheet?”. Companies with low
D/E ratios tend to be considered better credit risks than companies with high D/E ratios.
debt-to-total capitalization ratio – n : finance term defined as the ratio of debt to total capitalization
(debt plus shareholders’ equity) on a company’s balance sheet. Similar to the debt-to-equity ratio, the
debt-to-total capitalization ratio is a commonly-used measure of the strength of a business’s capital
structure or balance sheet . It is calculated by dividing the sum of the debt on a company’s balance sheet
(bank loans, notes, etc.) by the sum of the debt and equity on a company’s balance sheet. D/(D+E) =
debt-to-total capitalization ratio.
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debtor – n : a person or entity who owes money to another person or entity (a debtor owes money to a
creditor or lender).
declining market – n : the last stage of market development, in which annual industry revenues are in
steady decline due to some combination of market saturation, decline in size of the target market, and/or
introduction of a replacement product or technology.
Example: By 2000, traditional plug-into-the-wall telephone handsets represented a declining
market, as the demand for these products was increasingly being displaced by growing demand
for both wireless landline handsets and cellular phones.
demand – n : economics/marketing term; a) the extent to which customers buy, or wish to buy, a
company’s product or service; b) the aggregate size of the market for a product or service (expressed
either in unit sales or dollars).
demand sensitivity – n : (see price sensitivity)
depreciate – v : finance/accounting term; to write off, or expense, the purchase price of a large expense
or asset (e.g., equipment) over the useful life of the item.
depreciation – n : finance/accounting term; the act of depreciating; the expensing of the purchase price
of a physical asset (e.g., a piece of equipment) over the useful life of the asset. Depreciation is not a
cash expense, as equipment is paid for up-front or financed, while the cost is expensed over the useful
life of the equipment (as opposed to when cash is paid to the vendor).
Example: ABC Printing Corp. buys a printing press for $100,000 in cash in 2005. According to
accounting standards, this type of production equipment is deemed to have a useful life of 10
years. Consequently, while ABC’s cash flow statement for 2005 shows a cash outflow of the full
$100,000 for this purchase, the company’s income statements for the 10 years starting in 2005
will show a depreciation expense of $10,000 per year for the same purchase. The effect of this
accounting treatment is to show a company, over the useful life of the asset, as being relatively
more profitable than it otherwise would – since lower nominal expenses or costs lead to higher
relative profitability.
detailed financials – n : in-depth financial statements; typically a five-year set of pro forma (that is,
predictive or forward-looking) financial statements (balance sheet, income statement and cash flow
statement) which includes detailed expense build-up, clearly states the assumptions, and identifies key
milestones and when capital will be deployed.
dilute – v : finance/accounting term; to proportionally reduce; to reduce a person or entity’s proportional
(i.e., percentage) equity ownership, typically by issuing and selling new equity (stock) to other
shareholders. (see also dilution)
dilution – n : finance/accounting term; the act of diluting; the reduction in proportional (percentage)
ownership of each current shareholder of a company that results from the issuance of new shares. For
the entrepreneur or startup manager, dilution refers to the extent to which your personal proportional
ownership of your company declines when the company issues new shares, whether in the course of
raising equity capital (by selling newly-issued shares to investors), or through stock option plans to
motivate employees.
Example: If you own 50% of ABC Company, a firm worth a total of $1 million (pre-money
valuation), and ABC Co. then sells 500,000 newly-issued shares of stock at $1 each to a new
investor (i.e., ABC raises $500,000 in equity capital from that investor), then post-investment, you
would own 33.3% of ABC Co., now worth $1.5 million (post-money valuation). Note, in this
example, that although you percentage ownership of ABC has declined, your stake maintains the
same nominal value: i.e., your former ownership stake of 50% of $1 million = $500,000; while
your new stake of 33.3% of $1.5 million = $500,000.
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director – n : an individual serving on a company’s board of directors; can also denote (but should not
be confused with) an individual employee in a company with the title of “director” (e.g., “Director of
Product Management,” or “Director, Eastern Region Sales”).
directors’ and officers’ insurance – n : a.k.a. D&O insurance; a type of insurance policy whose
purpose is to protect a company’s directors (i.e., members of the board of directors) and corporate
officers (i.e., CEO, CFO, Secretary, etc.) from personal liability while discharging their duties on behalf of
the company.
Example: Because ABC Corp. purchased a D&O insurance policy in 2003, when, in 2004, a
disgruntled shareholder sued not only the company but also ABC’s individual directors, CEO and
CFO, the personal assets of those individual defendants were protected by the company’s D&O
policy (to the extent of its coverage).
discontinuous innovation – n: technological, product or service innovation in an industry or market that
requires end-users to change behavior, and thereby tends to suddenly and dramatically change the
dynamics of the industry, including possibly changes in competitive dynamics, industry revenue size and
growth rate and pricing. (See examples under continuous innovation)
discount rate – n : finance/accounting term; rate used to discount cash flows to determine the present
value of future expected cash flows. In finance, it is accepted that $1 today is worth more than $1
tomorrow. A company’s discount rate allows it to determine how much $1 tomorrow (or one year from
now, or ten years from now) is worth today.
distribute – v : to sell; to take a product or service to market. In certain industries, distribute can also
denote the act of serving as an intermediary between producers of a product and retailers or sellers of
that product. (see also distribution and distribution channels)
distribution – n : the act of distributing, or moving a business’s goods (products) to market for ultimate
sale to end-user customers. In some industries, distribution means the same as sales. (see also
distribute and distribution channels)
distribution channel – n : the mechanism or method by which a business brings its products to market,
or distributes its products to its target customers and generates sales. A given business may have
multiple distribution channels.
Examples: For a consumer product, for instance, alternative distribution channels might include
traditional retail stores, telesales, direct mail, infomercials, or web-based sales. For a business-
to-business product, alternative distribution channels might include direct sales (company-
employed sales reps calling on end-user business customers), telesales (the same, but by
telephone), or selling through distributors or manufacturers’ representatives.
distributor – n : a) a company that specializes in distributing other companies’ products – i.e., has
contractual relationships with one or more vendors (producers of the original products) under which the
distributor has certain rights, responsibilities and restrictions related to marketing and selling the vendors’
products to the ultimate end-users. b) In some industries that have multi -tier distribution systems – e.g.,
the steel industry, as well as many retail sectors – the term distributor is alternatively used to describe a
company that serves an intermediary role between a products’ original producers and the companies that
actually sell to end-users; these intermediaries typically purchase products from multiple vendors, provide
warehousing and transport to the retailers.
Examples: a) When American producers of software decide to market their products
internationally, they need to choose, for each foreign country they choose to enter, whether to set
up company offices (“go direct”) or, alternatively, to sign up a distributor to represent their
products in that country. Going direct has the advantage of enabling the vendor to retain all end-
user revenue (no need to pay distributor commissions). On the other hand, going through a
distributor in a foreign country may offer the benefit of faster time-to-market, established customer
relationships, and working with a partner familiar with local language and business customs.
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b) Book publishers typically do not sell their products directly to bookstores; rather, they sell to
distributors whose intermediary role is to purchase, warehouse and ship multiple publishers’ titles
to independent retailers and chain bookstores.
domain knowledge – n : knowledge about a specific industry, technology and/or market, typically based
on extensive experience in that industry or technology arena. Domain knowledge – which can take the
form of technological expertise, understanding of product trends, familiarity with key industry players and
influencers, and/or knowledge of industry-specific terminology and business practices – is a critical
success factor for entrepreneurs and startup teams.
due diligence – n : legal/finance term; the process employed by potential investors or their agents of
investigating a business deal or the target of an investment or acquisition; often involves exhaustive fact-
checking and review of all historical and current financial and legal records. Due diligence is performed
prior to closing the business transaction in question; often, the two parties to a transaction will sign a letter
of intent (LOI ) or memorandum of understanding (MOU) for a deal, stipulating that a final agreement and
closing of the deal is subject to the buyer’s completion of due diligence on the seller, to the buyer’s
satisfaction.
due diligence notebook – n : notebook containing all documents critical for investor decision making.
(see Venture Communication Pyramid)
E
E&O insurance – n : (see errors and omissions insurance)
EIN – n : (see Employer Identification Number)
early adopter – n : a term coined by Geoffrey A. Moore in his seminal work on marketing for technology
startups, Crossing the Chasm; individuals or organizations that enthusiastically embrace (try and buy)
new technologies or tech-based products before the vast majority of potential buyers consider it. In
Moore’s version of the technology adoption lifecycle, after innovators, early adopters buy into new
technology products very early in the product or technology’s lifecycle. In contrast to Moore’s innovators,
early adopters are not technologists, but people who understand and appreciate the benefits of the new
technology and apply those benefits to what they do. In your world, the early adopters always have the
new gadgets before they hit the mainstream.
early majority – n : a term coined by Geoffrey A. Moore in his seminal work on marketing for technology
startups, Crossing the Chasm. When analyzing the market for a given product, the early majority is
comprised of pragmatists, customers who to buy a new product only once it’s proven, established and
well-supported. Early majority customers typically follow after more risk-seeking and less-demanding
customers known as innovators and early adopters. The early majority typically understands technology,
but – unlike early adopters, who often buy based on a fascination with the technology and newness of the
product – makes purchase decisions based on the practicality, economic benefit and reliability of the
technology. Moore’s chasm is the gap between the early adopters and the early majority customers, who
are far more numerous, but, unlike early adopters, expect evidence of widespread adoption, proven
performance, reliability and excellent service or support.
early market – n : the market for technology products purchased by visionary customers (Geoffrey A.
Moore’s innovators and early adopters). Products in the early market stage are either fads that will
eventually fail, or will become accepted by the mainstream market (pragmatists) as technology standards.
EBITDA – n : finance/accounting term; acronym referring to earnings before interest, taxes, depreciation
and amortization; sometimes referred to more generally or less precisely as operating profit or pre-tax
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profit. EBITDA is also used as a quick measurement of cash flow, in that it measures earnings (profit, or
the excess of revenues over expenses) prior to taking into account the non-cash expenses of
depreciation and amortization.
economic buyer – n : marketing term, typically used in business-to-business markets; describes the
individual, decision-maker or group within the customer organization who controls the budget and writes
the checks for new product purchases.
elevator pitch – n : Imagine you walk onto an elevator and encounter the one person you want to invest
in your company. You have just a minute or two to sell your business to him or her – a brief moment to
explain why your company is going to make a difference. Smart entrepreneurs develop their concise
company summary ahead of time, and actually rehearse it.
Employer Identification Number – n : often referred to by its abbreviation (EIN), a.k.a. Federal
Employer Identification Number (FEIN), or tax ID; a unique number issued to a company, when it is first
established, by the U.S. Internal Revenue Service (IRS); as with an individual’s Social Security Number,
the EIN is required for a startup company to engage in many basic business transactions such as
opening a bank account, hiring employees, etc.
end user – n : also end-user; the ultimate customer; the individual or entity that actually uses your
product or service.
entrepreneur – n : an individual who starts, or participates in the founding and launch, of a new
company; a founder or cofounder.
equity – n : financial term; ownership in a corporation, generally in the form of common stock or
preferred stock; in a business organized as an LLC (limited liability company), equity ownership takes the
form of member interest.
ERP – n : acronym for enterprise resource planning, a major category of application software or systems
used by companies to plan and coordinate operations such as human resources, inventory control, or
production logistics.
errors and omissions insurance – n : also E&O insurance; a type of insurance designed to protect a
company and its principals and employees from legal liability stemming from claims (lawsuits, etc.)
concerning the commission of errors and/or omissions in the conduct of business.
exchange ratio – n : financial term, referring to convertible securities such as convertible preferred stock
and convertible bonds; the ratio at which the new securities are issued in exchange for the old securities
when the convertible security holder exercises his/her conversion right .
executive summary – n : a two- to five-page write-up describing a company for the purposes of whetting
the appetite of potential investors, key recruits and/or strategic partners. An executive summary is a
highly-distilled version of the business plan or investor presentation that tells your company’s story in very
few words (and pictures or diagrams). A strong executive summary should briefl y address the following
topics (similar to the topical coverage for your investor presentation):
a) the business your company is in (e.g., “… a web-based enterprise software for independent
retailers…”, or “…a biotech company focused on drug discovery for treating esophageal
cancer…”);
b) the stage of company development (e.g., “…incorporated in Delaware in [date], targeting
having demonstrable product prototype by [date] …”);
c) the target market/customers;
d) the customers’ unmet need, and how they are addressing that need today;
e) your company’s proposed solution to that unmet need (product and/or service);
f) competition and your competitive differentiation (how your solution is demonstrably better,
faster, cheaper, cooler, or otherwise more desirable to your target customers);
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g) established strategic alliances;
h) management team;
i) financial summary (results to-date and forecast out at least 3 years);
j) capitalization (invested capital to-date) and amount of capital the company is current hoping to
raise.
exit – n or v : in the world of entrepreneurship and venture finance, exit refers to a liquidity event, in
which owners of illiquid stock in a privately-held company – whether they be founders, employees, or
investors – achieve liquidity for their stock holdings (i.e., a market develops for their shares where no
market previously existed) due to one of two occurrences: a) the company “goes public” through an initial
public offering or IPO; or b) the company is sold to another company, either for cash or for the publicly-
traded stock of the acquiring company. (see also: shareholder exit, liquidity, and liquidity event)
exit strategy – n : a privately-held company’s plan to achieve liquidity or a financial exit for its
shareholders.
F
FASB – n : (see Financial Accounting Standards Board)
FEIN – n : Federal Employer Identification Number (see Employer Identification Number)
fiduciary – adj : legal term; relating to trust and legal accountability for certain financial matters of
another individual or entity.
– n : an individual or entity to whom another has assigned fiduciary responsibility.
fiduciary duty – n : legal term; assigned responsibility to act on behalf of an owner or owners in their
best financial interest. When an individual represents a party or a group in a position of trust or
confidence, it is that person’s duty to act primarily for the benefit of the party or group he/she represents.
A fiduciary duty compels one to make decisions that are in the best financial interest of to the party
represented. In entrepreneurship and venture finance, directors sitting on a company’s board of directors
legally carry a fiduciary duty or fiduciary responsibility to always act in the best financial interests of the
company and its shareholders.
fiduciary responsibility – n : (see: fiduciary duty)
Financial Accounting Standards Board – n : Usually referred to by its acronym FASB; the accounting
industry organization that determines and promulgates operating standards for the accounting profession
in the U.S. FASB determines and publishes GAAP (generally accepted accounting principles).
financial investor – n : an investor (individual or firm) who makes investment decisions primarily based
on the prospect for financial gain; financial investors tend to uses financial skills and methods to increase
returns and manage risks. (By contrast, strategic investors – typically companies – make investment
decisions based on the prospect of strategic benefit for their organization, such as future access to a key
new technology or product.)
Example: Venture capitalists are classic examples of financial investors; their partnership
agreements with their limited partner investors stipulate that they will strive to invest their fund(s)
in such a way as to try to maximize financial return for their investors.
financial projections – n : detailed financial statements, typically developed by a company’s
management, that represent the expected future financial results of a company; an important component
of a company’s business plan; a distilled version of financial projections should also appear in a
company’s executive summary and investor presentation . Different from pro forma financial statements,
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which represent expected future financial results after a specific, significant event, such as a fundraising
round, or a merger or acquisition.
financial risk – n : a.k.a. financing risk; one of the four categories of venture risk; the likelihood that a
new venture or young business will fail to raise sufficient capital financing (all rounds) to fund the startup
to a self-financing, self-sustaining, cash flow-positive operating state.
financial statements – n : finance/accounting term; a set of financial accounting tables that together
describe the financial performance of a company or business unit for the most recently completed period
(typically a year or quarter); often also summarize financial results from prior periods for comparison
purposes; financial statements are typically comprised of an income statement (a.k.a. a profit and loss
statement, or P&L), a cash flow statement, and a balance sheet . (see also pro forma financial
statements)
financing risk – n : (see financial risk)
financing round – n : a discrete fund-raising event for a company, usually occurring over the course of
several weeks to no more than a few months, during which the company raises financing with a specific
series of stock or security, at a set price or valuation. Each time a company raises money, it completes a
financing round. A company will set a goal to raise a set amount of capital in each round at a certain
valuation or price per share. Once that amount of money is raised, the round is closed. In the case of
preferred stock, each financing round is referred to as a series (e.g., Series A, or Series B).
friends and family financing – n : a form of startup funding in which the entrepreneur asks friends and
family members for investments in an early-stage business. This is frequently the first financing round for
young companies – often when a company is just being launched and is still far from producing a product
and generating revenue – and typically precedes financing by angels, venture capitalists and/or banks.
(Referred to by some cynics as the friends, family and fools round, implying that very-early-stage
companies will often raise money from anyone willing to give them money, sometimes including
individuals lacking in financial acumen or venture-investing experience or perspective.)
founder – n : an individual who, either by her or himself or in concert with others, starts a new company
from scratch; if there are multiple founders of a given business, they can be referred to as either founders
or cofounders.
founders’ equity – n : ownership shares in a company issued to the original organizers, or founders;
founders’ equity in a corporation is typically in the form of common stock. If the company is legally
organized as an LLC, the founders hold member interest rather than stock.
FUD factor – n: acronym for fear, uncertainty and doubt. The FUD factor is a commonly-used sales
tactic by which one vendor raises concerns in the mind of a prospective customer regarding certain
qualities or capabilities of the vendor’s competitors.
fund – n : a pool of committed capital dedicated to investment in a specific asset class; for example, a
venture capital fund is a professionally-managed fund dedicated to investing in high-potential private
companies.
– v : to provide capital or money to financially enable a business entity.
fund vintage – n : the year a fund was formed (typically refers to the year it was closed)
Example: A venture capital fund that was closed in July, 2000 is a “2000-vintage fund. ”
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G
GAAP – n : (see generally accepted accounting principles)
GP – n : (see general partner)
general counsel – n : the attorney or lawyer of record for a company, who is ultimately responsible for
the legal affairs of the business; usually attends the regular meetings of the company’s board of directors;
in startups, often also holds the title of secretary of the corporation.
general partner – n : abbreviated as GP, the managing partner of a partnership, such as an LLP, or the
managing entity of an LLC. In contrast, limited partners have ownership stakes in a partnership due to
having contribut ed capital, but are not involved in the management of the partnership. In the case of an
LLP, the general partners have limited legal liability. (Not to be confused with the job title of general
partner used in some investment firms and other partnerships and LLCs.)
Example: A typical venture capital fund has the legal form of a limited liability partnership (LLP) in
which investors in the fund are limited partners, and the venture capital firm that raised the fund
has the legal role or designation of general partner (i.e., the VC firm is legally responsible for
managing the fund’s investments).
generally accepted accounting principles– n or adj : accounting term; usually referred to by its
acronym GAAP; the guidelines, rules, procedures and detailed practices in accounting that govern the
practice of accounting in the U.S. The Financial Accounting Standards Board (FASB), a self-regulating
group organized by the accounting industry, determines, publishes and administers/enforces GAAP
standards.
go public – v : to take a privately-held company through an initial public offering (IPO), thereby enabling
its stock shares to be traded (bought and sold) by the general public for the first time.
governance – n : (see corporate governance)
grant – n : a type of funding typically provided by government agencies or non-profit foundations. If
your company wins a grant, this is “free money” – i.e., the grant does not purchase an ownership stake in
your company, and your company does not have to pay it back.
– v : to give. In the corporate world, used frequently in reference to stock options for employees;
employees are granted stock options.
gross margin – n : finance/accounting term; a ratio, usually expressed as a percentage, equal to the
selling price minus the cost of goods sold (COGS) – i.e., the gross profit – divided by the selling price.
Gross margin is essentially the same as gross profit, but expressed as a percentage of selling price or
revenue rather than in absolute dollars.
Example: Some industries, such as software, are inherently high-gross margin businesses, since
the cost to produce each incremental unit (the cost of the CD or the electronic download from the
company’s website) is near-zero compared to its selling price. If a software company charges
$280.00 per unit for its product and incurs a production cost (disc and packaging), or cost of
goods sold, of $7.00, then its gross margin is calculated as ($280 - $7) / $280 = 97.5%. The
gross profit in this example is $273 per unit.
In a shoe store, the gross margin on a pair of $100 shoes is determined by subtracting the cost to
the store of acquiring the product (as opposed to its original cost of production by the
manufacturer). Therefore, if a given pair of shoes is acquired by the store for $50 and sold for
$100 (referred to in the retail industry as 100% mark -up), then the gross margin is calculated as
($100 - $50) / $100 = 50%.
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gross profit – n : finance/accounting term; equal to the selling price minus the cost of goods sold
(COGS); the same as gross margin, but expressed in absolute dollars as opposed to as a percentage of
revenue. (see examples under gross margin)
H
harvest – v : (see Harvest stage)
Harvest stage – n : The fifth and last stage of the Venture Value Chain. In the Harvest stage, the
executives and/or board of directors of the business seek to provide the business's owners with a return
on their investment by either seeking a liquidity event (i.e., and initial public offering or sale of the
business) or otherwise producing cash returns by managing the business in such a way as to maximize
profits and dividends.
I
incentive stock option – n : often referred to by its abbreviation, ISO (pronounced ICE-oh); tax-deferred
employee stock option which provides tax advantages for the employer versus non-qualified stock option
(NSO) plans.
income – n : finance/accounting term; revenues minus expenses.
income statement – n : finance/accounting term; the profit-and-loss statement of a company.
incorporate – v : to create a new corporation by making a legal filing with the Secretary of State of a
given state (Delaware, California, Michigan, etc.).
incorporation – n : the act of incorporating, or creating a new corporation by making a legal filing with
the Secretary of State of a given state (Delaware, California, Michigan, etc.); for an LLC, this act is called
formation.
industry map – n : a visual and/or written representation of all players in an industry – e.g., suppliers,
manufacturers, distributors, consultants, influencers, dealers and customers – and how money, services
and products change hands within the industry. It’s very useful for an entrepreneurial team to develop an
industry map for their particular industry or market space, first of all to define their company’s position in
their industry, and secondly in order to communicate to others as part of a business plan, executive
summary and/or investor presentation.
industry marketing – n : in a business-to-business company, the sub-set of the marketing discipline that
entails tailoring, positioning and promoting a company’s products and/or services to a specific industry.
Example: An enterprise software vendor may have distinct individuals or teams assigned to
financial industry marketing vs. manufacturing industry marketing vs. retail industry marketing.
inflation – n : general decline of purchasing power per unit of currency (e.g., for one dollar). For
example, because of inflation, you can only buy 2 candy bars for a dollar now, whereas you could have
purchased four candy bars for a dollar 20 years ago.
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influencer – n : marketing term; an organization, individual or institution that influences the buying
behavior of customers. Examples include industry consultants, the trade press, business or popular
media, trade shows, and professional societies and conferences.
Example: Although dermatologists do not prescribe ABC Pharmaceutical Co.’s over-the-counter
skin ointment, ABC focuses considerable marketing effort on dermatologists and their
professional society, the American College of Dermatology, since ABC considers skin doctors to
be powerful influencers of their patients’ decisions about whether to use skin ointments, and,
through their recommendations, specifically which brands to purchase.
initial public offering – n : the event of first listing the stock of a formerly private company on a public
stock exchange (e.g., NASDAQ, the New York Stock Exchange, etc.) so that the company’s shares can
be freely traded – bought and sold – by the investing public; commonly referred to by its abbreviation
(IPO); going through the process of an IPO is often referred to as going public.
innovators – n : a term coined by Geoffrey A. Moore in his seminal work on marketing for technology
startups, “Crossing the Chasm”; the first customers of a newly commercialized technology in the
technology adoption life cycle. Innovators proactively seek out and purchase new technology products.
They tend to be technologists themselves who are fascinated with new innovations and the functions or
properties of new devices, regardless of the new product’s unproven benefits and lack of track record.
insolvency – n : legal term; financial condition in which a person or company is unable to meet its near-
term financial obligations. If a company can not recover from insolvency quickly, they may be forced to
file for bankruptcy protection.
institutional financing (or funding) – n : typically refers to funding that a startup company receives
from venture capitalists; usually takes the form of equity investment capital (i.e., the startup company
issues additional shares of stock, which it sells to the VC in exchange for cash at a negotiated price per
share).
institutional investor – n : term used for organizations possessing extremely large amounts of money,
that make multiple financial investments and oversee their investment portfolio. Examples of institutional
investors include pension funds, mutual funds, university endowments, foundations, insurance
companies, corporate treasuries and money management firms.
Example: Most limited partner investors in large venture capital funds are institutional investors
(as opposed to high-net -worth individuals).
intangible assets – n : assets of a firm that are not physical in nature and therefore tend to be more
difficult than physical assets to value.
Example: A company’s intellectual property, such as patents, trade secrets or software source
code, are considered intangible asset s.
intellectual property – n : often referred to by its abbreviation (IP); an intangible asset of a company
that consists of human ideas. Legally, patents, copyrights and trade secrets are all forms of intellectual
property. In the startup world, a company’s IP is a key part of its “secret sauce” – its key differentiation
that sets it apart from its present and future competition.
interest rate – n : finance/accounting term; the percentage applied to the principal amount of a loan or
bond used to calculate the dollar amount of interest charged. Interest rate x principal amount = interest.
inventory – n : goods held by a company to sell to customers.
invested equity – n : (see cash equity)
investment round – n: financing round from the perspective of the investor (see financing round).
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investment banking – n : the process of linking organizations to investors through securities offerings.
Investment banks underwrite securities offerings, such as bonds, preferred stock, or common stock
offerings, and sell the securities to other financial institutions, such as mutual funds or brokerage houses
that make a market in the securities. Investment banks also offer advisory services, such as mergers and
acquisitions (M&A) advisory services, or other corporate finance advisory services. (See also
underwriter.)
investor pitch – n : (see investor presentation)
investor presentation – n : a 10- to 25-slide presentation that tells the story of your company simply and
compellingly to potential investors. A strong investor presentation should address the following topics
(similar to the topical coverage for your executive summary):
a) the business your company is in (e.g., “… a web-based enterprise software for independent
retailers…”, or “…a biotech company focused on drug discovery for treating esophageal
cancer…”);
b) the stage of company development (e.g., “…incorporated in Delaware in [date], targeting
having demonstrable product prototype by [date]…”);
c) the target market/customers;
d) the customers’ unmet need, and how they are addressing that need today;
e) your company’s proposed solution to that unmet need (product and/or service);
f) competition and your competitive differentiation (how your solution is demonstrably better,
faster, cheaper, cooler, or otherwise more desirable to your target customers);
g) established strategic alliances;
h) management team;
i) financial summary (results to-date and forecast out at least 3 years);
j) capitalization (invested capital to-date) and amount of capital the company is current hoping to
raise.
IP – n : (see intellectual property)
IPO – n : (see initial public offering)
ISO – n : (see incentive stock option)
J & K
KISS philosophy – n : acronym for Keep It Simple, Stupid. A guiding philosophy widely used in
organizations that aims to focus management attention on the core attributes of a product, service or
task. Burdening products, services or tasks with unnecessary add-ons leads to unnecessary
development delays and management challenges. (So, when you think of how cool your product might
be with just one more bell or whistle, just KISS that idea goodbye. )
L
laggard – n : a term coined by Geoffrey A. Moore in his seminal work on marketing for technology
startups, “Crossing the Chasm” – 1991, HarperCollins; the last group of potential customers to adopt a
new technology or innovation in the technology adoption life cycle (if they adopt it at all).
Example: Elderly people, particularly elderly women, will probably prove to be the laggards in the
markets for PDAs (personal digital assistants) and MP3 digital music players.
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late majority – n : a term coined by Geoffrey A. Moore in his seminal work on marketing for technology
startups, “Crossing the Chasm” – 1991, HarperCollins; the late majority, like the early majority, is
comprised of pragmatists who are primarily concerned with the practicality of a technology in making their
purchasing decisions. However, the late majority is driven more by necessity than desire. They tend not
to be comfortable with technology, and purchase new technology only once it has become an established
standard – i.e., once it’s no longer new. The late majority can be thought of as the sector of the market
that watches, and then follows, the mainstream.
Launch stage – n : The second stage of the Venture Value Chain. In the Launch stage, the company is
legally formed and initially funded. The key tasks in the Launch stage are legal formation, seed funding,
and establishing proof-of-concept and proof-of-market.
LBO – n : (see leveraged buyout)
lead the round – v : venture capital term, a.k.a. price the round;
lender – n : a person or entity that lends money to another; typically a bank, but sometimes an individual
investor or institutional investor (see also creditor).
letter of intent – n : legal term; often referred to by its acronym, LOI; a brief, temporary, pre-contract
document between two or more entities that outlines the parties’ intention regarding a future contractual
or business arrangement. The purpose of a letter of intent is for the parties to establish and document a
common understanding of the form in which they see their legal or business relationship evolving; LOIs
tend to have a temporary, limited term and serve the purpose of a “place-holder” while the parties
continue detailed due diligence and/or negotiation. (see also: memorandum of understanding or MOU)
leveraged buyout – n : abbreviated LBO, a transaction in which a leveraged buy-out firm (LBO firm or
LBO shop) acquires a business, using debt to fund at least 50% of the purchase price. This type of
liquidity event is most often seen in traditional bricks-and-mortar businesses with the consistent cash flow
necessary to support the buyer’s debt service.
leveraged recapitalization – n : similar to an LBO, a transaction where a management team, sometimes
partnering with an investor or investment firm, purchases a company, using debt to fund at least 50% of
the purchase price. This type of liquidity event is typically seen in traditional bricks-and-mortar
businesses with consistent cash flow to support debt service. Leveraged recapitalizations are also known
as management buyouts (MBOs).
leverage
– v : to borrow money (use debt capital rather than equity capital) to fund a business or project,
with the goal of increasing return on equity.
– n : the use of debt in a business; the beneficial effects of the use of debt (i.e., additional capital
to fund the business without taking on more equity investment and the associated dilution).
liability – n : a) finance/accounting term; an economic obligation of an organization to another
organization or individual, or claims against the assets of an organization by outsiders. b) legal term; the
quality of being liable (i.e., obligated, or legally and financially responsible) under the law.
limited liability – n : legal term; a feature of the corporate (or corporation) form of organization under
which corporate creditors can make claims only against corporate assets rather than the assets of the
corporation’s owners, officers or directors. This feature is also shared with the LLC form of organization.
Example: All startup companies would be wise to legally form their business (incorporate or form
an LLC) so that the founders and owners can benefit from the limited liability provisions, shielding
their personal assets from future potential business creditors or legal actions.
limited liability company – n : abbreviated LLC, a legal form of company that has many of the tax
advantages of partnerships, notably the characteristic of being a pass-through entity for tax purposes.
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For companies with only one or two owners and no plans to raise money from venture investors, this form
of organization has the advantage (over the corporation legal form) of enabling owners to personally
receive tax advantages of early-stage losses, as well as to distribute profits without being subjected to
both corporate and personal taxation. However, unlike traditional partnerships, the LLC structure protects
owners from personal liability in the event of a legal judgment against the company. (Note: See also “S”
corporation, another form of business legal organization that shares the “pass-through” feature of the
LLC. )
limited partner – n : an investor in a venture capital fund, which typically takes the legal form of a limited
partnership or LLC and is managed by a venture capital firm that serves the legal role of general partner
of the fund.
limited partnership – n : a type of legal entity that is typically used by venture capital firms for each of
their venture capital funds. Many venture capital firms and funds are electing the LLC structure, however,
because owners (limited and general partners) are protected from personal liability.
line of credit – n : finance term; frequently referred to by its acronym, LOC; a mechanism by which a
company arranges ongoing short-term borrowing from a bank. A line of credit functions very much as if it
were a company’s credit card: the bank sets an interest rate for borrowing against the line of credit, an
upper credit limit, and rules governing the schedule of repayment.
liquidation – n : the process of turning assets into cash in order to pay creditors. Companies in dire
financial trouble contemplate liquidation as a way to potentially return more value to shareholders than in
a bankruptcy scenario.
liquidation preference – n : term included in many venture capital financing agreements. States that
the investors in a given round will receive a set multiple of their investment before investors in earlier
rounds see any return. For example, investors in a B round deal with a 2x liquidation preference would
receive 2x their investment before investors in the A rounds and earlier received a return.
Liquidity stage – n : the fifth and final stage of the Venture Value Chain. In the Liquidity stage, the
company achieves liquidity for its shareholders – outside investors, founders, and option-holding
employees – through a liquidity event. In a nutshell, the company returns money to investors at the
Liquidity stage through some sort of sale event, whether that is an IPO, an M&A transaction or a
recapitalization.
liquidity – n : the ability for shareholders to sell or trade their stock holdings – i.e., to convert their stock
shares to liquid cash.
liquidity event – n : an event that enables shareholders of a privately-held company to convert their
illiquid ownership shares into cash. Most typically, startups achieve liquidity for their shareholders
through one of three types of liquidity events: an initial public offering (IPO); a sale of the company or its
assets in an M&A transaction; or a leveraged buyout or management buyout. (see also: exit and
shareholder exit)
LLC – n : (see Limited Liability Company)
LOC – n : (see line of credit)
LOI – n : (see letter of intent)
LP – n: (see limited partner)
loan – n : money borrowed by a company; a form of debt. A company can borrow money from any
individual, company or institution, though loans are generally provided by financial institutions such as
commercial and investment banks.
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logo – n : the visual representation of your brand; a unique graphical mark or symbol. Some logos
incorporate the actual company or product name (e.g., IBM’s logo) and/or a tag line, while others are
simply easily identifiable symbols, such as McDonald’s golden arches.
lower of cost or market – adj: financial term, abbreviated LCM or LOCOM; valuation convention for
portfolio companies used by some venture capital funds and other investors where investments are listed
on the books at the lower of either the cost of the original investment or the market value of the
investment. Some VCs prefer other valuation methods, since LCM understates fund performance during
the life of a fund.
M
M&A – n or adj : (see mergers and acquisitions)
mainstream market – n : the vast majority of customers for a technology product, comprised of what
Geoffrey A. Moore in Crossing the Chasm refers to as pragmatists, or the early majority and late majority.
Pragmatist customers in a product’s mainstream market prefer proven, established, well -supported
products and expect technology products to solve problems or make their jobs easier; unlike Moore’s
innovators and early adopters, customers in the mainstream market do not find the latest technology
appealing for its own sake, and prefer proven standards.
management buy-out – n : (see leveraged recapitalization)
management risk – n : one of the four categories of venture risk; the likelihood that a new venture will
fail to meet its business and financial targets due to inadequate and/or inappropriate management, or due
to poor teamwork.
margin – n : profit, typically expressed as a percentage of gross sales or revenue; the difference
between what something costs, and what it is sold for. (see also: gross margin, operating margin, and
net margin)
margin structure – n : a representation of the value chain for a given product or service showing what
percentage of each dollar of end-user, point -of-purchase revenue accrues to each step in the value chain
(e.g., invention, design/engineering, manufacturing, marketing/branding, distribution/inventory/sales).
The percentage remaining after accounting for each step in the value chain equals the operating margin,
or pre-tax profit expressed as a percent of the selling price of the product or service.
market
– v : to promote to prospective customers with the intent of interesting them in purchasing a
product or service
– n : an active set of end-user customers who purchase, or have the potential to purchase, a
certain type of product or service based on common interests or needs
Examples: the market for cell phones, the market for electronic medical record
software, or the market for DVDs of syndicated television reruns
market maker – n : financial/Wall Street term; a brokerage house or investment bank that specializes in
buying or selling a specific security of a specific issuer for the purpose of creating a liquid market for
buyers and sellers of that security, and to make money in the process by charging a spread (margin)
between the purchase price and the sales price of that security. Investment banks and brokerage firms
typically make a market in many securities issued by multiple different companies.
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market research – n : the process of systematically investigating the market for a given product or
service, gathering and analyzing data regarding the number and location of customers; customers’
interests, preferences, and buying habits; and pricing and price sensitivity of demand. Such data is
gathered and analyzed for the purpose of gaining insight about a certain market in order to help a
company formulate its marketing strategy. Many firms specialize in performing and selling market
research to corporate clients (e.g., Information Resources, Inc., AC Nielsen, International Data Corp. and
Gartner Group).
market rate – n : a generic term referring to the ambient price, rate and/or terms available in the market
for investments, goods or services; “what the market will bear” at a given point in time.
market risk – n : one of the four categories of venture risk; the risk that the target market, or envisioned
market, for a firm’s new products or services turns out to be substantially less attractive than originally
expected; the likelihood that a company has overestimated the number of potential customers for its
product, the price they are willing to pay, and/or the rate at which they are ready to adopt the new product
or approach. Market risk can be caused by several factors, including: the company overestimating the
number of customers, customers not finding a new product appealing, customers not being ready to
adopt a new approach that your product requires, unanticipated competition, or an unanticipated
replacement technology or product. The most common basis for market risk is a company simply
overestimating demand, and therefore building sales forecasts around unrealistic expectations of
customer interest in their product or service.
market segment – n : a portion of a business’s total potential market for its product or service,
comprised of customers with similar interests, needs and buying patterns with respect to the product.
(see also market segmentation)
Example: Logical market segments for the manufacturers of woodworking tools (such as drills,
table saws and lathes) might include amateur do-it-yourselfers, serious woodworking hobbyists,
professional carpenters, finish carpenters, and professional cabinet -makers. Different
manufacturers and retailers of woodworking tools tend to focus on different market segments –
while some offer inexpensive tools appealing to amateurs, others tend to focus on high-end, less
price-sensitive users with more expensive, feature-rich products.
market segmentation – n : the process of subdividing a market into distinct groups of customers with
similar needs, such that a subset of the market (a segment ) can be selected as a target market and can
be reached with a distinct marketing mix. One way to check the legitimacy of a market segment is to ask
whether the customers in that segment are homogeneous and self-referencing (i.e., do they “talk to each
other,” read the same publications, attend the same conferences, belong to the same professional
associations, shop in the same places, etc.?); self-referencing groups of customers should be relatively
easily and cost-effectively reached by a single marketing mix. Markets may be segmented: a)
geographically (Where do they live?); b) demographically (i.e., according to age, race, gender, education,
religion, etc.); c) psychographically (i.e., according to their interests, attitudes, opinions, and needs);
and/or d) behavioristically (i.e., according to usage patterns, history, responsiveness or loyalty). (see
also market segment)
marketing – n : the business function of identifying a target market or set of customers for a given
product or service and systematically making those customers aware of the promoting growing,
maintaining or defending a market for a product or service. For you and your company, marketing is the
actions you perform to grow, maintain or defend your product or products successful position in the
marketplace.
marketing collateral – n : promotional literature and printed or electronic information designed to inform
customers about a product or service; can include brochures, data sheets, flyers, point -of-sale displays,
promotional CDs or DVDs, websites, and promotional gifts.
marketing communications – n : the subset of the marketing field, sometimes referred to as promotion
or marketing promotion, that entails formulating and communicating messages regarding a product or
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service to the target audience. Depending on the business, marketing communications can entail the
development and distribution of marketing collateral, public relations, advertising, and/or direct marketing.
The purpose of marketing communications is to build image and awareness (brand recognition) regarding
a product or service among target customers, and to generate qualified sales leads.
marketing promotion – n : (see marketing communications)
mature market – n : stage of market development in which products have reached mainstream
customers; annual industry revenue growth slows, eventually hitting a zero-growth plateau; consolidation
and shakeout is underway, reducing the industry to a few strong competitors; strong price competition
and margin compression become common; annual revenue for the industry flattens.
maturity date – n : in the case of debt, the date when the total principal amount of the debt outstanding
must be repaid.
MBO – n : acronym for management buy-out (see management buy-out or leveraged recapitalization)
member – n : legal term; a partial or full owner of a business legally formed as an LLC (limited liability
company)
member interest – n : legal/finance term; ownership interest in an LLC (limited liability company),
serving a similar function to stock in a corporation
merchant account – n : a bank account that allows your business to process credit card purchases.
mergers and acquisitions
– n : commonly referred to by its acronym, M&A; the field or activity concerned with companies
buying (merging with or acquiring) other companies; also refers to the M&A-related advisory services
provided to corporations by investment banking firms
– adj : describing or referring to a merger or acquisition activity, function or deal
memorandum of understanding – n : legal term; often referred to by its acronym, MOU; another name
for a letter of intent, or LOI; a brief, temporary, pre-contract document between two or more entities that
outlines the parties’ intention regarding a future contractual or business arrangement.
minute book – n : a.k.a. minutes book ; a binder, typically maintained by a company’s secretary or the
corporation and/or its general counsel (lead attorney) that contains all relevant corporate governance
documents and records of all meetings, transactions and actions of the company’s board of directors. A
company’s minute book typically includes all: articles of incorporation or formation documents, corporate
bylaws, board meeting minutes, board resolutions, shareholder notifications and announcements of
shareholder meetings, and a shareholder schedule.
mission – n : a company’s brief statement of what it intends to accomplish, for whom and to what end.
A company’s mission statement should communicate, in a powerful, brief form, its raison d’etre (reason
for being) to its employees, partners, customers, suppliers and other partners.
mission statement – n : a brief (typically 15-75 words) statement that concisely conveys a company’s
mission or raison d’etre (essential reason for being) to its key stakeholders, including employees,
shareholders, customers, suppliers, and partners. A good mission statement should communicate what
you do, how you do it (your business model), for whom (who’s the customer?), and based on what
underlying principles of behavior (e.g., integrity, quality, customer satisfaction).
MOU – n : (see memorandum of understanding or letter of intent)
multiple – n : finance/valuation term; a general term to describe any metric that is expressed as a
multiple of another metric.
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Example: The price-to-earnings, or PE multiple, is commonly used as a measure of the relative
value of a given public company’s stock compared to that of other companies. The company’s
market value of equity per share (share price) is stated in terms of a multiple of reported net
income per share (earnings).
multi-tier distribution – n : a form of distribution, common in certain industries such as retail, in which
vendors (i.e., producers of the original products) sell to an intermediary distributor, who may carry multiple
vendors’ products, and who in turn sell products to the retailers or sales entities that actually sell to end-
user customers. (see example (b) under distributor)
N
nascent market – n : a very new, formative market; the market development stage in which vendors sell
their products or services to innovator and early adopter customers. In typical nascent markets, rapid
innovation occurs, many new competitors (including startups) enter, and competition tends to revolve
around innovation and product features rather than around brand, service or price.
net income/loss – n : finance/accounting term, sometimes referred to as after-tax income, or simply as
earnings; the income or loss remaining after deducting all expenses from revenues, including interest,
taxes, depreciation and amortization.
net income/loss margin – n : financial/accounting term, often referred to as net margin; the income
(profit) or loss remaining after deducting all expenses from revenues, expressed as a percentage of
revenues. Margin calculations allow for comparisons between different-sized businesses.
net margin – n : (see net income/loss margin)
NDA – n : (see non-disclosure agreement)
NSO – n : (see non-qualified stock option)
non-disclosure agreement – n : also referred to by its acronym NDA, or as confidential disclosure
agreement, confidentiality agreement , or secrecy agreement; a contractual agreement between two or
more parties in which the parties commit to keep certain specified information confidential, or not to
disclose it to others. NDAs are frequently signed by two organizations at the beginning of business
discussions in which the parties anticipate divulging business, technology or product planning secrets to
each other. An NDA can be a “one-way NDA” (in which the first party agrees to maintain the
confidentiality of the second party’s secrets), or “two-way NDA” (in which both parties mutually agree not
to disclose the other’s secrets). NDAs are typically very brief (1-3 pages) and are often form agreements
reflecting very standard legal terms and language.
non-qualified stock option – n : often referred to by its abbreviation (NSO); a type of stock option that is
less advantageous for the employer from a tax standpoint than an incentive stock option (ISO), but is less
restrictive and generally easier for employers to set up. Unlike ISOs, which can only be granted to a
company’s employees, NSOs can be granted to non-employees (e.g., outside directors on a company’s
board of directors, or contractors)
O
offshore
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– adj : from an American perspective, describing a business entity or activity that is based or
carried out outside the United States
– v : to outsource a business activity or function (e.g., back-office operations, IT development,
call center, manufacturing, etc.) outside the United States
operating agreement – n : the legal foundation document describing an LLC (limited liability company);
this document serves the same function for an LLC as corporate bylaws serve for a corporation.
operating expenses – n : finance/accounting term; expenses related to the operations of the business
(e.g., salaries, rent, office equipment, depreciation, selling and administrative expenses, etc.).
operating income – n : finance/accounting term; also referred to as operating profit; profits from
operations calculated by subtracting the cost of goods (or services) sold (COGS), as well as the costs to
run the business (salaries, rent, etc.) known as operating expenses, from revenue. Operating income
measures the health of the core business before taking into account the effects of financing charges,
such as interest, and taxes.
operating margin – n : finance/accounting term; operating income as a percentage of revenues.
Operating margin measures the health of an organization’s business operations by showing operating
profitability on a percentage basis, which allows for apples-to-apples comparisons with larger and smaller
businesses.
outside director – n : a member of a company’s board of directors who is not an employee or officer of
the company. Outside directors are usually either major investors (or representing a large investor group)
and/or individuals with extensive industry experience who can offer useful advice and valuable
professional contacts.
outsource – v : to contract with an outside service provider to handle a certain business function for a
company; typically considered with non-core functions
Example: Functions frequently outsourced by companies include IT acquisition and
administration/support, manufacturing, packing/shipping/order fulfillment, and various human
resources functions such as payroll processing and benefits administration.
P
P&L – n and adj : (see profit and loss)
paid-in capital – n : finance/accounting term; equity investments in a company. The cumulative amount
of paid-in capital for a company at any given point in time is shown as a line item on the liabilities and
shareholders’ equity side of the company’s balance sheet.
pass-through entity – n : accounting/legal term; a legal form of organization that does not pay income
taxes at the organization level. Instead, the owners of the organization pay taxes based on their pro rata
ownership share of the organization. Examples of pass-through entities include partnerships, LLCs and S
corporations.
partnership – n : a legal organization structure in which multiple individuals, called general partners,
manage the business and are liable for its debts based on their pro rata ownership shares; other
individuals known as limited partners may invest in the partnership while not being directly involved in
management, and are liable only to the extent of their investments.
payables – n : (see accounts payable)
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patent – n : a grant by the United States federal government or a foreign government to an entity
(individual inventor, company or organization) giving the entity the exclusive right to produce and sell an
invention for a given period of time. Federal patent law identifies the specific rights of a patent holder for
different types of patents.
– v : the act of applying for and receiving a patent for an invention or piece of intellectual property
(e.g., “I intend to patent my new invention.”)
peer-to-peer – adj : describing the transfer of data directly from computer-to-computer, or user-t o-user,
rather than through a central server. Peer-to-peer networks are difficult to monitor as the traffic does not
pass through a server, whereas more traditional file-sharing networks, such as the original Napster,
moved files through a server, allowing for monitoring – and theoretically, control – of file-sharing behavior.
portfolio company – n : term used by venture capitalists and other private equity firms to describe
companies in which they own equity; a company in an investor’s investment portfolio.
positioning – n and v : marketing term; the perception that a company attempts to create in the minds of
its targeted customers regarding that company’s product or service offering relative to competitors’
offerings; the attribute or attributes associated with a company or product relative to competitive
companies or products in the same market. Also, marketing activities associated with creating a
company’s or product’s positioning.
Example: A strong positioning statement should clearly and succinctly address the following:
“For______ [your target customers or market segment], … _______ [your product or brand]
…is/provides/enables _______ [your product's or service's most important benefits] …because
_______ [reason why]. Unlike ______ [your primary competitors], _______[your brand] does
_______ [highlighting your brands primary competitive differentiation, i.e., what makes you
better].”
post -money valuation – n : the value or nominal worth of an entire company immediately after a
financing round. A company’s post-money valuation is equal to the pre-money valuation (i.e., the value
set immediately prior to the financing round) plus the amount of money raised in the financing round.
(see also: pre-money valuation)
PPM – n : (see private placement memorandum)
PR – n : (see public relations)
pragmatist – n : one who makes practical decisions; in the parlance of Geoffrey A. Moore’s Crossing the
Chasm, the early majority and late majority customers for a given category of products or services (i.e.,
those mainstream customers who represent the vast majority of all potential buyers) are pragmatists; they
make purchase decisions based on their perception of the product’s practical utility and benefit,
references and testimonials from fellow pragmatists, and their perceptions of emerging industry
standards.
pre-money valuation – n : the financial value or worth established for a company immediately prior to a
financing round. The pre-money valuation plus the dollar amount raised in the financing round equals the
post-money valuation.
preferred stock – n : equity, or stock, that offers owners different, preferential rights to those of common
stock owners. In a liquidity event, the preferred stock owners are typically paid before the common stock
owners.
price – n : the amount of money a business charges customers per unit for a product or service
– v : to set the formal, listed price of a product or service
price the round – v : (see lead the round)
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price sensitivity – n : economics/marketing term, a.k.a. price sensitivity of demand, or demand
sensitivity; the degree to which unit demand for a business’s products or services (i.e., the market’s desire
to buy) falls when prices are raised, or rises when prices are reduced.
Example: a) We’re fortunate that the market for Product A has low price sensitivity: when we
raised prices by 20 percent, we sold the same number of units the following quarter. [In this
case, the market can also be described as price insensitive; i.e., demand doesn’t change
appreciably with a change in price.] b) When we lowered the price of Product B by 5%, we
stimulated an immediate 25% increase in unit sales, showing that market to be highly price
sensitive.
principal – n : finance term;
principal amount – n : finance term; a.k.a. face value, or face amount; in the case of debt, the amount a
borrower promises to repay at or by a specific maturity date.
private banking – n : full-service banking and financial services offered generally to high-net-worth
individuals by larger commercial banks and financial institutions. Also known as private client services.
private client services – n : (see private banking).
private equity – n : equity capital invested in a private company. The three primary sectors of the
private equity market are traditional private equity, or LBO (leveraged buy-out), venture capital and real
estate.
private placement – n : a fundraising process in which the company raising the money markets and
sells securities (debt or equity) directly to a small group of investors – either institutional investors, venture
capitalists or angel investors – for investment rather than resale purposes. From a legal perspective, a
private placement is a securities offering that is not subject to registration requirements under the
Securities Act of 1933.
private placement memorandum – n : also referred to by its abbreviation (PPM); the prospectus used
in conducting a private placement; the marketing and legal document written by a company (or its
attorney or investment banker) for the purpose of raising money (either equity or debt) through a private
placement. A company provides a PPM to prospective investors, generally accredited investors, who
use the PPM as a tool to evaluate the investment opportunity.
pro forma – adj : financial/accounting term; forward-looking, or predicting future financial performance.
– n : "pro formas" is a way of informally referring to pro forma financial statements.
pro forma financial statements – n : financial statements intended to represent the future financial
performance of a company; often prepared to represent the predicted financial performance of company
after a certain hypothetical or expected future event occurs. For example, if a company is planning to
acquire another firm or to raise new capital, it will prepare pro forma financial statements to represent
what the combined entity will look like in terms of anticipated financial structure and future performance.
pro rata – adj : finance/legal term; reflective of proportional shares or ownership. An individual’s or
entity’s pro rata share is their due or proportional share. The term pro rata share is often used when
discussing ownershi p, financing, and fundraising.
Example: If you own 50% of a company, your pro rata share of the profits will be 50%. If the
company were to raise $2 million in its next financing round and you were asked to invest your
pro rata share, you would invest $1 million (or 50 percent of $2 million). If you didn’t invest at
least $1 million, your ownership stake of 50% would be diluted (proportionally reduced).
product line – n : a range of relat ed products marketed by the same company, typically under a
common brand name.
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Example: Nokia’s cell phone product line includes a range of models of various sizes, with
various levels of functionality, and at various price points. Apple’s iPod product line includes
digital music players in a range of sizes, storage capacities and prices, in addition to a selection
of add-on products such as covers, carriers, head phones and speakers.
product launch – n : the orchestrated introduction of a new product (or version of a product) to the
market; the events surrounding making the product available for purchase for the first time. Depending
on your company’s distribution channel, a comprehensive product launch could entail a number of
elements and activities, possibly including: advertising campaign, direct marketing campaign, public
relations campaign, brochures and sales literature, point -of-sales displays, product demonstrations, sales
training, call-center training (both pre-sales and post-sales support), inventory stocking in the distribution
channel, etc.
product manager – n : (see product management)
product management – n : the cross-disciplinary business function that entails taking responsibility for a
product from initial conception through development to ultimate product launch and lifecycle
management. In its broadest interpretation, product management encompasses oversight of the
following aspects of a product: a) identifying target markets and customers and their unmet needs; b)
translating those unmet needs into market requirements and associated product specifications to guide
the business’s engineering/product development function; c) overseeing product development and
testing; d) working with marketing and sales to successfully launch the product or service once it is
complete; and, e) tracking the product’s success in the market, understanding changing customer needs
and perceptions, and recommending ongoing product enhancements, new models, product line
extensions, etc. In some businesses, product management is a stand-alone business function, whereas
in other companies, it is organizationally a part of either the marketing or product development
(engineering) function.
product marketing – n : the element of the marketing function withi n a business that entails identifying
and analyzing target markets, researching and defining customer requirements, and developing product
specifications for the engineering or product development function of the business. Product marketing is
a hybrid activity that straddles the marketing and product management functions of a business, and as
such, it can be found organizationally in either group within a company.
product risk – n : one of the four categories of venture risk, sometimes referred to as technology risk; the
likelihood that a new venture will fail to produce the envisioned product in the planned timeframe due to
unanticipated technology and/or product development challenges, or that
productize – v : to take a capability – a new service, product or product feature – that the company has
provided to a single customer or a few customers on a custom basis, and turn it into a standard, fully-
tested, -packaged, -supported and -marketed product offering of the company.
profit and loss
– n : often referred to by its acronym, P&L; a) shorthand for a profit and loss statement, an
alternative name for an income statement ; b) informal name for a business unit or strategic
business unit, a stand-alone business within a larger company that is managed and
accounted for separately (see business unit)
– adj : referring to a profit and loss statement
promote – v : to market a product or service to a target market or customer set. (see also: marketing
communications)
promotion – n : a) the act of promoting, or marketing to a target market or customer set; b) a specific
marketing campaign or offer. (see also: marketing communications)
Example: The free toaster promotion was deemed a great success, having attracted thousands
of new customers to try our product.
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prospect
– n : prospective customer; an individual or entity who has expressed potential interest in
purchasing a given product or service, and has been screened or qualified by the sales team to verify that
they are serious in a near-term purchase (i.e., they have the necessary budget set aside, they have a
current need or interest, and they are not predisposed to a competitive solution)
– v : to seek out, contact and qualify prospective customers for a given product or service
proxy – n : the written authorization given by one individual to another to cast a vote. Shareholders may
sign a corporate proxy giving authorization to another person to vote for them in a shareholder vote.
Proxy is also a general term describing one who has the authority to represent or replace someone else,
or anything that is a suitable replacement for another thing.
psychographic profile – n : marketing term; combination of psychology and demographics that make the
marketing responses of those groups different from those of other groups. Understanding a group’s
psychographic profile and its relationship to its neighbors is a critical component of high tech marketing.
public relations – n : often referred to by its abbreviation, PR;
Q
qualify – v : to interact with a sales suspect (an individual or entity who has expressed preliminary
interest in a company’s product or service) with the purpose of determining whether or not they are a
serious customer – with budget, serious intent to buy in the near-term, and without an ingrained
preference for a competitive product. A prospective customer who has been successfully qualified is
sometimes referred to by the sale organization as a qualified prospect.
R
rapid-growth market – n : stage of market development where competitors are scaling rapidly to meet
growth in customer demand (often in excess of 50%/year); Vendors have crossed the chasm and are
selling to early majority (pragmatist, or mainstream) customers; competition around customer references,
emerging industry standards, and service; IPOs occur
receivables – n : accounting term; informal vernacular for accounts receivable
Refine stage – n : the fourth stage of the Venture Value Chain. In the Refine stage, companies should
focus on creating consistently cash-flow positive, self-funding operations. The company should be
managed for predictable growth in revenue and profitability. Public companies such as General Electric,
Microsoft and Wal-Mart are masters of Refining. These companies consistently grow revenues (sales
growth, or top-line growth) and profitability (earnings growth). Mastering the Refine stage can lead to
higher valuations in the Liquidity stage, the final stage of the Venture Value Chain.
reseller – n : (see VAR or value-added reseller)
resolution – n : (see board resolution)
restructuring – n : the significant makeover of an existing company typically involving the closing of
plants, firing of employees, reworking the company capital structure, bringing in new management and
relocating operations. Typically restructuring occurs
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return on equity – n : abbreviated ROE, indicator of profitability of a company. Net income less
preferred dividends over common equity, expressed as a percentage.
return on cash equity (contributed or invested equity) – n : indicator of profitability of a company. Net
income less preferred dividends over cash equity (contributed or invested equity) equity, expressed as a
percentage. Cash equity equals the sum of all cash equity invested in the company in all of its financing
rounds.
RFP – n : sales and marketing acronym for request-for-proposal.
round – n : (see financing round)
run rate – n : annualized revenue; the result of extrapolating recent financial results for a period shorter
than one year (e.g., results for the most recent quarter or half year) to represent a full -year period; that is,
the result of annualizing recent results. This method is often used to characterize the performance of
early-stage, high-growth businesses, since annualizing the revenue run rate of a company based on its
latest quarter may be far more impressive (and arguably more representative) of the company’s current
status than the potentially far smaller revenue number from its last full fiscal year.
Example: Whereas a startup has produced revenue of $800,000 in the past twelve months,
$500,000 of that amount has been generated in the most recent quarter. By annualizing the last
quarter’s results (i.e., multiplying that quarter’s results times 4), the company can claim it is
generating revenue at a $2 million run rate.
S
SMBs – n : acronym for small-to-midsized businesses.
S corporation – n : a form of legal organization for a business, commonly used only by small and/or
closely-held companies (the "S" refers to Subchapter S of the U.S. Internal Revenue Code). S
corporations are “pass-through” entities for tax purposes; that is, they pay no corporate tax, and all
financial profits or losses “pass through” or “flow through” proportionately to the shareholders on a pro
rata basis. This form of organization can be advantageous for shareholders, because: a) it avoids double
taxation; and b) individual shareholders can receive the tax benefits of a business’s losses. However, an
S corporation can have no more than 75 shareholders and is subject to limitations as to whom or what
type of entity can own the business. (Note: See also LLC or limited liability corporation, another form of
business legal organization that shares the “pass-through” feature of the S corporation.)
Sarbanes-Oxley Act – n : a business reform act signed to law on July 30, 2002. The Act mandated a
number of reforms to enhance corporate responsibility, enhance financial disclosures and combat
corporate and accounting fraud, and created the "Public Company Accounting Oversight Board," also
known as the PCAOB, to oversee the activities of the auditing profession. The full text of the Act is
available at: http://www.law.uc.edu/CCL/SOact/soact.pdf. The Act has many implications for private
businesses. You should consult your attorney about how the Act will effect your business.
SBA – n : the U.S. Small Business Administration, the federal government agency responsible for
assisting small and young companies and entrepreneurs (see www.sba.gov).
SBIR – n or adj: Small Business Innovation Research, the name of a U.S. federal government grant
program administered by the Small Business Administration (SBA) that provides funding solely to small,
for-profit businesses to develop and commercialize certain technologies. (For more information, see
www.sba.gov/sbir).
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scale – v : to grow a business, often rapidly, once its products have been commercially released and
customer sales have commenced. Generally speaking, companies scale successfully by developing a
well-thought -out and highly repeatable formula for production, distribution/sales, operations and customer
service.
Scale stage – n : the third stage of the Venture Value Chain. In the Scale stage, the company typically
raises institutional financing (equity or debt) to enable rapid scaling of the enterprise. Key tasks of the
Scale stage include: recruiting and orienting management and staff; building infrastructure (systems,
processes and procedures) necessary to grow the business; developing and refining the product line;
developing/strengthening the brand and building brand recognition; and expanding sales. The Scale
stage is the make-or-break stage for many startup companies. It is during this stage that a company’s
products or services must Cross the Chasm from selling to early adopter customers to selling to the far
more numerous, but difficult-to-please, early majority customers.
SEC – n : (see Securities and Exchange Commission)
secretary – n : (see secretary of the corporation)
secretary of the corporation – n : the legally-designated corporate officer responsible for keeping
minutes of board meetings, drafting board resolutions, and maintaining the company’s minute book
security – n : a financial instrument, such as a stock or bond, used by legal entities such as companies
or government agencies to raise money from individual or institutional investors.
Securities and Exchange Commission (SEC) – n : the U.S. federal government agency with primary
responsibility for overseeing and regulating the securities industry – i.e., the formation, underwriting,
selling, buying, trading and optioning of stocks and bonds by corporations, investment banks, brokerages,
and commercial banks. The primary mission of the SEC is to protect investors and maintain the integrity
of the securities markets (both private and public). The SEC also oversees other key participants in the
securities world, including stock exchanges, broker-dealers, investment advisors, mutual funds,
investment banks, and public utility holding companies. Through its EDGAR online system, the SEC
provides free public access to all filings companies make with the SEC (for example, filings required prior
to public offerings, as well as 10K annual reports and 10Q quarterly reports); such filings are very useful
data sources when conducting comparable companies analysis or valuation analysis. (For more
information, visit www.sec.gov. )
seed financing – n : financing to fund an early-stage company, generally provided by either angel
investors and/or a venture capital firm, to fund the early stages of a company’s business plan. Seed
financing typically occurs before a company has commercially released its product or service, and
therefore before the business is generating revenue.
seed round – n : (see seed financing)
segment – n and v : (see market segment and market segmentation)
segmentation – n : (see market segment and market segmentation)
self-referencing – adj : describing a market or set of customers in which the customers interact
intensively with one another and rely on each other (reference each other) for information about a type of
product or service. Self-referencing customer groups tend to read the same periodicals, belong to the
same clubs or professional associations, attend the same conferences, conventions and trade shows, or
communicate with one another through word-of-mouth, Internet chat rooms or web logs (“blogs”), or at
actual events such as industry conferences, conventions, concerts or other gatherings. Businesses value
self-referencing customer groups because they tend to be relatively inexpensive and efficient to reach,
communicate with and market to.
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Examples: DentaSpecial Inc. has developed an innovative new device for use by dentists.
Because dentists are a tightly self-referencing group, DentaSpecial can reach their prospective
customers relatively efficiently inexpensively; rather than advertising on television or in popular
magazines at great expense, the firm can promote its products by advertising in the professional
periodicals and at the annual and regional conventions of dentists’ professional association, the
American Dental Association (ADA). Because dentists tend not to compete with each other
beyond local boundaries, they are very comfortable “comparing notes” with their professional
colleagues and sharing best practices with one another.
CoolTool Inc. has developed a revolutionary new woodworking tool and would like to market the
tool to serious woodworkers. Fortunately, these – finish carpenters, cabinet-makers, and serious
woodworking hobbyists – are a highly self-referencing group, “sharing” information and best
practices by subscribing to a handful of publications such as Fine Woodworking Magazine.
Advertising in, or purchasing the subscriber list for, such a limited-circulation publication costs a
tiny fraction of broad-based marketing promotion to the general public (most of whom would not
be interested in CoolTool’s products).
series – n : In the case of preferred stock , each financing round is called a series (see financing round).
Example: ABC Ventures invested in both the Series A round and Series B round of the young
company’s funding.
Shape stage – n : The first stage of the Venture Value Chain. In the Shape stage, an individual or small
group of individuals develops, and progressively shapes the original business concept. This stage in the
Venture Value Chain involves idea generation, initial business model exploration, a reality check of the
validity of the business idea, business planning, and business plan validation. Entrepreneurs should fully
work through the Shape stage prior to the Launch of a new business.
shareholders’ equity – n : accounting/finance term; the residual ownership in an organization after
deducting liabilities.
shrink-wrap license – n : a license and/or copyright agreement on product or software packaging which
describes a company’s copyright to the product in the package. The agreement generally states that the
end user agrees to the copyright agreement upon opening the package.
SOHO – n and adj : acronym referring to small office/home office, a characterization for the millions of
Americans who work from home, whether they’re running their own small business or “telecommuting”
from home on behalf of an employer
sole proprietorship – n : a type of business legal organization with a single owner. Sole proprietorships
are pass-through entities.
software-as-a-service – n : (see application service provider)
spin-off – n : a company or stand-alone, separate business unit that is created by being
separated from an established business or institution. Typically, the spin-off offers a discrete set of
products and/or services.
– adj : describing a business that has been or is being spun out from an established
business or institution.
spin off – v : to create a spin-off business (see spin-off).
spin-out – n : (see spin-off)
stakeholder – n : owner of an organization. The term is also used generally to describe people who
have an interest of any kind in a business, transaction or deal.
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Example: When a startup raises money, there are several interested parties who are not owners
of the company, but are stakeholders in the transaction. The investors, and managers have an
interest in the success of the transaction, and thus are stakeholders. Further, advisors,
consultants, lawyers, accountants and other professionals are stakeholders, because they are
interested in the success of the transaction. All employees of the company, whether stockholding
or not, are stakeholders as the success of a fundraising transaction allows the jobs to exist.
startup – n : also start-up; a new or early-stage company.
stock – n : equity ownership in a corporation.
stock option – n : the right to purchase a company’s stock in the future; an option is a legal offer or
contract, typically granted by a company to an employee, director, or advisor, under which the grantee
(holder of the option) has the ability to purchase a certain number of shares of the company’s stock for a
stipulated price (the strike price). Most options are subject to a vesting period or vesting schedule, under
which the grantee’s rights to purchase the stock in question vests over a period of time (continued tenure
with the company); some vesting schedules, particularly those for corporate offi cers’ options, are based
on accomplishment of specific milestones instead of, or in combination with, tenure.
The purpose of a stock option is to provide a financial incentive (other than cash salary and/or
bonus) to an individual whose contribution is considered important to the company’s ongoing success.
This incentive works in two ways: a) the vesting schedule (typically between three and five years)
encourages the option recipient to stay with the company until his/her option fully vests (thereby giving
him/her the right to exercise the option, or purchase the stock, at the given strike price; and, b) the option
recipient has extra incentive to help make the company succeed, and to see that success reflect in an
increased stock price, since the indivi dual’s strike price “locks in” his/her right to purchase stock at a
(hopefully much lower) price set at the time the stock option was granted.
Example: ABC Corp. grants “Employee Smith” a stock option on January 1, 2006 for 36,000
shares of stock, at a strike price of $1.00/share, with a vesting schedule of 3 years vesting
monthly in a straight-line fashion. Therefore, starting February 1, 2006 and each month
thereafter for 36 months, Employee Smith vests on (earns the right to exercise) an additional
1/36
th
of her total options, of an additional 1,000 shares per month. At the end of the 3-year
vesting schedule, her full 36,000-share option is fully vested (i.e., she has the right to purchase all
36,000 shares at $1.00 per share.
stock option agreement – n : legal contract between a company granting a stock option and the
individual receiving the stock option; an option agreement is usually very brief – often simply a letter
agreement – that refers to (and typically incorporates by attachment) the company’s governing stock
option plan, and stipulates the date of the grant, the number of shares of stock in the grant, the vesting
schedule, and the strike price.
stock option plan – n : an executive and employee compensation mechanism whereby executives and
other key employees are granted stock options. Stock option plans allow companies to align the interests
of executives and shareholders by rewarding both for increases in valuation (stock price). A company's
stock option plan governs all incentive stock options (ISOs) and non-qualified stock options (NSOs)
issued by the company; the plan typically stipulates the rules and parameters (e.g., vesting schedules)
governing options granted under the plan.
stockholders’ equity – n : (see shareholders’ equity)
strategic investment – n : (see strategic investor)
strategic investor – n : an investor (typically a company) that invests primarily for strategic rather than
financial (return) purposes – for example, in order to gain future access to a key new technology or
product. (By contrast, financial investors make investment decisions primarily based on the prospect of a
strong financial return.)
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Example: Corporation Z, a large record company, made a strategic investment in a minority
equity stake in the startup digital music distributor; they did so in the hopes of learning more
about online media marketing, with the possibly of eventually acquiring the startup.
strategic business unit – n : (see business unit)
strike price – n : finance/accounting term; the price per share specified in an individual’s stock option at
which the grantee (holder of the option) has the right to purchase stock from the company once that
option vests.. The strike price for options is set by the company’s board of directors, and is adjusted from
time to time for new options granted by the company. The strike price “locks in” an individual’s future
purchase price for a given number of shares at the time that option in granted. Therefore, if the company
succeeds and its success is reflected by a rise in its stock price, an individual option holder, once his/her
grant vests, has the opportunity to purchase shares at a discount to the company’s then-current share
price. On the other hand, if the company’s stock price drops over the vesting period, the option’s strike
price will reflect a premium over the post-vesting stock price – a phenomenon known as the option being
under water.
subscription agreement – n : legal/finance term; the legal agreement between a company and an
investor governing the purchase and sale of stock. For a given financing round or preferred stock series,
the subscription agreement will typically be identical for all investors in that round (with the exception of
specific investors’ names, signature dates and the number of shares purchased).
supplier financing – n : arrangements with a business’s suppliers to provide funding either through
extended or generous credit terms, or through partnered product development; one way for small or
early-stage companies to reduce the need for outside financing
T
10-K – n : the SEC Form 10-K annual report filing that is legally required of all U.S. public companies
pursuant to Section 13 or 15(d) of the Security Exchange Act of 1934; 10-K (annual) and 10-Q (quarterly)
reports are publicly accessible at no charge on the SEC website EDGAR Online (edgar.brand.edgar-
online.com).
10-Q – n : the SEC Form 10-Q quarterly report filing that is legally required of all U.S. public companies
pursuant to Section 13 or 15(d) of the Security Exchange Act of 1934; 10-K (annual) and 10-Q (quarterly)
reports are publicly accessible at no charge on the SEC website EDGAR Online (edgar.brand.edgar-
online.com).
tagline – n : marketing/branding term; a few words – a phrase or sentence – associated with your brand
name (either company or product/service name) and logo that connotes the nature or character of your
business. A tagline should be brief, evocative and should imply what you do and/or what you stand for.
Example: Dell Computer’s tagline is “Easy as Dell.” Verizon’s tagline is “We Never Stop
Working for You.” The tagline for Newman’s Own is, “Shameless Exploitation in Pursuit of the
Common Good.” CompanyCrafters’ tagline is, “You inc, therefore you are.” [All taglines are the
trademarks or service marks of their respective owners.]
target market – n : a market, or market segment, specifically targeted by a company or the product
managers of a specific product. Your target market represents the group of customers that you want to
buy your product or service.
tax ID – n : informal term for Employer Identification Number (see Employer Identification Number)
tech transfer – n : (see technology transfer)
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technology adoption curve – n : (see technology adoption lifecycle)
technology adoption lifecycle – n : a.k.a. technology adoption curve; the staged pattern by which
virtually all new technologies or technology-related products are adopted by the market. Geoffrey A.
Moore, in his seminal work on marketing for technology startups, Crossing the Chasm, defined the
sequence of customer types to adopt (or buy) a given product as innovators, early adopters, early
majority, late majority, and laggards. Bear in mind that the technology adoption lifecycle follows the life of
a technology, rather than a specific product or a company.
technology risk – n : (see product risk)
technology transfer – n : commonly referred to as tech transfer; the process of arranging for the
commercialization of technology-based inventions or innovations originating in research universities,
government or non-profit laboratories or large corporations. Technol ogy transfer involves the
organization responsible for originating the technology negotiating the transfer of the commercialization
rights to that technology to a commercial entity (typically a for-profit company) via a licensing agreement .
The business arrangements associated with tech transfer agreements can vary widely, but typically
involve the company receiving the commercialization rights paying the owner of the intellectual property
or IP (the inventing organization) some combination of up-front license fees, royalties (variable payments
calculated as a percentage of future sales), and/or partial equity ownership (stock) in the commercializing
company. (Stock ownership is only common in tech transfer deals in cases in which the commercializing
entity is a startup company for whom the intellectual property being transferred is a strategic part of their
product portfolio. Large, publicly-traded companies will typically acquire tech transfer intellectual property
using some combination of the cash payment mechanisms described above – as opposed to stock).
term sheet – n : legal/venture capital term; a legal document, sent from a venture capital firm to a
company in which they are interested in investing, that summarizes the terms of VC’s investment offer –
number of shares they are interested in purchasing, price per share they are willing to pay, terms
describing the security (preferences, etc.), and other terms and conditions (whether they want
representation on the board of directors, for example). The term sheet serves as the basis for the
financing negotiation between the VC and the company; once all terms are agreed upon, the term sheet
serves as the basis for lawyers to draft the formal investment agreement between the two parties.
trademark – n : legal/marketing term; an identifying name or graphical mark that is uniquely
identified with a specific product, service or company. Trademarks can be names, logos, slogans or
symbols, and serve as important elements in branding and building brand equity. Trademarks can be
legally claimed or reserved by a company by simply labeling the mark or name with the trademark symbol
™. A more rigorous (and legally defensible) way to protect a company’s exclusive rights to a mark or
name is to formally register it (a registered trademark , indicated by the symbol ®) with the U.S. Patent
and Trademark Office (PTO).
– v : the act of legally claiming exclusive use rights to a unique mark, name or
slogan/tagline.
tranche – n : a general term for a round of financing (see financing round or series).
U
underwrite – v : to assume financial risk as an underwriter. Investment banks are in the business of
helping companies raise capital from public and private financial markets by underwriting companies’
issuances of either debt or equity securities. The act of underwriting entails the investment bank (a.k.a.
underwriter) purchasing the entire security issuance from the issuing company and then reselling those
securities, typically to a syndicate of institutional and/or individual investors.
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underwriter – n : a financial services firm or group of firms, usually investment banks, that buys an entire
debt or equity financing round or issuance from a corporation, usually at a discount (up to 6%+ for an
equity issuance) and then resells it into the private or public markets. The act of buying and then reselling
such a financing round, and taking on the associated financial risk, is known as underwriting.
upside case – n : in reference to a financial model, or financial projections: the financial model scenario
(also known as aggressive case or optimistic scenario) that uses management’s most aggressive (i.e.,
optimistic) assumptions – that is, assumptions that revenues will begin sooner and/or rise faster, and that
the costs of doing business will be limited or contained. The financial projections resulting from your
upside case assumptions should be better than those for your conservative case (lowest) and base case
(medium).
useful life – n : the number of years over which a given large, one-time expense, such as research and
development or financial closing costs, is deemed to have economic value to a business (see also
amortize and amortization period).
V
VAD – n : (see VAR)
value-added dealer – n : (see VAR)
value-added reseller – n : commonly referred to by its acronym, VAR, or simply as reseller; in some
industries, referred to as VAD, or value-added dealer. VARs are often locally- or regionally-oriented
businesses, typically fairly small and privately-held, that specialize in selling and servicing a certain
category of products; VARs are most common in business-to-business sales. Most VARs will represent
products from multiple vendors (the producers of the original products). Their value proposition to
vendors is to offer access to local customers with whom the VARs have preexisting relationships, plus
local pre- and post-sales support, in exchange for a sales commission that varies by industry. VARs’
value proposition to end-user business customers is local service and support, often from a know supplier
with whom the customer has an established business relationship.
VAR – n : (see value-added reseller)
valuation – n : the measure of how much a company is worth. (See also pre-money valuation and post-
money valuation)
valuation analysis– n : the process of determining the value of an asset or company. There are many
techniques for conducting valuation analysis, and it is often partially objective and partially subjective.
Approaches used in valuation analysis include: the analysis of market multiples of comparable
companies, and discounted cash flow analysis based on pro forma financial projections.
value chain – n : the series of steps by which value is created for a given product or service. For
instance, value chain may include “value-added stages” such as original invention, product design and
development, manufacturing/production, branding/marketing, distribution and sales, warranty service, and
after-market service. When planning a new business, it is useful to understand and carefully analyze the
value chain for your product or service, in order to thoroughly understand the types of companies or
“players” who serve each function or “link” in the chain, and how much each link or function in the chain
gets paid and by whom. (see also: margin structure)
value driver – n : an important factor that determines or causes an increase in value of a business, as
viewed by investors
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Example: For a brand new startup (i.e., a business still in the Shaping stage of the Venture
Value Chain), key value drivers can include the assembly of a strong management team, a
seasoned and influential board of directors and advisory board, the development of a compelling
business plan, and the ability to produce a demonstrable prototype of product. Key value drivers
for early-stage ventures (in the Launch stage) can include the completion of a first commercial
version of the product and attracting the first paying customers. Important value dri vers in the
Scale stage usually include a strengthened management team, expanded infrastructure for sales,
distribution and customer support, and predictably ramping revenue.
VC – n or adj : acronym referring to either venture capital, a venture capitalist, a venture capital firm, or a
venture capital fund.
vendor – n : a term commonly used in business-to-business markets, referring to the original producer of
a product or service
venture capital – n : often referred to by its acronym, VC; a general term for money that is invested in
equity securities (stock) of early-stage, high-growth and/or high-potential companies that are privately-
held (i.e., their stock is not publicly traded on an exchange). Venture capital is a high-risk asset class,
and consequently venture capital investors seek high rates of return on investment. Sources of venture
capital include friends and family, angel investors, venture capital firms, corporate venture capital groups,
as well as corporate strategic investors.
venture capital fund – n : also VC fund or simply VC; a closed-end, private pool of capital dedicated to
investments in the equity securities of privately-held, early-stage or high-growth companies. A venture
capital firm (the “general partner”) raises a VC fund from institutional investors and/or high-net-worth
individual investors (so-called “limited partners”). A successful VC firm will typically raise, manage and
invest multiple VC funds over time.
venture capitalist – often referred to as by its acronym, VC; institutional investment firm, or an
investment professional working for that firm, that specializes in making equity (stock) investments in
privately-held, early-stage or high-growth companies.
Venture Communication Pyramid
TM
– The Venture Communication Pyramid
TM
is a tool designed to
help startups better communicate their business message to investors, customers, partners and
employees. By providing a simple, coherent communications model with cascading levels of detail, the
Pyramid hel ps simplify and improve the impact of companies’ marketing and fund-raising efforts. At the
top of the pyramid (least detail) is the company’s brand, and at the bottom is the company’s domain
knowledge (greatest level of detail). Each cascading level of detail builds logically on the one before and
enables the company to present its messages clearly, compellingly, concisely and consistently.
Greater Detail
Less Detail
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venture investor – an individual or institution who invests in early-stage companies; typically, people or
organizations who purchase the privately-held, illiquid equity (stock) of startup companies. Venture
investors may include angels (high-net-worth individuals), private venture capital firms, or corporate
venture capital groups.
Venture Quotient
TM
– n : abbreviated VQ, the venture quotient measures the overall likelihood of
success of a new venture (i.e., a startup business) by accounting for the four categories of venture risk
(market, technology/product, management, and financial risks).
The VQ is calculated as follows:
VQ = (1 – R
K
) x (1 – R
P
) x (1 – R
M
) x (1 – R
F
) Where: R
K
= Market Risk
R
P
= Technology/Product Risk
R
M
= Management Risk
R
F
= Financial Risk
venture risk – n : the factors that can cause a startup business to fail. Venture risk is comprised of four
major categories: market risk , technology or product risk , management risk, and financial risk.
Venture Value Chain – n : a model that describes the lifecycle of a startup company, covering the
following five stages:
• Shape – develop, research and plan the original new-business concept
• Launch – start the business
• Scale – drive hyper-growth by rapidly scaling sales and operations
• Refine – manage for consistent and predictable revenue and profit growth
• Exit – achieve liquidity for shareholders
Entrepreneurs and startup teams can use the Venture Value Chain to identify where they are in the
startup company lifecycle, understand the critical success factors for the business at each stage, and
avoid unnecessary mistakes and oversights in planning and execution.
Shape Launch Scale Refine Harvest Shape Launch Scale Refine Harvest
The Venture Value Chain™
vertically integrated – adj : describing a company or a company’s operations that are performed in
house throughout the value chain.
vest – v : become exercisable (referring to a stock option or warrant) after satisfying a vesting schedule
or vesting requirement.
vesting schedule – n : also vesting requirement; the period of time over which a stock option becomes
exercisable. Most stock options vest in a “straight line” fashion (i.e., linearly, or at a constant rate over
time) over a set term of typically 3, 4 or 5 years. As an option recipient or grantee satisfies the time
requirements (typically linked to employment or service tenure), the option continues to vest incrementally
until it is fully vested (i.e., the vesting schedule is 100 percent satisfied). (See illustrative Example under
stock option.)
viral marketing – n : a term used to describe marketing campaigns in which customers proactively attract
other customers to a product or service in a geometrically expanding network of customers (e.g., I recruit
five people, then each of those in turn recruit five people themselves, etc.).
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Example: Online digital photography services tend to benefit from viral marketing. For example,
Jolie attends a class reunion, then posts her photos on an online service and e-mails the website
link to a few dozen classmates. Each of the classmates can go online to view the photos for free,
but they are first required to register with the photo service. If any of them want to order prints,
they pay for that service. And, once these several dozen people are acquainted with the service,
some will probably choose to post pictures themselves. For example, classmate Bob may
subsequently choose to post photos of his newborn child and e-mail 25 people in his extended
family to encourage them to view the pictures online. In this way, the online photo service
benefits from viral marketing – in a sense, “free advertising” – as their customers promote the
service through word-of-mouth to an ever-expanding network.
vision – n : a company’s vision statement is the business’s raison d’etre, or reason for being; often
erroneously confused with a mission statement.
VQ – n : (see Venture Quotient)
W
war room– n:- in reference to due diligence. The central location, generally a dedicated room or office,
for due diligence documents for potential investors, acquirers or investment bankers to use.
win-win strategies – n : progressive thinking to make partnerships, negotiations, and alliances greater
than the sum of the parts. Thinking creatively is the key to win-win strategies.
whole product – n:- derived from thoughts in Geoffrey A. Moore’s seminal work on marketing for
technology startups, “Crossing the Chasm”; A completely configured end product or solution for the
target mainstream customer.
working capital – finance/accounting term; defined as the excess of current assets over current
liabilities. In practice, working capital is the capital, or money, you need to fund the day to day cash
needs of a business.
X, Y & Z
zero coupon – adj : finance/accounting term; describing a debt instrument (a bond or note) that pays no
cash interest during its life or for a portion of its life
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More About CompanyCrafters
An Ann Arbor, Michigan-based management consulting firm focused on new venture launch and
corporate spin-outs, CompanyCrafters applies an experienced entrepreneur’s mindset to crafting and
growing new businesses, bringing to bear a proven proprietary approach including a range of high-value
tools and methodologies. CompanyCrafters delivers:
• Frank and Realistic Opportunity Assessments. Many new ventures – and pre-launch business
plans – aren’t fully thought through and contain an unnecessary level of business risk.
CompanyCrafters uses a uniquely powerful approach to crystallize the risks and rewards
presented by new opportunities, bringing clarity to key decisions.
• Business Model Evaluation and Recommendations. Most tech-oriented business
opportunities can be played out through dozens of different approaches – combinations of
business model, market focus and go-t o-market strategy. CompanyCrafters applies a suite of
powerful analytic tools to evaluate the range of approaches and determine the optimal strategy.
• Business Planning. CompanyCrafters works with the client’s management team to deliver a rich
and fully-developed business plan, pro forma financial forecasts, and marketing and execution
plans to launch the new business, along with related documents such as an investor presentation
and executive summary.
• Risk Reduction Strategies. New businesses are fraught with risks. CompanyCrafters leads its
clients through a focused risk analysis and reduction exercise by evaluating venture risk in each
critical area and developing risk mitigation strategies that focus management on executing
against critical success factors.
• New Business Launch and Execution Management. CompanyCrafters can play an active role
as advisors and interim executives in launching new businesses. We work with management to
lay out 30/60/90 day execution plans and deliverables to keep the launch on track. We can also
assist in recruiting and orienting the management team required to take the new venture forward.
• Innovative Go-to-Market Growth Strategies. CompanyCrafters works as an active, hands-on
role to evaluate and steer the go-to-market strategies for new businesses as they navigate
through the often tumultuous challenges faced by young, high-growth businesses.
To learn more, go to www.companycrafters.com.
doc_757748423.pdf
In this particular brief elucidation around entrepreneurs dictionary a guide to start up business terms for non mbas.
The
CompanyCrafters
Entrepreneur’s Dictionary
A Guide to Start-up Business Terms for Non-MBAs
www.CompanyCrafters.com
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Copyright © 2004-2006 CompanyCrafters LLC page 2 of 46
About CompanyCrafters
CompanyCrafters is a management consulting firm that helps Fortune 2000 corporations and leading
research institutions to craft and launch new businesses into new markets. Based in Ann Arbor, Michigan
and led by veteran executives with successful track records as technology company entrepreneurs and
CEOs, the firm specializes in creating and growing high tech business ventures.
At CompanyCrafters, we:
• Work with corporations, research institutions, venture capital firms and select start-ups to
plan and launch new businesses;
• Structure corporate and university spinouts; l
• Develop and execute go-to-market strategies for high technology businesses;
• Take on interim executive assignments in new venture and spinout teams;
• Educate executives in the science of starting and launching new businesses .
CompanyCrafters applies an experienced entrepreneur’s mind set to crafting and growing new
businesses.
CompanyCrafters applies an experienced entrepreneur’s mindset to crafting and growing new
businesses, bringing to bear a proven proprietary approach through a range of high-value tools and
methodologies, that focus on launching and scaling new ventures more rapidly and efficiently while
significantly improving the startup's chances of success.
To learn more about CompanyCrafters, visit our website at www.companycrafters.com.
Publication Date: August 15, 2006
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Copyright © 2004-2006 CompanyCrafters LLC page 3 of 46
Legal Notices & Disclaimers
Copyright © 2004-2006 by CompanyCrafters Solutions LLC. All rights reserved.
Reproduction of this documented in whole is permitted for personal use.
The following are trademarks of CompanyCrafters LLC: CompanyCrafters; the CompanyCrafters logo;
Est. Now; You inc, therefore you are; Inc. globally; Venture Value Chain; Venture Communication
Pyramid; Venture Quotient VQ.
This document provides lay definitions of terms intended to provide business people with practical advice
and informal guidance and education. Readers should note that many of the terms presented in this
document may have explicit legal and/or accounting meanings or definitions, and that this document is
NOT intended to provide formal legal or accounting definitions. Nothing in this document should
be construed in any way as providing legal or accounting advice.
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Copyright © 2004-2006 CompanyCrafters LLC page 4 of 46
Preface
We've all noticed it: every profession, every field of endeavor, every industry seems to have its own
unique language, its own special vocabulary. And if you're not from that particular field or haven't been
trained in that discipline, you find yourself on the outside looking in. You know the feeling: even though
everyone else in the room is speaking English, the strange words make it sound like a foreign language –
as if they're communicating in code, and you're the only one in the room who wasn't issued the secret
decoder ring. We think of this phenomenon as Secret Code Syndrome (SCS) – don't worry, it's not fatal.
We encounter Secret Code Syndrome in fields ranging from medicine to the military, from journalism to
jazz, from insurance to information technology. But one of the worst culprits of all is the field of business,
and in particular entrepreneurship – that is, starting new businesses from scratch.
At CompanyCrafters, we thi nk that's silly. We understand that the vast majority of new businesses are
launched by people who have deep expertise in and a passion for their particular field – say, wireless
networking, or construction materials, or healthcare software, or graphics design – while 99 percent of
those founders do not come equipped with an MBA degree or years of previous startup experience.
As serial entrepreneurs ourselves, we've already been through the drill and picked up the "secret code" of
startup businesses. And, because our mission in life at CompanyCrafters is to apply our "useful scar
tissue" to help others plan and launch great new businesses – whether from under the corporate umbrella
or as stand-alone ventures – we thought we'd clear the air. So we created The CompanyCrafters
Entrepreneur’s Dictionary to lay out a guide to business terminology for everyone in the startup game:
entrepreneurs, startup executives, service providers, corporate new-business-development specialists,
university tech-transfer professionals, inventors and anyone else considering launching a new venture.
So congratulations: You've just been issued your entrepreneurship "secret decoder ring." Here's to
successful venturing!
James D. Price
Founding Partner, CompanyCrafters
and
Adjunct Lecturer of Entrepreneurial Studies
Ross School of Business, University of Michigan
Ann Arbor, Michigan, 2006
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Copyright © 2004-2006 CompanyCrafters LLC page 5 of 46
A
ASP – n : (see application service provider)
accounting – n : the process of identifying, recording, summarizing, formatting, and reporting financial or
economic results or information.
accrue – v : a finance term; to accumulate. For example, interest on debt, or dividends on preferred
stock accrue or accumulate over time, though payments or the maturity are on specific dates. Founders
in startups often accrue some or all of their salary until their company can afford to pay them.
accounts payable – n : finance/accounting term; often referred to simply as “payables” or “A/P”;
amounts of money that a business currently owes to suppliers but has yet to pay. Simply, A/P is what you
currently owe your suppliers of goods or services in the ordinary course of business.
accounts receivable – n : finance/accounting term; often referred to simply as “receivables” or “A/R”;
amounts of money that a business is currently owed by customers but has yet to receive. Simply, A/R is
how much money your customers currently owe you in the ordinary course of business.
accredited investor – n : This is a legal distinction of a type of investor who is eligible to buy equity,
mezzanine, or debt securities in companies that are marketed privately (private placement), are not
registered with the SEC, and do not trade on a public market such as the NASDAQ or NYSE. Accredited
investors must be knowledgeable and sophisticated individuals or institutions and must meet required
minimum levels for assets under management or net worth, which are different for individuals and
institutions. The current standard states that for an individual to qualify as an accredited investor, she/he
must have a net worth of at least $1.0 million and/or an average income of $200,000 over the past three
years. Consult an attorney prior to and during the fundraising process to ensure that your company
conforms to SEC regulations.
addressable market – n : the total potential market for a product or service, measured in dollars of
revenue per year. In other words, your business’s addressable market can be calculated by identifying
the maximum number of customers who could theoretically buy your category of product or service each
year, and multiplying that number times your average selling price per unit. Note that the addressable
market includes your product sales plus those of all your direct competitors (i.e., 100 percent market
share). [NOTE: This is a crucial piece of data that every venture investor will want to know about your
business, so it’s worth putting serious analytical thought into it.]
advisory board – n: a group of advisors formed by a company to provide sounding-board advice,
typically regarding the company’s strategic direction and product plans; some companies form separate,
discrete advisory boards to provide science and technology input vs. business advice. A strong advi sory
board not only provides useful advice to a startup team, but also enhances the young company’s
credibility.
affiliated company – n : finance/accounting term; if "Company A" owns between 20% and 50% of the
voting equity shares of "Company B," then "B" is considered an affiliated company of "A" for accounting
and financial reporting purposes.
after-tax income/loss – n : (see net income/loss)
aggressive case – n: (see upside case).
amortize – v: to allocate a large expense, such as research and development or closing fees paid to
lenders, over the period of time that that expense benefits the company. When a business amortizes an
expense, that amortized expense is recorded on the company’s income statement not when the cash
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expense is incurred, but rather as a series of amortization expenses spread out over the amortization
period.
amortization – n: the act of amortizing an expense over the useful life of the expense item.
amortization period – n: the period of time over which a large expense item is amortized on the
company’s income statement. The amortization period for a given expense item it typically determined
based on that item’s useful life; tax authorities such as the IRS and/or accounting bodies such as FASB
will often stipulate the maximum allowable useful life over which a given category of expense can be
legally amortized or spread out.
angel – n: typically a high-net-worth individual (wealthy individual or family) who invests in one or more
early-stage startup companies; angels (a.k.a. angel investors) typically make equity (stock) investments,
although variations occur. An angel can be thought of as an individual who makes very early-stage
venture capital investments, often before the business has developed to the point at which institutional
venture capital investors are interested in investing. Because of the extraordinary risk associated with
such early-stage investments, angels will usually look for a low valuation – that is, a large ownership
share given the amount of their investment. (See also accredited investor.)
angel investor – n : (see angel)
application service provider – n : often referred to by the shorthand ASP; a company that provides its
customers with access to a software application or applications through the Internet, usually via a web-
browser interface; ASP's host the software on their servers rather than having the customers install the
software on their computers. Synonyms: software-as-a-service (SAS) or hosted solution provider.
articles of incorporation – n: document filed with a state government by a corporation's founders that
describes the purpose, place of business, and other details of a corporation; also known as charter or
charter of incorporation.
asset – n: finance/accounting term; an ec onomic resource that is expected to help generate cash inflows
or reduce cash outflows. For example: Laboratory equipment is an asset for biotechnology companies;
such companies expect that the laboratory equipment will help company scientists create products to sell,
thereby generating cash. Accounts receivable (A/R) is also an asset; if customers owe your company
money for goods or services delivered, you expect that they will pay you the money owed, thereby
generating cash.
authorized shares – n : the total number of shares of stock that a company is legally allowed to issue
under its articles of incorporation; this is a number that is determined by state law based on the
company’s filing in the state in which it is incorporated or registered.
B
B2B – adj: (see business-to-business)
B2C – adj: (see business to consumer)
back-office operations – n : administrative operations that support the primary business of the company.
Example: Customer service call-centers, transaction accounting (A/P and A/R), record-keeping,
contract administration, statement generation, and general bookkeeping are all back-office
operations. Outsourcing and offshoring of back-office operations is a current business trend that
can potentially help reduce costs.
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balance sheet – n : finance/accounting term; a financial statement that delineates a business’s assets,
liabilities, and shareholders’ equity. This can be thought of as the statement of the net worth of a
business. A business’s assets minus its liabilities equal its shareholders’ equity (i.e., net worth).
bank – n: (see commercial bank )
bankruptcy – n : legal term, popularly defined as insolvency. Technically, bankruptcy is a legal process
put in place to insure fair and equal treatment of creditors of an insolvent company, and also to protect
the insolvent debtor to get started again by retaining assets that are protected from liability. Chapter 11
bankruptcy is voluntary, meaning that the debtor chooses to reorganize and restructure in order to repay
debts. Chapter 7, or involuntary bankruptcy, involves the shutting down and liquidation of a business in
order to repay creditors.
base case – n : in reference to a financial model, or financial projections. The expected case of the
model using the assumptions that management deems most likely to occur. The financial results for your
base case should be better than those for your conservative case but worse than those for your
aggressive, or upside case.
board – n : (see board of directors)
board of directors – n : the governing body of a corporation, responsible from a legal and fiduciary
perspective for overseeing the activities and behavior of the CEO and other corporate officers on behalf
of the company’s shareholders. Typically comprised of several individuals (“directors”), commonly
including the CEO, perhaps one other employee/founder, as well as multiple outside directors (non-
employees) to represent investor shareholders and/or to provide industry knowledge and connections
and/or general business experience to the company’s executive team. Boards are commonly comprised
of an odd number of members in order to avoid the potential for tie votes. Often simply referred to as the
board; sometimes abbreviated as BOD or BoD.
board meeting – n : a formal meeting of a company’s board of directors, typically scheduled periodically
at a frequency ranging from quarterly to monthly.
board resolution – n : legal term; a formal, written decision of a company’s board of directors. A
company’s bylaws will stipulate the types of major corporate decisions that require a board resolution,
which typically calls for a formal board vote and majority approval to be enacted.
BoD – n : also BOD (see board of directors)
bond – n: finance/accounting term; a formal debt certificates that include a promise to pay interest (in
cash or accrued interest) at a specified annual interest rate and a promise to repay the principal amount,
or face value, at a specific maturity date.
book value – n : finance/accounting term; the balance of an account, such as the property, plant and
equipment, or equity accounts, shown on the accounting books of a company. For example, the book
value of equity equals the amount of equity contributed to a company, through purchases of common or
preferred stock, plus the accumulated net income (or loss) of the company. The startup manager should
note that book value of equity is not necessarily an accurate measure of the valuation of your company.
bootstrap – v : launch and build a startup business without using outside funding (particularly equity
financing) – i.e., funding the business solely with the founders’ resources, operating cash flow and/or debt
from banks, suppliers or credit cards. On the one hand, founders of bootstrapped startup companies own
100 percent of their business since they have not diluted their ownership stake by selling stock to
investors. On the other hand, bootstrapped startups may compromise their chances of success and/or
prospects for optimal growth and expansion due to capital constraints (i.e., inadequate supply of money
to start, operate and grow the business).
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burn rate – n: the rate of net cash outflow, or the rate (monthly, quarterly, or yearly) at which a company’s
cash outflows exceed the company’s cash inflows; in other words, the rate at which a startup business is
using up, or “burning through,” its cash.
brand – n : The distinctive identity of a company or its product. Narrowly defined, a brand is comprised
of the company’s (or product’s) name, tag line and logo. However, many marketing experts use a
broader definition of brand, connoting the narrower meaning plus the company’s or product’s overall
image to its target customers.
Examples: Narrowly, Dell Computer’s brand includes the Dell name, logo and tagline (“Dude,
you’re getting a Dell!”). More broadly, Dell’s brand also connotes high-quality, well-engineered,
reasonably-priced computers configured uniquely for each customer and delivered and serviced
in a convenient, fast and hassle-free manner. Abercrombie & Fitch’s broader brand image goes
beyond serviceable casual clothes to connote youthful beauty and a sexy, hip lifestyle for teens
and young adults.
brand awareness – n : how well your brand is known, specifically in your target market or customer set.
brokerage house – n : Wall Street term; a firm engaged in the business of brokering (buying, selling,
trading and underwriting) securities (financial instruments such as stocks and bonds).
business development – n : business function focused on strategy, creating strategic partnerships and
long-term relationships with suppliers and customers. The business development function within a
business can be thought of as a jack-of-all -trades position focused on strategic deal -making with an eye
toward increasing sales and expanding the company’s long-term business success or scope.
business model – n : the method or process by which a business makes money, or the way a business
extracts economic value for its products or services. A company’s business model includes how it
charges for its offerings and the context in which those products or services are offered for sale to end-
user customers (i.e., its distribution channels).
Examples: eBay’s primary business model entails charging sellers a percentage “success fee”
for any item sold on its auction website. The business model for some websites and e-
newsletters is to charge a subscription fee for access to premium content, while others provide
content at no charge and make their money by selling advertising and sponsorships; some
employ a business model that entails a blend of these two ways of making money. Meanwhile, in
the software business, some companies charge a monthly or annual license fee (essentially
leasing or renting the software), whereas others charge a single, one-time license fee; some
charge full-price for an upgrade, while others offer a credit to purchasers of the previous version.
Some online music services charge a per-tune download fee, while others charge a flat monthly
subscription fee for unlimited listening or downloads. To look at an example of a personal
services business, some executive recruiters charge a finder’s fee calculated as a percentage of
the candidate’s first-year salary, while others charge a flat dollar amount for all recruiting tasks.
business plan – n : : a document that tells the story of your company; audiences include prospective
investors, bankers, key hires and strategic partners. It should be a concise, organized, visually-impactful
and easily-navigable document that is consistent with all other forms of communication used by your
company to sell its message to both the outside world, and to employees and current investors in the
company. A typical business plan includes: a concise company description including current status of
company development (when founded, stage of development or growth, etc.); an analysis of the industry
and the market; a description of the target end-user customers and the nature and extent of their unmet
need; your business’s solution (product and/or service) to the customers’ unmet need and how it’s notably
better/differentiated form current competitive offerings; an execution plan (how you are going to do what
you do, including high-level tasks and key milestones and dates); a description of key managers and
advisors; and a set of financial projections (typically 5 years).
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business-to-business – adj : also referred to by the shorthand B2B; describes marketing and selling a
company’s products or services to other businesses (as opposed to individual consumers). For example,
Cisco Systems is primarily a B2B company in that it sells most of its Internet routers and other networking
equipment to other businesses rather than to consumers.
business-to-consumer – adj : also referred to by the shorthand B2C; describes marketing and selling a
company’s products or services to individual consumers (as opposed to other businesses). For example,
Amazon.com is a B2C company; that is, they sell products, ranging from books to tools to appliances,
directly to individuals.
business unit – n : a.k.a. strategic business unit or P&L; a stand-alone business that operates within a
larger company – in effect, a company within a company – with its own independent management team,
and financially measured or tracked as a separate entity (referred to by accountants as a separate profit
and loss center, or P&L).
bylaws – n : also referred to as corporate bylaws, a document that serves as the legal foundation
describing a corporation; this document serves the same function for a corporation that the operating
agreement does for an LLC.
C
“C” corporation – n : the most common legal form of organization for a company. Virtually all
established companies of any meaningful size, as well virtually all startups that seek outside investment
capital (venture capital), take this form (as opposed to other legal forms such as an “S” corporation, LLC
or LP). Though the income of “C” corporations is subject to double taxation (federal and state
governments tax a corporation’s earnings as well as dividends distributed by the corporations to
shareholders ), many venture-fundable companies chose this structure because it is advantageous from a
long-term capital gains perspective for tax purposes.
CAGR – n : (see compound annual growth rate)
COGS – n : (see cost of goods sold)
cap table – n : (see capitalization table)
capital – n : finance/accounting term; money. Specifically refers to funds contributed by investors or
lenders to a company for the purpose of funding (capitalizing) the infrastructure and growth needs of the
business.
capital structure – n : finance/accounting term; a.k.a. cap structure; owners’ equity plus long term debt;
how a company is financed; shown on the assets side of the company’s balance sheet.
capital structure explained: A typical company’s capital structure would include various pieces,
or tranches, of debt and equity. The make-up of a capital structure is typically represented either
in a capitalization table, where each instrument is laid out with the corresponding dollar amount s
and owners, or is represented by ratios, such as the debt-to-equity ratio, or the debt-to-total-
capitalization ratio, or percentages (e.g., 30% debt/70% equity). A typical start-up company is
financed primarily with equity, so that its capital structure is comprised nearly 100% of equity.
capital call – n: the legal right of a firm to call, or demand, a portion of the money committed to it by an
investor under a previous capital commitment ; the act of making such a call. For example, when a
venture capital firm (general partner, or G.P.) has received capital commitments from its limited partner
(L.P.) investors for a venture capital fund, and decides to invest in a portfolio company, the VC makes a
capital call to its L.P. investors in order to fund the new portfolio investment.
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capital commitment – n: a contractual agreement between an investor and a company or venture
capital firm wherein the investor commits to provide up to a specified amount of capital (money), or any
portion thereof, over an agreed-upon period of time.
Example: If an institutional investor (“limited partner”) agrees to invest $10 million in a venture
capital fund, that investor does not simply send the VC a check for $10 million. Rather, the
limited partner makes a capital commitment to the VC for the life of the fund (or the defined
investment period of the fund). When the VC wants to make an investment in a portfolio
company, it makes a capital call to the limited partner for some portion of the investor’s total
capital commitment – typically its pro rata share of the investment. When a capital call occurs,
the investor is contractually obligated to provide the funds requested.
capitalization – n : (see capital structure, also referred to as capitalization structure)
capitalization table – n : finance/accounting term; a.k.a. cap table; a chart or table that displays the
specific make-up of a company’s capital structure. A capitalization table lays out line-by-line the debt and
equity instruments on a company’s balance sheet, and who owns such instruments. In the start-up world,
as most start-ups are financed with 100% equity, the capitalization table shows who owns how much of
the company, and in which round or tranche each owner has invested, thus outlining the equity ownership
of the company.
capitalize – v : to fund or finance a business; provide capital to enable the business to fund initial startup,
ongoing operations and/or growth.
cash burn rate – n: (see burn rate)
cash equity – n: also referred contributed equity or invested equity, cash equity denotes the cumulative
total of all cash invested in a company through equity (as opposed to debt, or borrowing) instruments over
all of the company’s financing rounds.
cash flow – n: finance/accounting term referring to the amount of cash that “flows” in and out of a
business over a period of time. Cash flow means exactly what it sounds like: if your business is “cash
flow negative,” you are spending more cash in a given time period (typically per month or quarter) than
you are taking in; conversely, if your business is “cash flow positive,” you are taking in more cash than
you are spending.
cash flow statement – n: also statement of cash flows ; a standard finance/accounting statement that
shows the amounts of cash that are spent by a business (cash outflows) and collected by that business
(cash inflows ) over a specified period of time, typically a quarter or year.
channel – n : (see distribution channel )
chart of accounts – n : finance/accounting term; a numbered or coded list of all accounts (categories
and subcategories of expenses and revenues) for a company. The chart of accounts is the basic
bookkeeping or accounting tool of companies.
charter – n: (see articles of incorporation)
charter of incorporation – n: (see articles of incorporation)
chasm – n: a term coined by Geoffrey A. Moore in his seminal work on marketing for technology startups,
“Crossing the Chasm”; refers to the dramatic differences between the characteristics of and the ways a
business markets to: a) on the one hand, the initial customers for a technology-based product or service,
called innovators and early adopters; versus b) on the other hand, the bulk of the business’s potential
customers, referred to as pragmatists, or the early majority and late majority.
closely-held – adj : describing a company that is owned by one or a small number of shareholders.
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cofounder – n : also co-founder; an individual who starts a new business jointly with another person or
persons (fellow cofounder or cofounders). (see founder)
commercial bank – n: banking services provided to commercial organizations (corporations and
partnerships) and individuals; typically refers to traditional banking services, such as checking and
savings bank accounts, cash management accounts, interest bearing accounts, and loans.
committed capital – n: (see capital commitment)
common stock – n: finance/accounting term; equity or stock ownership of a company representing
owners who have the lowest-priority, or a “residual,” interest in the company. In other words, in a liquidity
event such as the sale of a company of all of its assets, common stockholders get paid last, only after the
principal amounts owed senior debt-holders, subordinated debt-holders, and preferred stockholders are
paid.
company backgrounder – n : a standard, one- or two-paragraph description of a company used to
describe your business to your various target audiences – customers, prospects, industry analysts,
investors, journalists and/or the general public – on your website, in press releases, and/or in brochures
and pamphlets about your company or your company’s products.
CompanyCrafters – n : a management consulting firm that specializes in new-venture launch and
corporate spin-outs. Based in Ann Arbor, Michigan and led by veteran executives with successful track
records as technology company entrepreneurs and CEOs, the firm specializes in creating and growing
high tech business ventures. For more information see: www.companycrafters.com.
comparable – n : also comp or comps, a company in the same or a similar industry, and/or at the same
or similar stage of development, to which a startup can compare itself regarding various key operating
ratios and valuation metrics. Comparables are useful for planning startup costs and common operating
ratios by providing entrepreneurs examples of the financial performance experienced by established
companies in the same or similar lines of business. Comparables are also used to derive valuations of
private and public companies by performing a comparable companies analysis.
comparable companies analysis – n : an analysis of several comparables by a business, or a
consulting or banking firm hired by that company, to derive valuation as well as to compare and
benchmark financial and operating multiples and metrics.
competitive analysis – n : the art of analyzing an industry, sector or niche to determine the identity,
size, market share, growth rates and competitive dynamics of all the businesses competing in that space.
The key to valuable competitive analysis is to determine not only the numerical facts, but more
importantly, to understand the competitive dynamics of the industry in question: What is the basis of
competition (e.g., features, price, shelf-space, channels, brand image)? How does profitability vary
among the various competitors and why? A comprehensive competitive analysis looks at each
company’s competitive positioning and what each company’s competitive differentiation is within its
sector. Many schools of thought exist regarding competitive analysis, and several different courses in
each major MBA program focus on the topic.
competitive differentiation – n : the ways a business differentiates itself from its competition.
Competitive differentiation can take many forms, though the focus of competitive differentiation is to set
your company apart from the competition, or potential competition if you are a startup company. As a
startup company, it’s important to determine what makes your offerings different, faster, cheaper, and/or
better than your competition. (see also: competitive positioning)
competitive positioning – n : how a company positions itself relative to its competitors in the minds of
customers. Companies need to position themselves effectively to address the question: How is your
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product or service demonstrably better, faster, cheaper or otherwise more appealing than those of your
competitors? (see also: competitive differentiation)
compound annual growth rate – n : often referred to by abbreviation CAGR; the annual growth in
revenues – of a company, a market niche or an industry – factoring in annual compounding (similar to the
concept of compound interest).
Example: If market niche has aggregate revenues of $100 million in the year 2001, and then
experiences a CAGR of exactly 20% over the next three years, then its 2002 revenues are (1.20
x $100,000,000 = $120,000,000); its 2003 revenues are (1.20 x $120,000,000 = $144,000,000);
and its revenues in 2004 are (1.20 x $144,000,000 = $172,800,000). In other words,
compounding means that the interest rate is applied to previous period’s numbers.
compound interest – n: finance/accounting term; in the case of a loan or bond where interest accrues
but is not paid, the interest accrued is added to the principal amount of the loan or bond. This increases
the principal amount, and interest now accrues on the new higher amount. Simply put, compound
interest is interest you pay on interest you have been charged. For the startup manager, you may see
this concept in the form of compounding dividends on preferred stock that has a set dividend rate.
compounding dividends – n: finance/accounting term; (see compound interest).
confidential disclosure agreement – n : (see non-disclosure agreement)
confidentiality agreement – n : (see non-disclosure agreement ).
conservative case – n : in reference to a financial model, or financial projections; the downside, or low
case of a business’s projections using the most conservative set of assumptions. The financial results for
your conservative case should be worse than those for your base case (most likely assumptions) or your
aggressive, or upside case (using the most optimistic assumptions).
consolidated financial statements – n : finance/accounting term; combined financial statements of a
parent company with those of all subsidiaries of the parent company as if the parent company and all its
subsidiaries were one entity. If you look at the financial reports publicly issued by Fortune 500
companies, they are all consolidated financial statements representing all of the businesses and
subsidiaries of the parent company.
continuous innovation – n : modest, gradational, ongoing upgrades or enhancements of existing
technologies or products; continuous innovation generally does not fundamentally change the dynamics
of an industry, nor does it typically require end users to change behavior. The opposite of continuous
innovation is discontinuous innovation, also known as disruptive innovation.
Examples: In the television industry, continuous innovation occurred for years with the steady,
gradational enhancements in, and improvements in pricing and programming for, standard color
televisions. By contrast, in recent years, this industry has begun to experience two types of
discontinuous innovation, with the introduction of flat-panel, digital TVs, on the one hand, and the
related phenomenon of high-definition (HD) programming – phenomena that together are
dramatically and rapidly changing the size and growth rate of the industry, competitive dynamics,
pricing, etc. and are suddenly compelling many consumers to expensively upgrade their TV sets
and services for the first time in decades.
In the restaurant industry, menu changes or the emergence of new restaurants and chains
represent continuous innovation, whereas the emergence of McDonald’s and the fast-food
phenomenon in the 1950’s constituted a discontinuous innovation, completely changing industry
growth rates, pricing assumptions, consumer perceptions of service and value, etc.
The telephone industry experienced only very modest continuous innovation for decades (e.g.,
changes in call plans, the advent of the touch-tone phone to replace the rotary-dial phone, etc.).
Then the industry experienced a dramatic in the 1990’s with the emergence of cellular phones
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with their associated dramatic changes in mobility and convenience. Currently, the industry is
experiencing yet another discontinuous innovation with the emergence of VOIP (voice over
Internet protocol), or Internet telephony, which is suddenly and dramatically changing cost and
pricing paradigms and competitive dynamics in the industry.
contributed equity – n : (see cash equity)
convertible bond – n : a bond or debt instrument with a provision allowing the holder or the issuer to
convert the security from a debt (borrowing) instrument to an equity instrument (common stock or other
equity security) of the issuing corporation; such conversions typically occur at a predetermined exchange
ratio stipulated in the convertible bond.
convertible preferred stock – n : a preferred stock issuance that is convertible to common stock of the
issuing corporation at a set per-share price known as the exchange ratio.
copyright – n : the legal protection of the works of authors or artists which gives the originators the
exclusive right to publish or benefit from their works, or to determine who else may do so. In the U.S.,
copyright law is administered by the federal government’s U.S. Patent and Trademark Office (PTO).
corporate bylaws – n : the legal foundation document for a corporation (either “S” corporation or “C”
corporation); serves the same purpose for a corporation that an operating agreement serves for an LLC.
corporate governance – n : the rules dictating how various rights and responsibilities are shared
between the various stakeholders in corporations, primarily management team members, directors,
shareholders, and other financial stakeholders.
corporation – n : a legal form of business organization that shields its individual principals (shareholders)
from personal liability. Two types of corporation are available to businesses, the “C” corporation, which is
a taxable entity; and the “S” corporation (a form commonly used only by small, closely-held companies),
which is a pass-through entity for tax purposes.
cost of goods sold – n : finance/accounting term (often abbreviated COGS); the incremental, direct cost
of producing each product or service unit that is sold to customers; sometimes also referred to as variable
cost. The selling price (revenue derived from selling an individual product or service unit) minus the
COGS equals the gross margin or gross profit.
coupon – n : finance/accounting term; also known as coupon rate; the interest rate paid on a bond or
other debt instrument.
coupon rate – n : (see coupon)
covenants – n: legal term for the terms of a contractual agreement or contract that restrict the actions of
one party. Restrictive covenants are typically written into financing agreements, such as loan or bond
documents.
credit – n : finance term; the capacity to borrow (as in, “The company has a line of credit of $50,000…”;
the act of borrowing (as in, “We purchased the item on credit…”).
credit risk – n : finance term; from a lender’s perspective, the degree of risk (i.e., the likelihood, or
probability) that a borrower will fail to repay the principal and interest of his/her loan according to the
schedule stipulated in the loan agreement. Also used to refer to the borrower itself from a creditor’s
(lender’s) perspective (as in, “ABC Corp. is a good credit risk…” or, “Acme Corp. is a poor credit risk…”
creditor – n: finance/accounting and/or legal term; a person or entity who is owed money; lender.
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critical success factor – n: a factor that must be addressed by a business in order to succeed. Startup
businesses that clearly identify and address all their critical success factors have a much higher likelihood
of surviving and prospering in the long run.
crossing the chasm – v : a term coined by Geoffrey A. Moore in his seminal work on marketing for
technology startups, “Crossing the Chasm”; a phrase referring to the challenging strategic and marketing
process by which technology startups transition from selling their products and/or services to innovators
and early adopters to selling to the early majority, a.k.a. pragmatists; this transition (“crossing the chasm”)
entails a dramatic shift in mentality for the startup, best understood by reviewing Moore’s book.
current assets – n : finance/accounting term; cash and other assets that are expected to be converted
to cash or sold or consumed within one year in the ordinary course of business. Accounts receivable and
cash are two types or classes of current assets.
current liabilities – n : finance/accounting term; liabilities such as debts that are expected to repaid
within one year in the ordinary course of business. Accounts payable are a type current liability.
customer funding – n : a business arrangement between a vendor and its customer wherein the
customer agrees to provide the vendor with some level of up-front funding in advance of delivery of the
product or service. The intention of such arrangements is usually to partially or wholly fund a vendor’s
product development. The vendor benefits by receiving earlier cash flow that can help fund product
development and obviate the need for as much external funding (reducing shareholder dilution). The
customer, on the other hand, often benefits from such arrangements by getting an early look at a new
product or technology, experiencing the ultimate benefits of the product sooner than it otherwise would,
having disproportionate influence over the product’s features and delivery schedule, and possibly special
discounts off the eventual list price.
D
D&O insurance – n : (see directors’ and officers’ insurance)
debt – n : borrowed funds; money, goods or services owed by one person or organization to another.
From a finance/accounting standpoint, debt is money owed to another party (known as a creditor),
whether that party is a bank (in which case the debt is a loan), an institutional investor (bonds or notes),
or a supplier (supplier-extended credit terms). Accounts payable (A/P) (i.e., outstanding bills, or money
owed for goods or services rendered) are not considered debt in accounting parlance. Debt can take the
form of loans, bonds, notes, credit cards, equipment financing, and a number of other instruments.
debt-to-equity ratio – n : finance term, sometimes referred to by shorthand D/E; the ratio of debt to
shareholders’ equity on a company’s balance sheet. D/E is calculated by dividing the sum of the debt on
a company’s balance sheet (bank loans, notes, etc.) by the sum of the shareholders’ equity. The debt-to-
equity ratio is a commonly-used measure of the strength of the capital structure of a business –
answering the important question, “How strong is the company’s balance sheet?”. Companies with low
D/E ratios tend to be considered better credit risks than companies with high D/E ratios.
debt-to-total capitalization ratio – n : finance term defined as the ratio of debt to total capitalization
(debt plus shareholders’ equity) on a company’s balance sheet. Similar to the debt-to-equity ratio, the
debt-to-total capitalization ratio is a commonly-used measure of the strength of a business’s capital
structure or balance sheet . It is calculated by dividing the sum of the debt on a company’s balance sheet
(bank loans, notes, etc.) by the sum of the debt and equity on a company’s balance sheet. D/(D+E) =
debt-to-total capitalization ratio.
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debtor – n : a person or entity who owes money to another person or entity (a debtor owes money to a
creditor or lender).
declining market – n : the last stage of market development, in which annual industry revenues are in
steady decline due to some combination of market saturation, decline in size of the target market, and/or
introduction of a replacement product or technology.
Example: By 2000, traditional plug-into-the-wall telephone handsets represented a declining
market, as the demand for these products was increasingly being displaced by growing demand
for both wireless landline handsets and cellular phones.
demand – n : economics/marketing term; a) the extent to which customers buy, or wish to buy, a
company’s product or service; b) the aggregate size of the market for a product or service (expressed
either in unit sales or dollars).
demand sensitivity – n : (see price sensitivity)
depreciate – v : finance/accounting term; to write off, or expense, the purchase price of a large expense
or asset (e.g., equipment) over the useful life of the item.
depreciation – n : finance/accounting term; the act of depreciating; the expensing of the purchase price
of a physical asset (e.g., a piece of equipment) over the useful life of the asset. Depreciation is not a
cash expense, as equipment is paid for up-front or financed, while the cost is expensed over the useful
life of the equipment (as opposed to when cash is paid to the vendor).
Example: ABC Printing Corp. buys a printing press for $100,000 in cash in 2005. According to
accounting standards, this type of production equipment is deemed to have a useful life of 10
years. Consequently, while ABC’s cash flow statement for 2005 shows a cash outflow of the full
$100,000 for this purchase, the company’s income statements for the 10 years starting in 2005
will show a depreciation expense of $10,000 per year for the same purchase. The effect of this
accounting treatment is to show a company, over the useful life of the asset, as being relatively
more profitable than it otherwise would – since lower nominal expenses or costs lead to higher
relative profitability.
detailed financials – n : in-depth financial statements; typically a five-year set of pro forma (that is,
predictive or forward-looking) financial statements (balance sheet, income statement and cash flow
statement) which includes detailed expense build-up, clearly states the assumptions, and identifies key
milestones and when capital will be deployed.
dilute – v : finance/accounting term; to proportionally reduce; to reduce a person or entity’s proportional
(i.e., percentage) equity ownership, typically by issuing and selling new equity (stock) to other
shareholders. (see also dilution)
dilution – n : finance/accounting term; the act of diluting; the reduction in proportional (percentage)
ownership of each current shareholder of a company that results from the issuance of new shares. For
the entrepreneur or startup manager, dilution refers to the extent to which your personal proportional
ownership of your company declines when the company issues new shares, whether in the course of
raising equity capital (by selling newly-issued shares to investors), or through stock option plans to
motivate employees.
Example: If you own 50% of ABC Company, a firm worth a total of $1 million (pre-money
valuation), and ABC Co. then sells 500,000 newly-issued shares of stock at $1 each to a new
investor (i.e., ABC raises $500,000 in equity capital from that investor), then post-investment, you
would own 33.3% of ABC Co., now worth $1.5 million (post-money valuation). Note, in this
example, that although you percentage ownership of ABC has declined, your stake maintains the
same nominal value: i.e., your former ownership stake of 50% of $1 million = $500,000; while
your new stake of 33.3% of $1.5 million = $500,000.
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director – n : an individual serving on a company’s board of directors; can also denote (but should not
be confused with) an individual employee in a company with the title of “director” (e.g., “Director of
Product Management,” or “Director, Eastern Region Sales”).
directors’ and officers’ insurance – n : a.k.a. D&O insurance; a type of insurance policy whose
purpose is to protect a company’s directors (i.e., members of the board of directors) and corporate
officers (i.e., CEO, CFO, Secretary, etc.) from personal liability while discharging their duties on behalf of
the company.
Example: Because ABC Corp. purchased a D&O insurance policy in 2003, when, in 2004, a
disgruntled shareholder sued not only the company but also ABC’s individual directors, CEO and
CFO, the personal assets of those individual defendants were protected by the company’s D&O
policy (to the extent of its coverage).
discontinuous innovation – n: technological, product or service innovation in an industry or market that
requires end-users to change behavior, and thereby tends to suddenly and dramatically change the
dynamics of the industry, including possibly changes in competitive dynamics, industry revenue size and
growth rate and pricing. (See examples under continuous innovation)
discount rate – n : finance/accounting term; rate used to discount cash flows to determine the present
value of future expected cash flows. In finance, it is accepted that $1 today is worth more than $1
tomorrow. A company’s discount rate allows it to determine how much $1 tomorrow (or one year from
now, or ten years from now) is worth today.
distribute – v : to sell; to take a product or service to market. In certain industries, distribute can also
denote the act of serving as an intermediary between producers of a product and retailers or sellers of
that product. (see also distribution and distribution channels)
distribution – n : the act of distributing, or moving a business’s goods (products) to market for ultimate
sale to end-user customers. In some industries, distribution means the same as sales. (see also
distribute and distribution channels)
distribution channel – n : the mechanism or method by which a business brings its products to market,
or distributes its products to its target customers and generates sales. A given business may have
multiple distribution channels.
Examples: For a consumer product, for instance, alternative distribution channels might include
traditional retail stores, telesales, direct mail, infomercials, or web-based sales. For a business-
to-business product, alternative distribution channels might include direct sales (company-
employed sales reps calling on end-user business customers), telesales (the same, but by
telephone), or selling through distributors or manufacturers’ representatives.
distributor – n : a) a company that specializes in distributing other companies’ products – i.e., has
contractual relationships with one or more vendors (producers of the original products) under which the
distributor has certain rights, responsibilities and restrictions related to marketing and selling the vendors’
products to the ultimate end-users. b) In some industries that have multi -tier distribution systems – e.g.,
the steel industry, as well as many retail sectors – the term distributor is alternatively used to describe a
company that serves an intermediary role between a products’ original producers and the companies that
actually sell to end-users; these intermediaries typically purchase products from multiple vendors, provide
warehousing and transport to the retailers.
Examples: a) When American producers of software decide to market their products
internationally, they need to choose, for each foreign country they choose to enter, whether to set
up company offices (“go direct”) or, alternatively, to sign up a distributor to represent their
products in that country. Going direct has the advantage of enabling the vendor to retain all end-
user revenue (no need to pay distributor commissions). On the other hand, going through a
distributor in a foreign country may offer the benefit of faster time-to-market, established customer
relationships, and working with a partner familiar with local language and business customs.
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b) Book publishers typically do not sell their products directly to bookstores; rather, they sell to
distributors whose intermediary role is to purchase, warehouse and ship multiple publishers’ titles
to independent retailers and chain bookstores.
domain knowledge – n : knowledge about a specific industry, technology and/or market, typically based
on extensive experience in that industry or technology arena. Domain knowledge – which can take the
form of technological expertise, understanding of product trends, familiarity with key industry players and
influencers, and/or knowledge of industry-specific terminology and business practices – is a critical
success factor for entrepreneurs and startup teams.
due diligence – n : legal/finance term; the process employed by potential investors or their agents of
investigating a business deal or the target of an investment or acquisition; often involves exhaustive fact-
checking and review of all historical and current financial and legal records. Due diligence is performed
prior to closing the business transaction in question; often, the two parties to a transaction will sign a letter
of intent (LOI ) or memorandum of understanding (MOU) for a deal, stipulating that a final agreement and
closing of the deal is subject to the buyer’s completion of due diligence on the seller, to the buyer’s
satisfaction.
due diligence notebook – n : notebook containing all documents critical for investor decision making.
(see Venture Communication Pyramid)
E
E&O insurance – n : (see errors and omissions insurance)
EIN – n : (see Employer Identification Number)
early adopter – n : a term coined by Geoffrey A. Moore in his seminal work on marketing for technology
startups, Crossing the Chasm; individuals or organizations that enthusiastically embrace (try and buy)
new technologies or tech-based products before the vast majority of potential buyers consider it. In
Moore’s version of the technology adoption lifecycle, after innovators, early adopters buy into new
technology products very early in the product or technology’s lifecycle. In contrast to Moore’s innovators,
early adopters are not technologists, but people who understand and appreciate the benefits of the new
technology and apply those benefits to what they do. In your world, the early adopters always have the
new gadgets before they hit the mainstream.
early majority – n : a term coined by Geoffrey A. Moore in his seminal work on marketing for technology
startups, Crossing the Chasm. When analyzing the market for a given product, the early majority is
comprised of pragmatists, customers who to buy a new product only once it’s proven, established and
well-supported. Early majority customers typically follow after more risk-seeking and less-demanding
customers known as innovators and early adopters. The early majority typically understands technology,
but – unlike early adopters, who often buy based on a fascination with the technology and newness of the
product – makes purchase decisions based on the practicality, economic benefit and reliability of the
technology. Moore’s chasm is the gap between the early adopters and the early majority customers, who
are far more numerous, but, unlike early adopters, expect evidence of widespread adoption, proven
performance, reliability and excellent service or support.
early market – n : the market for technology products purchased by visionary customers (Geoffrey A.
Moore’s innovators and early adopters). Products in the early market stage are either fads that will
eventually fail, or will become accepted by the mainstream market (pragmatists) as technology standards.
EBITDA – n : finance/accounting term; acronym referring to earnings before interest, taxes, depreciation
and amortization; sometimes referred to more generally or less precisely as operating profit or pre-tax
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profit. EBITDA is also used as a quick measurement of cash flow, in that it measures earnings (profit, or
the excess of revenues over expenses) prior to taking into account the non-cash expenses of
depreciation and amortization.
economic buyer – n : marketing term, typically used in business-to-business markets; describes the
individual, decision-maker or group within the customer organization who controls the budget and writes
the checks for new product purchases.
elevator pitch – n : Imagine you walk onto an elevator and encounter the one person you want to invest
in your company. You have just a minute or two to sell your business to him or her – a brief moment to
explain why your company is going to make a difference. Smart entrepreneurs develop their concise
company summary ahead of time, and actually rehearse it.
Employer Identification Number – n : often referred to by its abbreviation (EIN), a.k.a. Federal
Employer Identification Number (FEIN), or tax ID; a unique number issued to a company, when it is first
established, by the U.S. Internal Revenue Service (IRS); as with an individual’s Social Security Number,
the EIN is required for a startup company to engage in many basic business transactions such as
opening a bank account, hiring employees, etc.
end user – n : also end-user; the ultimate customer; the individual or entity that actually uses your
product or service.
entrepreneur – n : an individual who starts, or participates in the founding and launch, of a new
company; a founder or cofounder.
equity – n : financial term; ownership in a corporation, generally in the form of common stock or
preferred stock; in a business organized as an LLC (limited liability company), equity ownership takes the
form of member interest.
ERP – n : acronym for enterprise resource planning, a major category of application software or systems
used by companies to plan and coordinate operations such as human resources, inventory control, or
production logistics.
errors and omissions insurance – n : also E&O insurance; a type of insurance designed to protect a
company and its principals and employees from legal liability stemming from claims (lawsuits, etc.)
concerning the commission of errors and/or omissions in the conduct of business.
exchange ratio – n : financial term, referring to convertible securities such as convertible preferred stock
and convertible bonds; the ratio at which the new securities are issued in exchange for the old securities
when the convertible security holder exercises his/her conversion right .
executive summary – n : a two- to five-page write-up describing a company for the purposes of whetting
the appetite of potential investors, key recruits and/or strategic partners. An executive summary is a
highly-distilled version of the business plan or investor presentation that tells your company’s story in very
few words (and pictures or diagrams). A strong executive summary should briefl y address the following
topics (similar to the topical coverage for your investor presentation):
a) the business your company is in (e.g., “… a web-based enterprise software for independent
retailers…”, or “…a biotech company focused on drug discovery for treating esophageal
cancer…”);
b) the stage of company development (e.g., “…incorporated in Delaware in [date], targeting
having demonstrable product prototype by [date] …”);
c) the target market/customers;
d) the customers’ unmet need, and how they are addressing that need today;
e) your company’s proposed solution to that unmet need (product and/or service);
f) competition and your competitive differentiation (how your solution is demonstrably better,
faster, cheaper, cooler, or otherwise more desirable to your target customers);
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g) established strategic alliances;
h) management team;
i) financial summary (results to-date and forecast out at least 3 years);
j) capitalization (invested capital to-date) and amount of capital the company is current hoping to
raise.
exit – n or v : in the world of entrepreneurship and venture finance, exit refers to a liquidity event, in
which owners of illiquid stock in a privately-held company – whether they be founders, employees, or
investors – achieve liquidity for their stock holdings (i.e., a market develops for their shares where no
market previously existed) due to one of two occurrences: a) the company “goes public” through an initial
public offering or IPO; or b) the company is sold to another company, either for cash or for the publicly-
traded stock of the acquiring company. (see also: shareholder exit, liquidity, and liquidity event)
exit strategy – n : a privately-held company’s plan to achieve liquidity or a financial exit for its
shareholders.
F
FASB – n : (see Financial Accounting Standards Board)
FEIN – n : Federal Employer Identification Number (see Employer Identification Number)
fiduciary – adj : legal term; relating to trust and legal accountability for certain financial matters of
another individual or entity.
– n : an individual or entity to whom another has assigned fiduciary responsibility.
fiduciary duty – n : legal term; assigned responsibility to act on behalf of an owner or owners in their
best financial interest. When an individual represents a party or a group in a position of trust or
confidence, it is that person’s duty to act primarily for the benefit of the party or group he/she represents.
A fiduciary duty compels one to make decisions that are in the best financial interest of to the party
represented. In entrepreneurship and venture finance, directors sitting on a company’s board of directors
legally carry a fiduciary duty or fiduciary responsibility to always act in the best financial interests of the
company and its shareholders.
fiduciary responsibility – n : (see: fiduciary duty)
Financial Accounting Standards Board – n : Usually referred to by its acronym FASB; the accounting
industry organization that determines and promulgates operating standards for the accounting profession
in the U.S. FASB determines and publishes GAAP (generally accepted accounting principles).
financial investor – n : an investor (individual or firm) who makes investment decisions primarily based
on the prospect for financial gain; financial investors tend to uses financial skills and methods to increase
returns and manage risks. (By contrast, strategic investors – typically companies – make investment
decisions based on the prospect of strategic benefit for their organization, such as future access to a key
new technology or product.)
Example: Venture capitalists are classic examples of financial investors; their partnership
agreements with their limited partner investors stipulate that they will strive to invest their fund(s)
in such a way as to try to maximize financial return for their investors.
financial projections – n : detailed financial statements, typically developed by a company’s
management, that represent the expected future financial results of a company; an important component
of a company’s business plan; a distilled version of financial projections should also appear in a
company’s executive summary and investor presentation . Different from pro forma financial statements,
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which represent expected future financial results after a specific, significant event, such as a fundraising
round, or a merger or acquisition.
financial risk – n : a.k.a. financing risk; one of the four categories of venture risk; the likelihood that a
new venture or young business will fail to raise sufficient capital financing (all rounds) to fund the startup
to a self-financing, self-sustaining, cash flow-positive operating state.
financial statements – n : finance/accounting term; a set of financial accounting tables that together
describe the financial performance of a company or business unit for the most recently completed period
(typically a year or quarter); often also summarize financial results from prior periods for comparison
purposes; financial statements are typically comprised of an income statement (a.k.a. a profit and loss
statement, or P&L), a cash flow statement, and a balance sheet . (see also pro forma financial
statements)
financing risk – n : (see financial risk)
financing round – n : a discrete fund-raising event for a company, usually occurring over the course of
several weeks to no more than a few months, during which the company raises financing with a specific
series of stock or security, at a set price or valuation. Each time a company raises money, it completes a
financing round. A company will set a goal to raise a set amount of capital in each round at a certain
valuation or price per share. Once that amount of money is raised, the round is closed. In the case of
preferred stock, each financing round is referred to as a series (e.g., Series A, or Series B).
friends and family financing – n : a form of startup funding in which the entrepreneur asks friends and
family members for investments in an early-stage business. This is frequently the first financing round for
young companies – often when a company is just being launched and is still far from producing a product
and generating revenue – and typically precedes financing by angels, venture capitalists and/or banks.
(Referred to by some cynics as the friends, family and fools round, implying that very-early-stage
companies will often raise money from anyone willing to give them money, sometimes including
individuals lacking in financial acumen or venture-investing experience or perspective.)
founder – n : an individual who, either by her or himself or in concert with others, starts a new company
from scratch; if there are multiple founders of a given business, they can be referred to as either founders
or cofounders.
founders’ equity – n : ownership shares in a company issued to the original organizers, or founders;
founders’ equity in a corporation is typically in the form of common stock. If the company is legally
organized as an LLC, the founders hold member interest rather than stock.
FUD factor – n: acronym for fear, uncertainty and doubt. The FUD factor is a commonly-used sales
tactic by which one vendor raises concerns in the mind of a prospective customer regarding certain
qualities or capabilities of the vendor’s competitors.
fund – n : a pool of committed capital dedicated to investment in a specific asset class; for example, a
venture capital fund is a professionally-managed fund dedicated to investing in high-potential private
companies.
– v : to provide capital or money to financially enable a business entity.
fund vintage – n : the year a fund was formed (typically refers to the year it was closed)
Example: A venture capital fund that was closed in July, 2000 is a “2000-vintage fund. ”
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G
GAAP – n : (see generally accepted accounting principles)
GP – n : (see general partner)
general counsel – n : the attorney or lawyer of record for a company, who is ultimately responsible for
the legal affairs of the business; usually attends the regular meetings of the company’s board of directors;
in startups, often also holds the title of secretary of the corporation.
general partner – n : abbreviated as GP, the managing partner of a partnership, such as an LLP, or the
managing entity of an LLC. In contrast, limited partners have ownership stakes in a partnership due to
having contribut ed capital, but are not involved in the management of the partnership. In the case of an
LLP, the general partners have limited legal liability. (Not to be confused with the job title of general
partner used in some investment firms and other partnerships and LLCs.)
Example: A typical venture capital fund has the legal form of a limited liability partnership (LLP) in
which investors in the fund are limited partners, and the venture capital firm that raised the fund
has the legal role or designation of general partner (i.e., the VC firm is legally responsible for
managing the fund’s investments).
generally accepted accounting principles– n or adj : accounting term; usually referred to by its
acronym GAAP; the guidelines, rules, procedures and detailed practices in accounting that govern the
practice of accounting in the U.S. The Financial Accounting Standards Board (FASB), a self-regulating
group organized by the accounting industry, determines, publishes and administers/enforces GAAP
standards.
go public – v : to take a privately-held company through an initial public offering (IPO), thereby enabling
its stock shares to be traded (bought and sold) by the general public for the first time.
governance – n : (see corporate governance)
grant – n : a type of funding typically provided by government agencies or non-profit foundations. If
your company wins a grant, this is “free money” – i.e., the grant does not purchase an ownership stake in
your company, and your company does not have to pay it back.
– v : to give. In the corporate world, used frequently in reference to stock options for employees;
employees are granted stock options.
gross margin – n : finance/accounting term; a ratio, usually expressed as a percentage, equal to the
selling price minus the cost of goods sold (COGS) – i.e., the gross profit – divided by the selling price.
Gross margin is essentially the same as gross profit, but expressed as a percentage of selling price or
revenue rather than in absolute dollars.
Example: Some industries, such as software, are inherently high-gross margin businesses, since
the cost to produce each incremental unit (the cost of the CD or the electronic download from the
company’s website) is near-zero compared to its selling price. If a software company charges
$280.00 per unit for its product and incurs a production cost (disc and packaging), or cost of
goods sold, of $7.00, then its gross margin is calculated as ($280 - $7) / $280 = 97.5%. The
gross profit in this example is $273 per unit.
In a shoe store, the gross margin on a pair of $100 shoes is determined by subtracting the cost to
the store of acquiring the product (as opposed to its original cost of production by the
manufacturer). Therefore, if a given pair of shoes is acquired by the store for $50 and sold for
$100 (referred to in the retail industry as 100% mark -up), then the gross margin is calculated as
($100 - $50) / $100 = 50%.
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gross profit – n : finance/accounting term; equal to the selling price minus the cost of goods sold
(COGS); the same as gross margin, but expressed in absolute dollars as opposed to as a percentage of
revenue. (see examples under gross margin)
H
harvest – v : (see Harvest stage)
Harvest stage – n : The fifth and last stage of the Venture Value Chain. In the Harvest stage, the
executives and/or board of directors of the business seek to provide the business's owners with a return
on their investment by either seeking a liquidity event (i.e., and initial public offering or sale of the
business) or otherwise producing cash returns by managing the business in such a way as to maximize
profits and dividends.
I
incentive stock option – n : often referred to by its abbreviation, ISO (pronounced ICE-oh); tax-deferred
employee stock option which provides tax advantages for the employer versus non-qualified stock option
(NSO) plans.
income – n : finance/accounting term; revenues minus expenses.
income statement – n : finance/accounting term; the profit-and-loss statement of a company.
incorporate – v : to create a new corporation by making a legal filing with the Secretary of State of a
given state (Delaware, California, Michigan, etc.).
incorporation – n : the act of incorporating, or creating a new corporation by making a legal filing with
the Secretary of State of a given state (Delaware, California, Michigan, etc.); for an LLC, this act is called
formation.
industry map – n : a visual and/or written representation of all players in an industry – e.g., suppliers,
manufacturers, distributors, consultants, influencers, dealers and customers – and how money, services
and products change hands within the industry. It’s very useful for an entrepreneurial team to develop an
industry map for their particular industry or market space, first of all to define their company’s position in
their industry, and secondly in order to communicate to others as part of a business plan, executive
summary and/or investor presentation.
industry marketing – n : in a business-to-business company, the sub-set of the marketing discipline that
entails tailoring, positioning and promoting a company’s products and/or services to a specific industry.
Example: An enterprise software vendor may have distinct individuals or teams assigned to
financial industry marketing vs. manufacturing industry marketing vs. retail industry marketing.
inflation – n : general decline of purchasing power per unit of currency (e.g., for one dollar). For
example, because of inflation, you can only buy 2 candy bars for a dollar now, whereas you could have
purchased four candy bars for a dollar 20 years ago.
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influencer – n : marketing term; an organization, individual or institution that influences the buying
behavior of customers. Examples include industry consultants, the trade press, business or popular
media, trade shows, and professional societies and conferences.
Example: Although dermatologists do not prescribe ABC Pharmaceutical Co.’s over-the-counter
skin ointment, ABC focuses considerable marketing effort on dermatologists and their
professional society, the American College of Dermatology, since ABC considers skin doctors to
be powerful influencers of their patients’ decisions about whether to use skin ointments, and,
through their recommendations, specifically which brands to purchase.
initial public offering – n : the event of first listing the stock of a formerly private company on a public
stock exchange (e.g., NASDAQ, the New York Stock Exchange, etc.) so that the company’s shares can
be freely traded – bought and sold – by the investing public; commonly referred to by its abbreviation
(IPO); going through the process of an IPO is often referred to as going public.
innovators – n : a term coined by Geoffrey A. Moore in his seminal work on marketing for technology
startups, “Crossing the Chasm”; the first customers of a newly commercialized technology in the
technology adoption life cycle. Innovators proactively seek out and purchase new technology products.
They tend to be technologists themselves who are fascinated with new innovations and the functions or
properties of new devices, regardless of the new product’s unproven benefits and lack of track record.
insolvency – n : legal term; financial condition in which a person or company is unable to meet its near-
term financial obligations. If a company can not recover from insolvency quickly, they may be forced to
file for bankruptcy protection.
institutional financing (or funding) – n : typically refers to funding that a startup company receives
from venture capitalists; usually takes the form of equity investment capital (i.e., the startup company
issues additional shares of stock, which it sells to the VC in exchange for cash at a negotiated price per
share).
institutional investor – n : term used for organizations possessing extremely large amounts of money,
that make multiple financial investments and oversee their investment portfolio. Examples of institutional
investors include pension funds, mutual funds, university endowments, foundations, insurance
companies, corporate treasuries and money management firms.
Example: Most limited partner investors in large venture capital funds are institutional investors
(as opposed to high-net -worth individuals).
intangible assets – n : assets of a firm that are not physical in nature and therefore tend to be more
difficult than physical assets to value.
Example: A company’s intellectual property, such as patents, trade secrets or software source
code, are considered intangible asset s.
intellectual property – n : often referred to by its abbreviation (IP); an intangible asset of a company
that consists of human ideas. Legally, patents, copyrights and trade secrets are all forms of intellectual
property. In the startup world, a company’s IP is a key part of its “secret sauce” – its key differentiation
that sets it apart from its present and future competition.
interest rate – n : finance/accounting term; the percentage applied to the principal amount of a loan or
bond used to calculate the dollar amount of interest charged. Interest rate x principal amount = interest.
inventory – n : goods held by a company to sell to customers.
invested equity – n : (see cash equity)
investment round – n: financing round from the perspective of the investor (see financing round).
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investment banking – n : the process of linking organizations to investors through securities offerings.
Investment banks underwrite securities offerings, such as bonds, preferred stock, or common stock
offerings, and sell the securities to other financial institutions, such as mutual funds or brokerage houses
that make a market in the securities. Investment banks also offer advisory services, such as mergers and
acquisitions (M&A) advisory services, or other corporate finance advisory services. (See also
underwriter.)
investor pitch – n : (see investor presentation)
investor presentation – n : a 10- to 25-slide presentation that tells the story of your company simply and
compellingly to potential investors. A strong investor presentation should address the following topics
(similar to the topical coverage for your executive summary):
a) the business your company is in (e.g., “… a web-based enterprise software for independent
retailers…”, or “…a biotech company focused on drug discovery for treating esophageal
cancer…”);
b) the stage of company development (e.g., “…incorporated in Delaware in [date], targeting
having demonstrable product prototype by [date]…”);
c) the target market/customers;
d) the customers’ unmet need, and how they are addressing that need today;
e) your company’s proposed solution to that unmet need (product and/or service);
f) competition and your competitive differentiation (how your solution is demonstrably better,
faster, cheaper, cooler, or otherwise more desirable to your target customers);
g) established strategic alliances;
h) management team;
i) financial summary (results to-date and forecast out at least 3 years);
j) capitalization (invested capital to-date) and amount of capital the company is current hoping to
raise.
IP – n : (see intellectual property)
IPO – n : (see initial public offering)
ISO – n : (see incentive stock option)
J & K
KISS philosophy – n : acronym for Keep It Simple, Stupid. A guiding philosophy widely used in
organizations that aims to focus management attention on the core attributes of a product, service or
task. Burdening products, services or tasks with unnecessary add-ons leads to unnecessary
development delays and management challenges. (So, when you think of how cool your product might
be with just one more bell or whistle, just KISS that idea goodbye. )
L
laggard – n : a term coined by Geoffrey A. Moore in his seminal work on marketing for technology
startups, “Crossing the Chasm” – 1991, HarperCollins; the last group of potential customers to adopt a
new technology or innovation in the technology adoption life cycle (if they adopt it at all).
Example: Elderly people, particularly elderly women, will probably prove to be the laggards in the
markets for PDAs (personal digital assistants) and MP3 digital music players.
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late majority – n : a term coined by Geoffrey A. Moore in his seminal work on marketing for technology
startups, “Crossing the Chasm” – 1991, HarperCollins; the late majority, like the early majority, is
comprised of pragmatists who are primarily concerned with the practicality of a technology in making their
purchasing decisions. However, the late majority is driven more by necessity than desire. They tend not
to be comfortable with technology, and purchase new technology only once it has become an established
standard – i.e., once it’s no longer new. The late majority can be thought of as the sector of the market
that watches, and then follows, the mainstream.
Launch stage – n : The second stage of the Venture Value Chain. In the Launch stage, the company is
legally formed and initially funded. The key tasks in the Launch stage are legal formation, seed funding,
and establishing proof-of-concept and proof-of-market.
LBO – n : (see leveraged buyout)
lead the round – v : venture capital term, a.k.a. price the round;
lender – n : a person or entity that lends money to another; typically a bank, but sometimes an individual
investor or institutional investor (see also creditor).
letter of intent – n : legal term; often referred to by its acronym, LOI; a brief, temporary, pre-contract
document between two or more entities that outlines the parties’ intention regarding a future contractual
or business arrangement. The purpose of a letter of intent is for the parties to establish and document a
common understanding of the form in which they see their legal or business relationship evolving; LOIs
tend to have a temporary, limited term and serve the purpose of a “place-holder” while the parties
continue detailed due diligence and/or negotiation. (see also: memorandum of understanding or MOU)
leveraged buyout – n : abbreviated LBO, a transaction in which a leveraged buy-out firm (LBO firm or
LBO shop) acquires a business, using debt to fund at least 50% of the purchase price. This type of
liquidity event is most often seen in traditional bricks-and-mortar businesses with the consistent cash flow
necessary to support the buyer’s debt service.
leveraged recapitalization – n : similar to an LBO, a transaction where a management team, sometimes
partnering with an investor or investment firm, purchases a company, using debt to fund at least 50% of
the purchase price. This type of liquidity event is typically seen in traditional bricks-and-mortar
businesses with consistent cash flow to support debt service. Leveraged recapitalizations are also known
as management buyouts (MBOs).
leverage
– v : to borrow money (use debt capital rather than equity capital) to fund a business or project,
with the goal of increasing return on equity.
– n : the use of debt in a business; the beneficial effects of the use of debt (i.e., additional capital
to fund the business without taking on more equity investment and the associated dilution).
liability – n : a) finance/accounting term; an economic obligation of an organization to another
organization or individual, or claims against the assets of an organization by outsiders. b) legal term; the
quality of being liable (i.e., obligated, or legally and financially responsible) under the law.
limited liability – n : legal term; a feature of the corporate (or corporation) form of organization under
which corporate creditors can make claims only against corporate assets rather than the assets of the
corporation’s owners, officers or directors. This feature is also shared with the LLC form of organization.
Example: All startup companies would be wise to legally form their business (incorporate or form
an LLC) so that the founders and owners can benefit from the limited liability provisions, shielding
their personal assets from future potential business creditors or legal actions.
limited liability company – n : abbreviated LLC, a legal form of company that has many of the tax
advantages of partnerships, notably the characteristic of being a pass-through entity for tax purposes.
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For companies with only one or two owners and no plans to raise money from venture investors, this form
of organization has the advantage (over the corporation legal form) of enabling owners to personally
receive tax advantages of early-stage losses, as well as to distribute profits without being subjected to
both corporate and personal taxation. However, unlike traditional partnerships, the LLC structure protects
owners from personal liability in the event of a legal judgment against the company. (Note: See also “S”
corporation, another form of business legal organization that shares the “pass-through” feature of the
LLC. )
limited partner – n : an investor in a venture capital fund, which typically takes the legal form of a limited
partnership or LLC and is managed by a venture capital firm that serves the legal role of general partner
of the fund.
limited partnership – n : a type of legal entity that is typically used by venture capital firms for each of
their venture capital funds. Many venture capital firms and funds are electing the LLC structure, however,
because owners (limited and general partners) are protected from personal liability.
line of credit – n : finance term; frequently referred to by its acronym, LOC; a mechanism by which a
company arranges ongoing short-term borrowing from a bank. A line of credit functions very much as if it
were a company’s credit card: the bank sets an interest rate for borrowing against the line of credit, an
upper credit limit, and rules governing the schedule of repayment.
liquidation – n : the process of turning assets into cash in order to pay creditors. Companies in dire
financial trouble contemplate liquidation as a way to potentially return more value to shareholders than in
a bankruptcy scenario.
liquidation preference – n : term included in many venture capital financing agreements. States that
the investors in a given round will receive a set multiple of their investment before investors in earlier
rounds see any return. For example, investors in a B round deal with a 2x liquidation preference would
receive 2x their investment before investors in the A rounds and earlier received a return.
Liquidity stage – n : the fifth and final stage of the Venture Value Chain. In the Liquidity stage, the
company achieves liquidity for its shareholders – outside investors, founders, and option-holding
employees – through a liquidity event. In a nutshell, the company returns money to investors at the
Liquidity stage through some sort of sale event, whether that is an IPO, an M&A transaction or a
recapitalization.
liquidity – n : the ability for shareholders to sell or trade their stock holdings – i.e., to convert their stock
shares to liquid cash.
liquidity event – n : an event that enables shareholders of a privately-held company to convert their
illiquid ownership shares into cash. Most typically, startups achieve liquidity for their shareholders
through one of three types of liquidity events: an initial public offering (IPO); a sale of the company or its
assets in an M&A transaction; or a leveraged buyout or management buyout. (see also: exit and
shareholder exit)
LLC – n : (see Limited Liability Company)
LOC – n : (see line of credit)
LOI – n : (see letter of intent)
LP – n: (see limited partner)
loan – n : money borrowed by a company; a form of debt. A company can borrow money from any
individual, company or institution, though loans are generally provided by financial institutions such as
commercial and investment banks.
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logo – n : the visual representation of your brand; a unique graphical mark or symbol. Some logos
incorporate the actual company or product name (e.g., IBM’s logo) and/or a tag line, while others are
simply easily identifiable symbols, such as McDonald’s golden arches.
lower of cost or market – adj: financial term, abbreviated LCM or LOCOM; valuation convention for
portfolio companies used by some venture capital funds and other investors where investments are listed
on the books at the lower of either the cost of the original investment or the market value of the
investment. Some VCs prefer other valuation methods, since LCM understates fund performance during
the life of a fund.
M
M&A – n or adj : (see mergers and acquisitions)
mainstream market – n : the vast majority of customers for a technology product, comprised of what
Geoffrey A. Moore in Crossing the Chasm refers to as pragmatists, or the early majority and late majority.
Pragmatist customers in a product’s mainstream market prefer proven, established, well -supported
products and expect technology products to solve problems or make their jobs easier; unlike Moore’s
innovators and early adopters, customers in the mainstream market do not find the latest technology
appealing for its own sake, and prefer proven standards.
management buy-out – n : (see leveraged recapitalization)
management risk – n : one of the four categories of venture risk; the likelihood that a new venture will
fail to meet its business and financial targets due to inadequate and/or inappropriate management, or due
to poor teamwork.
margin – n : profit, typically expressed as a percentage of gross sales or revenue; the difference
between what something costs, and what it is sold for. (see also: gross margin, operating margin, and
net margin)
margin structure – n : a representation of the value chain for a given product or service showing what
percentage of each dollar of end-user, point -of-purchase revenue accrues to each step in the value chain
(e.g., invention, design/engineering, manufacturing, marketing/branding, distribution/inventory/sales).
The percentage remaining after accounting for each step in the value chain equals the operating margin,
or pre-tax profit expressed as a percent of the selling price of the product or service.
market
– v : to promote to prospective customers with the intent of interesting them in purchasing a
product or service
– n : an active set of end-user customers who purchase, or have the potential to purchase, a
certain type of product or service based on common interests or needs
Examples: the market for cell phones, the market for electronic medical record
software, or the market for DVDs of syndicated television reruns
market maker – n : financial/Wall Street term; a brokerage house or investment bank that specializes in
buying or selling a specific security of a specific issuer for the purpose of creating a liquid market for
buyers and sellers of that security, and to make money in the process by charging a spread (margin)
between the purchase price and the sales price of that security. Investment banks and brokerage firms
typically make a market in many securities issued by multiple different companies.
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market research – n : the process of systematically investigating the market for a given product or
service, gathering and analyzing data regarding the number and location of customers; customers’
interests, preferences, and buying habits; and pricing and price sensitivity of demand. Such data is
gathered and analyzed for the purpose of gaining insight about a certain market in order to help a
company formulate its marketing strategy. Many firms specialize in performing and selling market
research to corporate clients (e.g., Information Resources, Inc., AC Nielsen, International Data Corp. and
Gartner Group).
market rate – n : a generic term referring to the ambient price, rate and/or terms available in the market
for investments, goods or services; “what the market will bear” at a given point in time.
market risk – n : one of the four categories of venture risk; the risk that the target market, or envisioned
market, for a firm’s new products or services turns out to be substantially less attractive than originally
expected; the likelihood that a company has overestimated the number of potential customers for its
product, the price they are willing to pay, and/or the rate at which they are ready to adopt the new product
or approach. Market risk can be caused by several factors, including: the company overestimating the
number of customers, customers not finding a new product appealing, customers not being ready to
adopt a new approach that your product requires, unanticipated competition, or an unanticipated
replacement technology or product. The most common basis for market risk is a company simply
overestimating demand, and therefore building sales forecasts around unrealistic expectations of
customer interest in their product or service.
market segment – n : a portion of a business’s total potential market for its product or service,
comprised of customers with similar interests, needs and buying patterns with respect to the product.
(see also market segmentation)
Example: Logical market segments for the manufacturers of woodworking tools (such as drills,
table saws and lathes) might include amateur do-it-yourselfers, serious woodworking hobbyists,
professional carpenters, finish carpenters, and professional cabinet -makers. Different
manufacturers and retailers of woodworking tools tend to focus on different market segments –
while some offer inexpensive tools appealing to amateurs, others tend to focus on high-end, less
price-sensitive users with more expensive, feature-rich products.
market segmentation – n : the process of subdividing a market into distinct groups of customers with
similar needs, such that a subset of the market (a segment ) can be selected as a target market and can
be reached with a distinct marketing mix. One way to check the legitimacy of a market segment is to ask
whether the customers in that segment are homogeneous and self-referencing (i.e., do they “talk to each
other,” read the same publications, attend the same conferences, belong to the same professional
associations, shop in the same places, etc.?); self-referencing groups of customers should be relatively
easily and cost-effectively reached by a single marketing mix. Markets may be segmented: a)
geographically (Where do they live?); b) demographically (i.e., according to age, race, gender, education,
religion, etc.); c) psychographically (i.e., according to their interests, attitudes, opinions, and needs);
and/or d) behavioristically (i.e., according to usage patterns, history, responsiveness or loyalty). (see
also market segment)
marketing – n : the business function of identifying a target market or set of customers for a given
product or service and systematically making those customers aware of the promoting growing,
maintaining or defending a market for a product or service. For you and your company, marketing is the
actions you perform to grow, maintain or defend your product or products successful position in the
marketplace.
marketing collateral – n : promotional literature and printed or electronic information designed to inform
customers about a product or service; can include brochures, data sheets, flyers, point -of-sale displays,
promotional CDs or DVDs, websites, and promotional gifts.
marketing communications – n : the subset of the marketing field, sometimes referred to as promotion
or marketing promotion, that entails formulating and communicating messages regarding a product or
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service to the target audience. Depending on the business, marketing communications can entail the
development and distribution of marketing collateral, public relations, advertising, and/or direct marketing.
The purpose of marketing communications is to build image and awareness (brand recognition) regarding
a product or service among target customers, and to generate qualified sales leads.
marketing promotion – n : (see marketing communications)
mature market – n : stage of market development in which products have reached mainstream
customers; annual industry revenue growth slows, eventually hitting a zero-growth plateau; consolidation
and shakeout is underway, reducing the industry to a few strong competitors; strong price competition
and margin compression become common; annual revenue for the industry flattens.
maturity date – n : in the case of debt, the date when the total principal amount of the debt outstanding
must be repaid.
MBO – n : acronym for management buy-out (see management buy-out or leveraged recapitalization)
member – n : legal term; a partial or full owner of a business legally formed as an LLC (limited liability
company)
member interest – n : legal/finance term; ownership interest in an LLC (limited liability company),
serving a similar function to stock in a corporation
merchant account – n : a bank account that allows your business to process credit card purchases.
mergers and acquisitions
– n : commonly referred to by its acronym, M&A; the field or activity concerned with companies
buying (merging with or acquiring) other companies; also refers to the M&A-related advisory services
provided to corporations by investment banking firms
– adj : describing or referring to a merger or acquisition activity, function or deal
memorandum of understanding – n : legal term; often referred to by its acronym, MOU; another name
for a letter of intent, or LOI; a brief, temporary, pre-contract document between two or more entities that
outlines the parties’ intention regarding a future contractual or business arrangement.
minute book – n : a.k.a. minutes book ; a binder, typically maintained by a company’s secretary or the
corporation and/or its general counsel (lead attorney) that contains all relevant corporate governance
documents and records of all meetings, transactions and actions of the company’s board of directors. A
company’s minute book typically includes all: articles of incorporation or formation documents, corporate
bylaws, board meeting minutes, board resolutions, shareholder notifications and announcements of
shareholder meetings, and a shareholder schedule.
mission – n : a company’s brief statement of what it intends to accomplish, for whom and to what end.
A company’s mission statement should communicate, in a powerful, brief form, its raison d’etre (reason
for being) to its employees, partners, customers, suppliers and other partners.
mission statement – n : a brief (typically 15-75 words) statement that concisely conveys a company’s
mission or raison d’etre (essential reason for being) to its key stakeholders, including employees,
shareholders, customers, suppliers, and partners. A good mission statement should communicate what
you do, how you do it (your business model), for whom (who’s the customer?), and based on what
underlying principles of behavior (e.g., integrity, quality, customer satisfaction).
MOU – n : (see memorandum of understanding or letter of intent)
multiple – n : finance/valuation term; a general term to describe any metric that is expressed as a
multiple of another metric.
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Example: The price-to-earnings, or PE multiple, is commonly used as a measure of the relative
value of a given public company’s stock compared to that of other companies. The company’s
market value of equity per share (share price) is stated in terms of a multiple of reported net
income per share (earnings).
multi-tier distribution – n : a form of distribution, common in certain industries such as retail, in which
vendors (i.e., producers of the original products) sell to an intermediary distributor, who may carry multiple
vendors’ products, and who in turn sell products to the retailers or sales entities that actually sell to end-
user customers. (see example (b) under distributor)
N
nascent market – n : a very new, formative market; the market development stage in which vendors sell
their products or services to innovator and early adopter customers. In typical nascent markets, rapid
innovation occurs, many new competitors (including startups) enter, and competition tends to revolve
around innovation and product features rather than around brand, service or price.
net income/loss – n : finance/accounting term, sometimes referred to as after-tax income, or simply as
earnings; the income or loss remaining after deducting all expenses from revenues, including interest,
taxes, depreciation and amortization.
net income/loss margin – n : financial/accounting term, often referred to as net margin; the income
(profit) or loss remaining after deducting all expenses from revenues, expressed as a percentage of
revenues. Margin calculations allow for comparisons between different-sized businesses.
net margin – n : (see net income/loss margin)
NDA – n : (see non-disclosure agreement)
NSO – n : (see non-qualified stock option)
non-disclosure agreement – n : also referred to by its acronym NDA, or as confidential disclosure
agreement, confidentiality agreement , or secrecy agreement; a contractual agreement between two or
more parties in which the parties commit to keep certain specified information confidential, or not to
disclose it to others. NDAs are frequently signed by two organizations at the beginning of business
discussions in which the parties anticipate divulging business, technology or product planning secrets to
each other. An NDA can be a “one-way NDA” (in which the first party agrees to maintain the
confidentiality of the second party’s secrets), or “two-way NDA” (in which both parties mutually agree not
to disclose the other’s secrets). NDAs are typically very brief (1-3 pages) and are often form agreements
reflecting very standard legal terms and language.
non-qualified stock option – n : often referred to by its abbreviation (NSO); a type of stock option that is
less advantageous for the employer from a tax standpoint than an incentive stock option (ISO), but is less
restrictive and generally easier for employers to set up. Unlike ISOs, which can only be granted to a
company’s employees, NSOs can be granted to non-employees (e.g., outside directors on a company’s
board of directors, or contractors)
O
offshore
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– adj : from an American perspective, describing a business entity or activity that is based or
carried out outside the United States
– v : to outsource a business activity or function (e.g., back-office operations, IT development,
call center, manufacturing, etc.) outside the United States
operating agreement – n : the legal foundation document describing an LLC (limited liability company);
this document serves the same function for an LLC as corporate bylaws serve for a corporation.
operating expenses – n : finance/accounting term; expenses related to the operations of the business
(e.g., salaries, rent, office equipment, depreciation, selling and administrative expenses, etc.).
operating income – n : finance/accounting term; also referred to as operating profit; profits from
operations calculated by subtracting the cost of goods (or services) sold (COGS), as well as the costs to
run the business (salaries, rent, etc.) known as operating expenses, from revenue. Operating income
measures the health of the core business before taking into account the effects of financing charges,
such as interest, and taxes.
operating margin – n : finance/accounting term; operating income as a percentage of revenues.
Operating margin measures the health of an organization’s business operations by showing operating
profitability on a percentage basis, which allows for apples-to-apples comparisons with larger and smaller
businesses.
outside director – n : a member of a company’s board of directors who is not an employee or officer of
the company. Outside directors are usually either major investors (or representing a large investor group)
and/or individuals with extensive industry experience who can offer useful advice and valuable
professional contacts.
outsource – v : to contract with an outside service provider to handle a certain business function for a
company; typically considered with non-core functions
Example: Functions frequently outsourced by companies include IT acquisition and
administration/support, manufacturing, packing/shipping/order fulfillment, and various human
resources functions such as payroll processing and benefits administration.
P
P&L – n and adj : (see profit and loss)
paid-in capital – n : finance/accounting term; equity investments in a company. The cumulative amount
of paid-in capital for a company at any given point in time is shown as a line item on the liabilities and
shareholders’ equity side of the company’s balance sheet.
pass-through entity – n : accounting/legal term; a legal form of organization that does not pay income
taxes at the organization level. Instead, the owners of the organization pay taxes based on their pro rata
ownership share of the organization. Examples of pass-through entities include partnerships, LLCs and S
corporations.
partnership – n : a legal organization structure in which multiple individuals, called general partners,
manage the business and are liable for its debts based on their pro rata ownership shares; other
individuals known as limited partners may invest in the partnership while not being directly involved in
management, and are liable only to the extent of their investments.
payables – n : (see accounts payable)
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patent – n : a grant by the United States federal government or a foreign government to an entity
(individual inventor, company or organization) giving the entity the exclusive right to produce and sell an
invention for a given period of time. Federal patent law identifies the specific rights of a patent holder for
different types of patents.
– v : the act of applying for and receiving a patent for an invention or piece of intellectual property
(e.g., “I intend to patent my new invention.”)
peer-to-peer – adj : describing the transfer of data directly from computer-to-computer, or user-t o-user,
rather than through a central server. Peer-to-peer networks are difficult to monitor as the traffic does not
pass through a server, whereas more traditional file-sharing networks, such as the original Napster,
moved files through a server, allowing for monitoring – and theoretically, control – of file-sharing behavior.
portfolio company – n : term used by venture capitalists and other private equity firms to describe
companies in which they own equity; a company in an investor’s investment portfolio.
positioning – n and v : marketing term; the perception that a company attempts to create in the minds of
its targeted customers regarding that company’s product or service offering relative to competitors’
offerings; the attribute or attributes associated with a company or product relative to competitive
companies or products in the same market. Also, marketing activities associated with creating a
company’s or product’s positioning.
Example: A strong positioning statement should clearly and succinctly address the following:
“For______ [your target customers or market segment], … _______ [your product or brand]
…is/provides/enables _______ [your product's or service's most important benefits] …because
_______ [reason why]. Unlike ______ [your primary competitors], _______[your brand] does
_______ [highlighting your brands primary competitive differentiation, i.e., what makes you
better].”
post -money valuation – n : the value or nominal worth of an entire company immediately after a
financing round. A company’s post-money valuation is equal to the pre-money valuation (i.e., the value
set immediately prior to the financing round) plus the amount of money raised in the financing round.
(see also: pre-money valuation)
PPM – n : (see private placement memorandum)
PR – n : (see public relations)
pragmatist – n : one who makes practical decisions; in the parlance of Geoffrey A. Moore’s Crossing the
Chasm, the early majority and late majority customers for a given category of products or services (i.e.,
those mainstream customers who represent the vast majority of all potential buyers) are pragmatists; they
make purchase decisions based on their perception of the product’s practical utility and benefit,
references and testimonials from fellow pragmatists, and their perceptions of emerging industry
standards.
pre-money valuation – n : the financial value or worth established for a company immediately prior to a
financing round. The pre-money valuation plus the dollar amount raised in the financing round equals the
post-money valuation.
preferred stock – n : equity, or stock, that offers owners different, preferential rights to those of common
stock owners. In a liquidity event, the preferred stock owners are typically paid before the common stock
owners.
price – n : the amount of money a business charges customers per unit for a product or service
– v : to set the formal, listed price of a product or service
price the round – v : (see lead the round)
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price sensitivity – n : economics/marketing term, a.k.a. price sensitivity of demand, or demand
sensitivity; the degree to which unit demand for a business’s products or services (i.e., the market’s desire
to buy) falls when prices are raised, or rises when prices are reduced.
Example: a) We’re fortunate that the market for Product A has low price sensitivity: when we
raised prices by 20 percent, we sold the same number of units the following quarter. [In this
case, the market can also be described as price insensitive; i.e., demand doesn’t change
appreciably with a change in price.] b) When we lowered the price of Product B by 5%, we
stimulated an immediate 25% increase in unit sales, showing that market to be highly price
sensitive.
principal – n : finance term;
principal amount – n : finance term; a.k.a. face value, or face amount; in the case of debt, the amount a
borrower promises to repay at or by a specific maturity date.
private banking – n : full-service banking and financial services offered generally to high-net-worth
individuals by larger commercial banks and financial institutions. Also known as private client services.
private client services – n : (see private banking).
private equity – n : equity capital invested in a private company. The three primary sectors of the
private equity market are traditional private equity, or LBO (leveraged buy-out), venture capital and real
estate.
private placement – n : a fundraising process in which the company raising the money markets and
sells securities (debt or equity) directly to a small group of investors – either institutional investors, venture
capitalists or angel investors – for investment rather than resale purposes. From a legal perspective, a
private placement is a securities offering that is not subject to registration requirements under the
Securities Act of 1933.
private placement memorandum – n : also referred to by its abbreviation (PPM); the prospectus used
in conducting a private placement; the marketing and legal document written by a company (or its
attorney or investment banker) for the purpose of raising money (either equity or debt) through a private
placement. A company provides a PPM to prospective investors, generally accredited investors, who
use the PPM as a tool to evaluate the investment opportunity.
pro forma – adj : financial/accounting term; forward-looking, or predicting future financial performance.
– n : "pro formas" is a way of informally referring to pro forma financial statements.
pro forma financial statements – n : financial statements intended to represent the future financial
performance of a company; often prepared to represent the predicted financial performance of company
after a certain hypothetical or expected future event occurs. For example, if a company is planning to
acquire another firm or to raise new capital, it will prepare pro forma financial statements to represent
what the combined entity will look like in terms of anticipated financial structure and future performance.
pro rata – adj : finance/legal term; reflective of proportional shares or ownership. An individual’s or
entity’s pro rata share is their due or proportional share. The term pro rata share is often used when
discussing ownershi p, financing, and fundraising.
Example: If you own 50% of a company, your pro rata share of the profits will be 50%. If the
company were to raise $2 million in its next financing round and you were asked to invest your
pro rata share, you would invest $1 million (or 50 percent of $2 million). If you didn’t invest at
least $1 million, your ownership stake of 50% would be diluted (proportionally reduced).
product line – n : a range of relat ed products marketed by the same company, typically under a
common brand name.
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Example: Nokia’s cell phone product line includes a range of models of various sizes, with
various levels of functionality, and at various price points. Apple’s iPod product line includes
digital music players in a range of sizes, storage capacities and prices, in addition to a selection
of add-on products such as covers, carriers, head phones and speakers.
product launch – n : the orchestrated introduction of a new product (or version of a product) to the
market; the events surrounding making the product available for purchase for the first time. Depending
on your company’s distribution channel, a comprehensive product launch could entail a number of
elements and activities, possibly including: advertising campaign, direct marketing campaign, public
relations campaign, brochures and sales literature, point -of-sales displays, product demonstrations, sales
training, call-center training (both pre-sales and post-sales support), inventory stocking in the distribution
channel, etc.
product manager – n : (see product management)
product management – n : the cross-disciplinary business function that entails taking responsibility for a
product from initial conception through development to ultimate product launch and lifecycle
management. In its broadest interpretation, product management encompasses oversight of the
following aspects of a product: a) identifying target markets and customers and their unmet needs; b)
translating those unmet needs into market requirements and associated product specifications to guide
the business’s engineering/product development function; c) overseeing product development and
testing; d) working with marketing and sales to successfully launch the product or service once it is
complete; and, e) tracking the product’s success in the market, understanding changing customer needs
and perceptions, and recommending ongoing product enhancements, new models, product line
extensions, etc. In some businesses, product management is a stand-alone business function, whereas
in other companies, it is organizationally a part of either the marketing or product development
(engineering) function.
product marketing – n : the element of the marketing function withi n a business that entails identifying
and analyzing target markets, researching and defining customer requirements, and developing product
specifications for the engineering or product development function of the business. Product marketing is
a hybrid activity that straddles the marketing and product management functions of a business, and as
such, it can be found organizationally in either group within a company.
product risk – n : one of the four categories of venture risk, sometimes referred to as technology risk; the
likelihood that a new venture will fail to produce the envisioned product in the planned timeframe due to
unanticipated technology and/or product development challenges, or that
productize – v : to take a capability – a new service, product or product feature – that the company has
provided to a single customer or a few customers on a custom basis, and turn it into a standard, fully-
tested, -packaged, -supported and -marketed product offering of the company.
profit and loss
– n : often referred to by its acronym, P&L; a) shorthand for a profit and loss statement, an
alternative name for an income statement ; b) informal name for a business unit or strategic
business unit, a stand-alone business within a larger company that is managed and
accounted for separately (see business unit)
– adj : referring to a profit and loss statement
promote – v : to market a product or service to a target market or customer set. (see also: marketing
communications)
promotion – n : a) the act of promoting, or marketing to a target market or customer set; b) a specific
marketing campaign or offer. (see also: marketing communications)
Example: The free toaster promotion was deemed a great success, having attracted thousands
of new customers to try our product.
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prospect
– n : prospective customer; an individual or entity who has expressed potential interest in
purchasing a given product or service, and has been screened or qualified by the sales team to verify that
they are serious in a near-term purchase (i.e., they have the necessary budget set aside, they have a
current need or interest, and they are not predisposed to a competitive solution)
– v : to seek out, contact and qualify prospective customers for a given product or service
proxy – n : the written authorization given by one individual to another to cast a vote. Shareholders may
sign a corporate proxy giving authorization to another person to vote for them in a shareholder vote.
Proxy is also a general term describing one who has the authority to represent or replace someone else,
or anything that is a suitable replacement for another thing.
psychographic profile – n : marketing term; combination of psychology and demographics that make the
marketing responses of those groups different from those of other groups. Understanding a group’s
psychographic profile and its relationship to its neighbors is a critical component of high tech marketing.
public relations – n : often referred to by its abbreviation, PR;
Q
qualify – v : to interact with a sales suspect (an individual or entity who has expressed preliminary
interest in a company’s product or service) with the purpose of determining whether or not they are a
serious customer – with budget, serious intent to buy in the near-term, and without an ingrained
preference for a competitive product. A prospective customer who has been successfully qualified is
sometimes referred to by the sale organization as a qualified prospect.
R
rapid-growth market – n : stage of market development where competitors are scaling rapidly to meet
growth in customer demand (often in excess of 50%/year); Vendors have crossed the chasm and are
selling to early majority (pragmatist, or mainstream) customers; competition around customer references,
emerging industry standards, and service; IPOs occur
receivables – n : accounting term; informal vernacular for accounts receivable
Refine stage – n : the fourth stage of the Venture Value Chain. In the Refine stage, companies should
focus on creating consistently cash-flow positive, self-funding operations. The company should be
managed for predictable growth in revenue and profitability. Public companies such as General Electric,
Microsoft and Wal-Mart are masters of Refining. These companies consistently grow revenues (sales
growth, or top-line growth) and profitability (earnings growth). Mastering the Refine stage can lead to
higher valuations in the Liquidity stage, the final stage of the Venture Value Chain.
reseller – n : (see VAR or value-added reseller)
resolution – n : (see board resolution)
restructuring – n : the significant makeover of an existing company typically involving the closing of
plants, firing of employees, reworking the company capital structure, bringing in new management and
relocating operations. Typically restructuring occurs
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return on equity – n : abbreviated ROE, indicator of profitability of a company. Net income less
preferred dividends over common equity, expressed as a percentage.
return on cash equity (contributed or invested equity) – n : indicator of profitability of a company. Net
income less preferred dividends over cash equity (contributed or invested equity) equity, expressed as a
percentage. Cash equity equals the sum of all cash equity invested in the company in all of its financing
rounds.
RFP – n : sales and marketing acronym for request-for-proposal.
round – n : (see financing round)
run rate – n : annualized revenue; the result of extrapolating recent financial results for a period shorter
than one year (e.g., results for the most recent quarter or half year) to represent a full -year period; that is,
the result of annualizing recent results. This method is often used to characterize the performance of
early-stage, high-growth businesses, since annualizing the revenue run rate of a company based on its
latest quarter may be far more impressive (and arguably more representative) of the company’s current
status than the potentially far smaller revenue number from its last full fiscal year.
Example: Whereas a startup has produced revenue of $800,000 in the past twelve months,
$500,000 of that amount has been generated in the most recent quarter. By annualizing the last
quarter’s results (i.e., multiplying that quarter’s results times 4), the company can claim it is
generating revenue at a $2 million run rate.
S
SMBs – n : acronym for small-to-midsized businesses.
S corporation – n : a form of legal organization for a business, commonly used only by small and/or
closely-held companies (the "S" refers to Subchapter S of the U.S. Internal Revenue Code). S
corporations are “pass-through” entities for tax purposes; that is, they pay no corporate tax, and all
financial profits or losses “pass through” or “flow through” proportionately to the shareholders on a pro
rata basis. This form of organization can be advantageous for shareholders, because: a) it avoids double
taxation; and b) individual shareholders can receive the tax benefits of a business’s losses. However, an
S corporation can have no more than 75 shareholders and is subject to limitations as to whom or what
type of entity can own the business. (Note: See also LLC or limited liability corporation, another form of
business legal organization that shares the “pass-through” feature of the S corporation.)
Sarbanes-Oxley Act – n : a business reform act signed to law on July 30, 2002. The Act mandated a
number of reforms to enhance corporate responsibility, enhance financial disclosures and combat
corporate and accounting fraud, and created the "Public Company Accounting Oversight Board," also
known as the PCAOB, to oversee the activities of the auditing profession. The full text of the Act is
available at: http://www.law.uc.edu/CCL/SOact/soact.pdf. The Act has many implications for private
businesses. You should consult your attorney about how the Act will effect your business.
SBA – n : the U.S. Small Business Administration, the federal government agency responsible for
assisting small and young companies and entrepreneurs (see www.sba.gov).
SBIR – n or adj: Small Business Innovation Research, the name of a U.S. federal government grant
program administered by the Small Business Administration (SBA) that provides funding solely to small,
for-profit businesses to develop and commercialize certain technologies. (For more information, see
www.sba.gov/sbir).
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scale – v : to grow a business, often rapidly, once its products have been commercially released and
customer sales have commenced. Generally speaking, companies scale successfully by developing a
well-thought -out and highly repeatable formula for production, distribution/sales, operations and customer
service.
Scale stage – n : the third stage of the Venture Value Chain. In the Scale stage, the company typically
raises institutional financing (equity or debt) to enable rapid scaling of the enterprise. Key tasks of the
Scale stage include: recruiting and orienting management and staff; building infrastructure (systems,
processes and procedures) necessary to grow the business; developing and refining the product line;
developing/strengthening the brand and building brand recognition; and expanding sales. The Scale
stage is the make-or-break stage for many startup companies. It is during this stage that a company’s
products or services must Cross the Chasm from selling to early adopter customers to selling to the far
more numerous, but difficult-to-please, early majority customers.
SEC – n : (see Securities and Exchange Commission)
secretary – n : (see secretary of the corporation)
secretary of the corporation – n : the legally-designated corporate officer responsible for keeping
minutes of board meetings, drafting board resolutions, and maintaining the company’s minute book
security – n : a financial instrument, such as a stock or bond, used by legal entities such as companies
or government agencies to raise money from individual or institutional investors.
Securities and Exchange Commission (SEC) – n : the U.S. federal government agency with primary
responsibility for overseeing and regulating the securities industry – i.e., the formation, underwriting,
selling, buying, trading and optioning of stocks and bonds by corporations, investment banks, brokerages,
and commercial banks. The primary mission of the SEC is to protect investors and maintain the integrity
of the securities markets (both private and public). The SEC also oversees other key participants in the
securities world, including stock exchanges, broker-dealers, investment advisors, mutual funds,
investment banks, and public utility holding companies. Through its EDGAR online system, the SEC
provides free public access to all filings companies make with the SEC (for example, filings required prior
to public offerings, as well as 10K annual reports and 10Q quarterly reports); such filings are very useful
data sources when conducting comparable companies analysis or valuation analysis. (For more
information, visit www.sec.gov. )
seed financing – n : financing to fund an early-stage company, generally provided by either angel
investors and/or a venture capital firm, to fund the early stages of a company’s business plan. Seed
financing typically occurs before a company has commercially released its product or service, and
therefore before the business is generating revenue.
seed round – n : (see seed financing)
segment – n and v : (see market segment and market segmentation)
segmentation – n : (see market segment and market segmentation)
self-referencing – adj : describing a market or set of customers in which the customers interact
intensively with one another and rely on each other (reference each other) for information about a type of
product or service. Self-referencing customer groups tend to read the same periodicals, belong to the
same clubs or professional associations, attend the same conferences, conventions and trade shows, or
communicate with one another through word-of-mouth, Internet chat rooms or web logs (“blogs”), or at
actual events such as industry conferences, conventions, concerts or other gatherings. Businesses value
self-referencing customer groups because they tend to be relatively inexpensive and efficient to reach,
communicate with and market to.
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Examples: DentaSpecial Inc. has developed an innovative new device for use by dentists.
Because dentists are a tightly self-referencing group, DentaSpecial can reach their prospective
customers relatively efficiently inexpensively; rather than advertising on television or in popular
magazines at great expense, the firm can promote its products by advertising in the professional
periodicals and at the annual and regional conventions of dentists’ professional association, the
American Dental Association (ADA). Because dentists tend not to compete with each other
beyond local boundaries, they are very comfortable “comparing notes” with their professional
colleagues and sharing best practices with one another.
CoolTool Inc. has developed a revolutionary new woodworking tool and would like to market the
tool to serious woodworkers. Fortunately, these – finish carpenters, cabinet-makers, and serious
woodworking hobbyists – are a highly self-referencing group, “sharing” information and best
practices by subscribing to a handful of publications such as Fine Woodworking Magazine.
Advertising in, or purchasing the subscriber list for, such a limited-circulation publication costs a
tiny fraction of broad-based marketing promotion to the general public (most of whom would not
be interested in CoolTool’s products).
series – n : In the case of preferred stock , each financing round is called a series (see financing round).
Example: ABC Ventures invested in both the Series A round and Series B round of the young
company’s funding.
Shape stage – n : The first stage of the Venture Value Chain. In the Shape stage, an individual or small
group of individuals develops, and progressively shapes the original business concept. This stage in the
Venture Value Chain involves idea generation, initial business model exploration, a reality check of the
validity of the business idea, business planning, and business plan validation. Entrepreneurs should fully
work through the Shape stage prior to the Launch of a new business.
shareholders’ equity – n : accounting/finance term; the residual ownership in an organization after
deducting liabilities.
shrink-wrap license – n : a license and/or copyright agreement on product or software packaging which
describes a company’s copyright to the product in the package. The agreement generally states that the
end user agrees to the copyright agreement upon opening the package.
SOHO – n and adj : acronym referring to small office/home office, a characterization for the millions of
Americans who work from home, whether they’re running their own small business or “telecommuting”
from home on behalf of an employer
sole proprietorship – n : a type of business legal organization with a single owner. Sole proprietorships
are pass-through entities.
software-as-a-service – n : (see application service provider)
spin-off – n : a company or stand-alone, separate business unit that is created by being
separated from an established business or institution. Typically, the spin-off offers a discrete set of
products and/or services.
– adj : describing a business that has been or is being spun out from an established
business or institution.
spin off – v : to create a spin-off business (see spin-off).
spin-out – n : (see spin-off)
stakeholder – n : owner of an organization. The term is also used generally to describe people who
have an interest of any kind in a business, transaction or deal.
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Example: When a startup raises money, there are several interested parties who are not owners
of the company, but are stakeholders in the transaction. The investors, and managers have an
interest in the success of the transaction, and thus are stakeholders. Further, advisors,
consultants, lawyers, accountants and other professionals are stakeholders, because they are
interested in the success of the transaction. All employees of the company, whether stockholding
or not, are stakeholders as the success of a fundraising transaction allows the jobs to exist.
startup – n : also start-up; a new or early-stage company.
stock – n : equity ownership in a corporation.
stock option – n : the right to purchase a company’s stock in the future; an option is a legal offer or
contract, typically granted by a company to an employee, director, or advisor, under which the grantee
(holder of the option) has the ability to purchase a certain number of shares of the company’s stock for a
stipulated price (the strike price). Most options are subject to a vesting period or vesting schedule, under
which the grantee’s rights to purchase the stock in question vests over a period of time (continued tenure
with the company); some vesting schedules, particularly those for corporate offi cers’ options, are based
on accomplishment of specific milestones instead of, or in combination with, tenure.
The purpose of a stock option is to provide a financial incentive (other than cash salary and/or
bonus) to an individual whose contribution is considered important to the company’s ongoing success.
This incentive works in two ways: a) the vesting schedule (typically between three and five years)
encourages the option recipient to stay with the company until his/her option fully vests (thereby giving
him/her the right to exercise the option, or purchase the stock, at the given strike price; and, b) the option
recipient has extra incentive to help make the company succeed, and to see that success reflect in an
increased stock price, since the indivi dual’s strike price “locks in” his/her right to purchase stock at a
(hopefully much lower) price set at the time the stock option was granted.
Example: ABC Corp. grants “Employee Smith” a stock option on January 1, 2006 for 36,000
shares of stock, at a strike price of $1.00/share, with a vesting schedule of 3 years vesting
monthly in a straight-line fashion. Therefore, starting February 1, 2006 and each month
thereafter for 36 months, Employee Smith vests on (earns the right to exercise) an additional
1/36
th
of her total options, of an additional 1,000 shares per month. At the end of the 3-year
vesting schedule, her full 36,000-share option is fully vested (i.e., she has the right to purchase all
36,000 shares at $1.00 per share.
stock option agreement – n : legal contract between a company granting a stock option and the
individual receiving the stock option; an option agreement is usually very brief – often simply a letter
agreement – that refers to (and typically incorporates by attachment) the company’s governing stock
option plan, and stipulates the date of the grant, the number of shares of stock in the grant, the vesting
schedule, and the strike price.
stock option plan – n : an executive and employee compensation mechanism whereby executives and
other key employees are granted stock options. Stock option plans allow companies to align the interests
of executives and shareholders by rewarding both for increases in valuation (stock price). A company's
stock option plan governs all incentive stock options (ISOs) and non-qualified stock options (NSOs)
issued by the company; the plan typically stipulates the rules and parameters (e.g., vesting schedules)
governing options granted under the plan.
stockholders’ equity – n : (see shareholders’ equity)
strategic investment – n : (see strategic investor)
strategic investor – n : an investor (typically a company) that invests primarily for strategic rather than
financial (return) purposes – for example, in order to gain future access to a key new technology or
product. (By contrast, financial investors make investment decisions primarily based on the prospect of a
strong financial return.)
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Example: Corporation Z, a large record company, made a strategic investment in a minority
equity stake in the startup digital music distributor; they did so in the hopes of learning more
about online media marketing, with the possibly of eventually acquiring the startup.
strategic business unit – n : (see business unit)
strike price – n : finance/accounting term; the price per share specified in an individual’s stock option at
which the grantee (holder of the option) has the right to purchase stock from the company once that
option vests.. The strike price for options is set by the company’s board of directors, and is adjusted from
time to time for new options granted by the company. The strike price “locks in” an individual’s future
purchase price for a given number of shares at the time that option in granted. Therefore, if the company
succeeds and its success is reflected by a rise in its stock price, an individual option holder, once his/her
grant vests, has the opportunity to purchase shares at a discount to the company’s then-current share
price. On the other hand, if the company’s stock price drops over the vesting period, the option’s strike
price will reflect a premium over the post-vesting stock price – a phenomenon known as the option being
under water.
subscription agreement – n : legal/finance term; the legal agreement between a company and an
investor governing the purchase and sale of stock. For a given financing round or preferred stock series,
the subscription agreement will typically be identical for all investors in that round (with the exception of
specific investors’ names, signature dates and the number of shares purchased).
supplier financing – n : arrangements with a business’s suppliers to provide funding either through
extended or generous credit terms, or through partnered product development; one way for small or
early-stage companies to reduce the need for outside financing
T
10-K – n : the SEC Form 10-K annual report filing that is legally required of all U.S. public companies
pursuant to Section 13 or 15(d) of the Security Exchange Act of 1934; 10-K (annual) and 10-Q (quarterly)
reports are publicly accessible at no charge on the SEC website EDGAR Online (edgar.brand.edgar-
online.com).
10-Q – n : the SEC Form 10-Q quarterly report filing that is legally required of all U.S. public companies
pursuant to Section 13 or 15(d) of the Security Exchange Act of 1934; 10-K (annual) and 10-Q (quarterly)
reports are publicly accessible at no charge on the SEC website EDGAR Online (edgar.brand.edgar-
online.com).
tagline – n : marketing/branding term; a few words – a phrase or sentence – associated with your brand
name (either company or product/service name) and logo that connotes the nature or character of your
business. A tagline should be brief, evocative and should imply what you do and/or what you stand for.
Example: Dell Computer’s tagline is “Easy as Dell.” Verizon’s tagline is “We Never Stop
Working for You.” The tagline for Newman’s Own is, “Shameless Exploitation in Pursuit of the
Common Good.” CompanyCrafters’ tagline is, “You inc, therefore you are.” [All taglines are the
trademarks or service marks of their respective owners.]
target market – n : a market, or market segment, specifically targeted by a company or the product
managers of a specific product. Your target market represents the group of customers that you want to
buy your product or service.
tax ID – n : informal term for Employer Identification Number (see Employer Identification Number)
tech transfer – n : (see technology transfer)
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technology adoption curve – n : (see technology adoption lifecycle)
technology adoption lifecycle – n : a.k.a. technology adoption curve; the staged pattern by which
virtually all new technologies or technology-related products are adopted by the market. Geoffrey A.
Moore, in his seminal work on marketing for technology startups, Crossing the Chasm, defined the
sequence of customer types to adopt (or buy) a given product as innovators, early adopters, early
majority, late majority, and laggards. Bear in mind that the technology adoption lifecycle follows the life of
a technology, rather than a specific product or a company.
technology risk – n : (see product risk)
technology transfer – n : commonly referred to as tech transfer; the process of arranging for the
commercialization of technology-based inventions or innovations originating in research universities,
government or non-profit laboratories or large corporations. Technol ogy transfer involves the
organization responsible for originating the technology negotiating the transfer of the commercialization
rights to that technology to a commercial entity (typically a for-profit company) via a licensing agreement .
The business arrangements associated with tech transfer agreements can vary widely, but typically
involve the company receiving the commercialization rights paying the owner of the intellectual property
or IP (the inventing organization) some combination of up-front license fees, royalties (variable payments
calculated as a percentage of future sales), and/or partial equity ownership (stock) in the commercializing
company. (Stock ownership is only common in tech transfer deals in cases in which the commercializing
entity is a startup company for whom the intellectual property being transferred is a strategic part of their
product portfolio. Large, publicly-traded companies will typically acquire tech transfer intellectual property
using some combination of the cash payment mechanisms described above – as opposed to stock).
term sheet – n : legal/venture capital term; a legal document, sent from a venture capital firm to a
company in which they are interested in investing, that summarizes the terms of VC’s investment offer –
number of shares they are interested in purchasing, price per share they are willing to pay, terms
describing the security (preferences, etc.), and other terms and conditions (whether they want
representation on the board of directors, for example). The term sheet serves as the basis for the
financing negotiation between the VC and the company; once all terms are agreed upon, the term sheet
serves as the basis for lawyers to draft the formal investment agreement between the two parties.
trademark – n : legal/marketing term; an identifying name or graphical mark that is uniquely
identified with a specific product, service or company. Trademarks can be names, logos, slogans or
symbols, and serve as important elements in branding and building brand equity. Trademarks can be
legally claimed or reserved by a company by simply labeling the mark or name with the trademark symbol
™. A more rigorous (and legally defensible) way to protect a company’s exclusive rights to a mark or
name is to formally register it (a registered trademark , indicated by the symbol ®) with the U.S. Patent
and Trademark Office (PTO).
– v : the act of legally claiming exclusive use rights to a unique mark, name or
slogan/tagline.
tranche – n : a general term for a round of financing (see financing round or series).
U
underwrite – v : to assume financial risk as an underwriter. Investment banks are in the business of
helping companies raise capital from public and private financial markets by underwriting companies’
issuances of either debt or equity securities. The act of underwriting entails the investment bank (a.k.a.
underwriter) purchasing the entire security issuance from the issuing company and then reselling those
securities, typically to a syndicate of institutional and/or individual investors.
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underwriter – n : a financial services firm or group of firms, usually investment banks, that buys an entire
debt or equity financing round or issuance from a corporation, usually at a discount (up to 6%+ for an
equity issuance) and then resells it into the private or public markets. The act of buying and then reselling
such a financing round, and taking on the associated financial risk, is known as underwriting.
upside case – n : in reference to a financial model, or financial projections: the financial model scenario
(also known as aggressive case or optimistic scenario) that uses management’s most aggressive (i.e.,
optimistic) assumptions – that is, assumptions that revenues will begin sooner and/or rise faster, and that
the costs of doing business will be limited or contained. The financial projections resulting from your
upside case assumptions should be better than those for your conservative case (lowest) and base case
(medium).
useful life – n : the number of years over which a given large, one-time expense, such as research and
development or financial closing costs, is deemed to have economic value to a business (see also
amortize and amortization period).
V
VAD – n : (see VAR)
value-added dealer – n : (see VAR)
value-added reseller – n : commonly referred to by its acronym, VAR, or simply as reseller; in some
industries, referred to as VAD, or value-added dealer. VARs are often locally- or regionally-oriented
businesses, typically fairly small and privately-held, that specialize in selling and servicing a certain
category of products; VARs are most common in business-to-business sales. Most VARs will represent
products from multiple vendors (the producers of the original products). Their value proposition to
vendors is to offer access to local customers with whom the VARs have preexisting relationships, plus
local pre- and post-sales support, in exchange for a sales commission that varies by industry. VARs’
value proposition to end-user business customers is local service and support, often from a know supplier
with whom the customer has an established business relationship.
VAR – n : (see value-added reseller)
valuation – n : the measure of how much a company is worth. (See also pre-money valuation and post-
money valuation)
valuation analysis– n : the process of determining the value of an asset or company. There are many
techniques for conducting valuation analysis, and it is often partially objective and partially subjective.
Approaches used in valuation analysis include: the analysis of market multiples of comparable
companies, and discounted cash flow analysis based on pro forma financial projections.
value chain – n : the series of steps by which value is created for a given product or service. For
instance, value chain may include “value-added stages” such as original invention, product design and
development, manufacturing/production, branding/marketing, distribution and sales, warranty service, and
after-market service. When planning a new business, it is useful to understand and carefully analyze the
value chain for your product or service, in order to thoroughly understand the types of companies or
“players” who serve each function or “link” in the chain, and how much each link or function in the chain
gets paid and by whom. (see also: margin structure)
value driver – n : an important factor that determines or causes an increase in value of a business, as
viewed by investors
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Example: For a brand new startup (i.e., a business still in the Shaping stage of the Venture
Value Chain), key value drivers can include the assembly of a strong management team, a
seasoned and influential board of directors and advisory board, the development of a compelling
business plan, and the ability to produce a demonstrable prototype of product. Key value drivers
for early-stage ventures (in the Launch stage) can include the completion of a first commercial
version of the product and attracting the first paying customers. Important value dri vers in the
Scale stage usually include a strengthened management team, expanded infrastructure for sales,
distribution and customer support, and predictably ramping revenue.
VC – n or adj : acronym referring to either venture capital, a venture capitalist, a venture capital firm, or a
venture capital fund.
vendor – n : a term commonly used in business-to-business markets, referring to the original producer of
a product or service
venture capital – n : often referred to by its acronym, VC; a general term for money that is invested in
equity securities (stock) of early-stage, high-growth and/or high-potential companies that are privately-
held (i.e., their stock is not publicly traded on an exchange). Venture capital is a high-risk asset class,
and consequently venture capital investors seek high rates of return on investment. Sources of venture
capital include friends and family, angel investors, venture capital firms, corporate venture capital groups,
as well as corporate strategic investors.
venture capital fund – n : also VC fund or simply VC; a closed-end, private pool of capital dedicated to
investments in the equity securities of privately-held, early-stage or high-growth companies. A venture
capital firm (the “general partner”) raises a VC fund from institutional investors and/or high-net-worth
individual investors (so-called “limited partners”). A successful VC firm will typically raise, manage and
invest multiple VC funds over time.
venture capitalist – often referred to as by its acronym, VC; institutional investment firm, or an
investment professional working for that firm, that specializes in making equity (stock) investments in
privately-held, early-stage or high-growth companies.
Venture Communication Pyramid
TM
– The Venture Communication Pyramid
TM
is a tool designed to
help startups better communicate their business message to investors, customers, partners and
employees. By providing a simple, coherent communications model with cascading levels of detail, the
Pyramid hel ps simplify and improve the impact of companies’ marketing and fund-raising efforts. At the
top of the pyramid (least detail) is the company’s brand, and at the bottom is the company’s domain
knowledge (greatest level of detail). Each cascading level of detail builds logically on the one before and
enables the company to present its messages clearly, compellingly, concisely and consistently.
Greater Detail
Less Detail
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venture investor – an individual or institution who invests in early-stage companies; typically, people or
organizations who purchase the privately-held, illiquid equity (stock) of startup companies. Venture
investors may include angels (high-net-worth individuals), private venture capital firms, or corporate
venture capital groups.
Venture Quotient
TM
– n : abbreviated VQ, the venture quotient measures the overall likelihood of
success of a new venture (i.e., a startup business) by accounting for the four categories of venture risk
(market, technology/product, management, and financial risks).
The VQ is calculated as follows:
VQ = (1 – R
K
) x (1 – R
P
) x (1 – R
M
) x (1 – R
F
) Where: R
K
= Market Risk
R
P
= Technology/Product Risk
R
M
= Management Risk
R
F
= Financial Risk
venture risk – n : the factors that can cause a startup business to fail. Venture risk is comprised of four
major categories: market risk , technology or product risk , management risk, and financial risk.
Venture Value Chain – n : a model that describes the lifecycle of a startup company, covering the
following five stages:
• Shape – develop, research and plan the original new-business concept
• Launch – start the business
• Scale – drive hyper-growth by rapidly scaling sales and operations
• Refine – manage for consistent and predictable revenue and profit growth
• Exit – achieve liquidity for shareholders
Entrepreneurs and startup teams can use the Venture Value Chain to identify where they are in the
startup company lifecycle, understand the critical success factors for the business at each stage, and
avoid unnecessary mistakes and oversights in planning and execution.
Shape Launch Scale Refine Harvest Shape Launch Scale Refine Harvest
The Venture Value Chain™
vertically integrated – adj : describing a company or a company’s operations that are performed in
house throughout the value chain.
vest – v : become exercisable (referring to a stock option or warrant) after satisfying a vesting schedule
or vesting requirement.
vesting schedule – n : also vesting requirement; the period of time over which a stock option becomes
exercisable. Most stock options vest in a “straight line” fashion (i.e., linearly, or at a constant rate over
time) over a set term of typically 3, 4 or 5 years. As an option recipient or grantee satisfies the time
requirements (typically linked to employment or service tenure), the option continues to vest incrementally
until it is fully vested (i.e., the vesting schedule is 100 percent satisfied). (See illustrative Example under
stock option.)
viral marketing – n : a term used to describe marketing campaigns in which customers proactively attract
other customers to a product or service in a geometrically expanding network of customers (e.g., I recruit
five people, then each of those in turn recruit five people themselves, etc.).
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Example: Online digital photography services tend to benefit from viral marketing. For example,
Jolie attends a class reunion, then posts her photos on an online service and e-mails the website
link to a few dozen classmates. Each of the classmates can go online to view the photos for free,
but they are first required to register with the photo service. If any of them want to order prints,
they pay for that service. And, once these several dozen people are acquainted with the service,
some will probably choose to post pictures themselves. For example, classmate Bob may
subsequently choose to post photos of his newborn child and e-mail 25 people in his extended
family to encourage them to view the pictures online. In this way, the online photo service
benefits from viral marketing – in a sense, “free advertising” – as their customers promote the
service through word-of-mouth to an ever-expanding network.
vision – n : a company’s vision statement is the business’s raison d’etre, or reason for being; often
erroneously confused with a mission statement.
VQ – n : (see Venture Quotient)
W
war room– n:- in reference to due diligence. The central location, generally a dedicated room or office,
for due diligence documents for potential investors, acquirers or investment bankers to use.
win-win strategies – n : progressive thinking to make partnerships, negotiations, and alliances greater
than the sum of the parts. Thinking creatively is the key to win-win strategies.
whole product – n:- derived from thoughts in Geoffrey A. Moore’s seminal work on marketing for
technology startups, “Crossing the Chasm”; A completely configured end product or solution for the
target mainstream customer.
working capital – finance/accounting term; defined as the excess of current assets over current
liabilities. In practice, working capital is the capital, or money, you need to fund the day to day cash
needs of a business.
X, Y & Z
zero coupon – adj : finance/accounting term; describing a debt instrument (a bond or note) that pays no
cash interest during its life or for a portion of its life
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More About CompanyCrafters
An Ann Arbor, Michigan-based management consulting firm focused on new venture launch and
corporate spin-outs, CompanyCrafters applies an experienced entrepreneur’s mindset to crafting and
growing new businesses, bringing to bear a proven proprietary approach including a range of high-value
tools and methodologies. CompanyCrafters delivers:
• Frank and Realistic Opportunity Assessments. Many new ventures – and pre-launch business
plans – aren’t fully thought through and contain an unnecessary level of business risk.
CompanyCrafters uses a uniquely powerful approach to crystallize the risks and rewards
presented by new opportunities, bringing clarity to key decisions.
• Business Model Evaluation and Recommendations. Most tech-oriented business
opportunities can be played out through dozens of different approaches – combinations of
business model, market focus and go-t o-market strategy. CompanyCrafters applies a suite of
powerful analytic tools to evaluate the range of approaches and determine the optimal strategy.
• Business Planning. CompanyCrafters works with the client’s management team to deliver a rich
and fully-developed business plan, pro forma financial forecasts, and marketing and execution
plans to launch the new business, along with related documents such as an investor presentation
and executive summary.
• Risk Reduction Strategies. New businesses are fraught with risks. CompanyCrafters leads its
clients through a focused risk analysis and reduction exercise by evaluating venture risk in each
critical area and developing risk mitigation strategies that focus management on executing
against critical success factors.
• New Business Launch and Execution Management. CompanyCrafters can play an active role
as advisors and interim executives in launching new businesses. We work with management to
lay out 30/60/90 day execution plans and deliverables to keep the launch on track. We can also
assist in recruiting and orienting the management team required to take the new venture forward.
• Innovative Go-to-Market Growth Strategies. CompanyCrafters works as an active, hands-on
role to evaluate and steer the go-to-market strategies for new businesses as they navigate
through the often tumultuous challenges faced by young, high-growth businesses.
To learn more, go to www.companycrafters.com.
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