Administration: A legal process initiated to protect a company from creditors while it undergoes financial restructuring or attempts to sell its assets. For investors, administration can signal financial distress within a company in which they have invested, potentially affecting the value of their holdings or the likelihood of any return on investment.
Arm’s length: “Arm’s length” is an expression which is commonly used to refer to transactions in which two or more unrelated and unaffiliated parties agree to do business, acting independently and in their self-interest.
Bridge Round: A bridge round is a type of funding that is used to extend the runway of a startup until it can raise the next round of venture capital funding. It is usually a smaller amount of money than a regular round, and it is often structured as a convertible note or a SAFE (Simple Agreement for Future Equity).
Cap Table: A document that shows ownership of a company, including the number, type (common, preferred), and ownership percentage of each shareholder class.
Colourable device: The expression ‘colourable device’ means any sham arrangement or transaction, camouflaged as a real transaction, lacking in commercial substance, and done only to obtain a tax benefit.
Convertible Instruments: Financial instruments, such as convertible notes or convertible preferred stock, which can be converted into equity at a later stage, typically during a future financing round. Investors may utilise convertibles as a means to invest in a company while deferring valuation discussions, providing flexibility in determining the company’s worth at a later date.
CVA: CVA is the commonly used abbreviation of “Company Voluntary Arrangement”, is a contract between a company and its creditors which agrees how the company’s debts will be resolved. A CVA is a way for a viable but insolvent limited company to pay its creditors over a fixed period. It allows the directors to retain control of the company whilst continuing to trade. Read more on: https://www.gov.uk/guidance/director-information-hub-company-voluntary-arrangements
CVL: Creditors’ voluntary liquidation (CVL) is when the directors take steps to close down the company. Read more on: https://www.gov.uk/guidance/director-information-hub-creditors-voluntary-liquidation-cvl
Deeply Discounted Rights Issues (also known as cram down rounds, wipe out rounds): Also known as cram down rounds or wipe out rounds, these are financing rounds where existing shareholders are offered the opportunity to purchase additional shares at a significantly reduced price, often diluting their existing ownership stakes. Investors may view deeply discounted rights issues as a last-resort measure by companies to raise capital, potentially signalling financial distress or unfavourable market conditions.
Dilution: The decrease in ownership percentage of existing shareholders due to the creation of new shares (e.g., through new funding rounds).
Drag and Tag Rights: Contractual rights allowing some shareholders to force others to sell their shares alongside them in a company acquisition.
EIS: The Enterprise Investment Scheme (EIS) is one of 4 venture capital schemes in place now in the UK. It offers tax relief to investors in qualifying early-stage companies.
– Investors who subscribe for shares in qualifying companies can benefit from income tax relief of up to 30% of the amount invested, up to a maximum of £1 million per tax year.
– Additionally, investments made through the EIS may qualify for other tax reliefs, such as capital gains tax (CGT) deferral, inheritance tax (IHT) exemption, and loss relief.
– To qualify for EIS, companies must meet certain criteria, including being unquoted, having a permanent establishment in the UK, and carrying out a qualifying trade.
Read more on: https://www.gov.uk/guidance/venture-capital-schemes-apply-for-the-enterprise-investment-scheme
First in First out (FIFO): A method used to determine the order in which shares are sold or redeemed, with the earliest acquired shares being the first to be sold (FIFO = first in, first out). The relevance for EIS is as follows: The ordinary share identification rules do not apply to shares that have attracted EIS relief. There is no pooling of these shares and other matching rules do not apply. Instead the Income Tax rules in ITA07/S246(2)apply. Disposals are identified first against the earliest acquisition. see: https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm20140
Friends & Family Round: An initial funding round typically involving investments from individuals close to the founders, such as family members, friends, or personal contacts. For investors, participating in friends and family rounds offers early access to promising startups and the potential for significant returns, albeit with heightened risks associated with investing in early-stage ventures.
Fully Diluted: Refers to the total number of shares that would be outstanding if all potential sources of conversion, such as stock options, warrants, and convertible securities, were exercised or converted into common stock. Understanding a company’s fully diluted share count is crucial for investors to accurately assess ownership dilution and potential future share price fluctuations.
Information Rights: Entitlements granted to investors allowing access to certain company information, financial reports, and updates on operational performance. For investors, information rights are essential for conducting due diligence, monitoring investment performance, and making informed decisions regarding portfolio management and potential exits.
Insolvency: A financial state where a company is unable to meet its financial obligations, such as paying debts or meeting operational expenses, often leading to bankruptcy or liquidation. Investors must monitor signs of insolvency within their portfolio companies to assess the likelihood of potential losses and take appropriate risk mitigation measures.
Liquidation Waterfall: A hierarchical framework outlining the distribution of proceeds from the sale of a company’s assets among various stakeholders, typically prioritising creditors, preferred shareholders, and common shareholders in descending order. Understanding the liquidation waterfall is crucial for investors to assess their potential recovery in exit scenarios and prioritise their claims to maximise returns.
Loss Relief: Tax relief provisions allowing investors to offset losses incurred from investments in unlisted companies against other income or capital gains, reducing their overall tax liabilities. Investors may leverage loss relief to mitigate the financial impact of unsuccessful investments and enhance the after-tax returns of their investment portfolios.
M&A: The process of combining two or more companies through various transactional structures, such as mergers, acquisitions, or asset purchases. For investors, Mergers and Acquisitions (M&A) activities represent opportunities for realising returns through the sale of portfolio companies or participating in consolidation strategies to enhance the value of their investments.
Minority Shareholder Provisions (Articles/SHA): Legal clauses outlining the rights and protections afforded to minority shareholders in a company, such as veto rights, tag-along rights, and anti-dilution provisions. Investors must carefully review minority shareholder provisions to safeguard their interests and ensure equitable treatment in corporate decision-making processes.
Negligible Value Claim: A claim made by investors to crystallise capital losses on investments that have become worthless or significantly devalued, allowing them to offset these losses against taxable income or capital gains. For investors, negligible value claims serve as a mechanism to mitigate the financial impact of unsuccessful investments and optimise tax planning strategies. Read more on: https://www.gov.uk/guidance/negligible-value-agreements
Nominee: An entity appointed to hold shares or voting rights on behalf of investors, consolidating their interests and facilitating administrative tasks such as voting in shareholder meetings or receiving dividends. Utilising a nominee structure can streamline investor management and provide anonymity for beneficial owners, particularly in cases involving multiple shareholders or complex ownership structures.
Options (ESOP/Employee Stock Option Plans): Contracts granting employees the right to purchase company shares at a predetermined price within a specified timeframe, often used as a form of equity-based compensation to incentivize employee retention and performance. For investors, understanding the impact of employee stock options on equity ownership and potential dilution is essential for evaluating a company’s capital structure and investment prospects.
Part 26A Restructure: A legal restructuring process under the UK Companies Act 2006, allowing companies to implement financial reorganisations, debt restructuring, or capital reductions with the approval of the court and relevant stakeholders. Investors may encounter Part 26A restructures in distressed or turnaround situations, where companies seek to address financial challenges, streamline operations, and improve their long-term viability. Understanding the implications of a Part 26A restructure is crucial for investors to assess the potential impact on their investments, rights, and recovery prospects in the reorganised entity.
Post Money Valuation: The estimated value of a company immediately after a financing round, including the infusion of new capital. For investors, understanding post-money valuation helps assess the company’s overall worth and their ownership stake post-investment.
Pre Money Valuation: The estimated value of a company before it receives additional capital in a financing round. Investors use pre-money valuation to determine the company’s value per share and calculate the percentage ownership they will receive for their investment.
Pre-emption (and disapplication) pro rata rights: Rights granted to existing shareholders allowing them to maintain their ownership percentage by purchasing additional shares in future fundraising rounds before new investors. Investors value pre-emption rights as they protect against dilution and preserve their proportional ownership in the company.
Preference: A type of equity or debt that grants certain privileges or priority rights to investors over common shareholders in terms of dividends, liquidation proceeds, or voting rights. Investors may prefer preference shares or debt instruments for their protective features and enhanced claim on company assets in case of liquidation.
Recapitalisation (Notion special – eg ords to deferred): Restructuring a company’s capital structure (debt and equity) to improve its financial health.
Rollover Relief: UK tax relief that allows investors to defer capital gains tax when they reinvest proceeds from a qualifying disposal into another qualifying investment.
Read more on: https://www.gov.uk/business-asset-rollover-relief
Runway: The amount of time a company has left operating with its current cash flow before needing additional funding.
SEIS: The Seed Enterprise Investment Scheme (SEIS) is one of 4 venture capital schemes in place now in the UK. It offers tax relief to investors in qualifying early-stage companies. SEIS is a more targeted version of EIS, aimed at encouraging investment in even earlier-stage startups and startups with lower funding needs.
– Investors in SEIS-eligible companies can benefit from income tax relief of up to 50% of the amount invested, up to a maximum of £100,000 per tax year.
– Similar to EIS, investments made through SEIS may also qualify for other tax reliefs, such as CGT exemption on gains made from SEIS investments and loss relief.
– SEIS-eligible companies must meet strict criteria, including being less than two years old, having fewer than 25 employees, and having gross assets of £200,000 or less.
Read more on: https://www.gov.uk/guidance/venture-capital-schemes-apply-to-use-the-seed-enterprise-investment-scheme
Series A: The Series A round is the first major round of venture capital funding, where you have proven your product-market fit, generated some revenue, and achieved some traction. You need money to scale your operations, expand your team, and enter new markets. The typical sources of Series A funding are venture capital firms, corporate investors, and strategic partners. The average amount of Series A funding is between $2 million and $15 million, and the valuation of your startup is based on your revenue, growth, and market size.
Up and to the Right (Unicorns): A colloquial term referring to the desirable trajectory of a company’s growth, as depicted on a graph where both revenue and valuation increase steadily over time. Investors seek companies with “up and to the right” growth patterns as they indicate strong performance and potential for significant returns.
Venture Capital: A form of private equity investment provided to startups and early-stage companies with high growth potential, typically in exchange for equity ownership. Venture capital firms invest institutional funds into promising ventures and actively support their growth through strategic guidance, operational assistance, and networking opportunities.