The investor’s field guide
Words worth
understanding.
Good questions begin with clear language. A working reference for buying, building and backing private companies.
A terms
- Add-backs
- Adjustments that add selected expenses back to reported profit when estimating maintainable business earnings.
- Advance assurance
- An HMRC indication about specified company and share-issue conditions for a proposed UK venture capital scheme investment.
- Angel syndicate
- A group of investors who coordinate their assessment of, and sometimes investment in, an early-stage company.
B terms
- Burn rate
- The speed at which a company spends cash, commonly stated as gross spending or net cash outflow per month.
C terms
- Cap table
- A record of a company’s ownership, showing shareholders, securities and the effect of potential share issuances.
- Cash flow
- The movement of money into and out of a business over a specified period.
- Convertible note
- A debt instrument that may convert into shares under conditions set out in its agreement.
- Customer concentration
- The degree to which a business depends on a small number of customers for revenue, profit or cash receipts.
D terms
- Deferred consideration
- Purchase money that is payable after completion rather than entirely when ownership changes.
- Dilution
- A reduction in an existing holder’s percentage ownership when a company issues additional shares or equivalent rights.
- Drag-along and tag-along
- Shareholder provisions governing when holders may be required or entitled to participate in a sale.
- Due diligence
- The investigation of a business, its people and its obligations before deciding whether and how to proceed.
E terms
- Earn-out
- A part of an acquisition price that depends on the acquired business meeting agreed future conditions.
- EBITDA
- Earnings before interest, tax, depreciation and amortisation, used to compare operating profitability.
- EIS
- The UK Enterprise Investment Scheme, which can provide tax relief for qualifying investment in eligible higher-risk companies.
- Escrow
- An arrangement in which money or assets are held by a third party and released under agreed conditions.
- Exit
- A transaction or process through which an owner realises or ends some or all of their investment.
F terms
- Fair market value
- The price a willing buyer would pay and a willing seller would accept, with neither under pressure and both reasonably informed.
G terms
- Gross margin
- Gross profit expressed as a percentage of revenue, after deducting the costs classified as directly associated with sales.
H terms
- Heads of terms
- An outline of the principal points agreed in a proposed transaction before detailed contracts are completed.
L terms
- Letter of intent
- A document recording a proposed transaction’s main terms and the parties’ intention to continue negotiations.
- Liquidation preference
- A contractual priority determining how certain shareholders receive proceeds before other holders in specified exit or winding-up events.
M terms
- Management buyout
- An acquisition in which an existing management team buys the business it helps run.
N terms
- Net profit
- The accounting profit remaining after recognised expenses, with the precise meaning determined by the stated reporting basis.
- Non-disclosure agreement
- A contract setting limits on how confidential information may be used and shared.
P terms
- Personal guarantee
- A commitment making an individual responsible for specified business obligations if the agreed conditions for liability arise.
- Post-money valuation
- The equity value of a company immediately after new investment, under the assumptions of the funding agreement.
- Pre-emption rights
- Rights that may give existing holders a first opportunity to acquire new or transferred shares before others.
- Pre-money valuation
- The agreed equity value of a company immediately before new investment in a priced funding round.
R terms
- Recurring revenue
- Revenue expected to repeat through subscriptions, contracts or continuing customer relationships, subject to renewal and delivery.
- Runway
- An estimate of how long a company can continue before its available cash runs out at an assumed spending rate.
S terms
- SAFE
- A simple agreement for future equity that provides contractual rights to shares or proceeds on specified events.
- Search fund
- A structure in which investors support an entrepreneur’s search for a business to acquire and usually operate.
- SEIS
- The UK Seed Enterprise Investment Scheme, which can offer tax relief for qualifying investment in eligible early-stage companies.
- Seller finance
- Funding in which a seller allows a buyer to pay part of a purchase price over time, often through a loan.
- Seller’s discretionary earnings
- An estimate of the earnings available to one working owner before certain financing, tax and discretionary costs.
- Share purchase vs asset purchase
- A share purchase transfers ownership of a company; an asset purchase transfers specified business assets and agreed liabilities.
T terms
- Term sheet
- A summary of the proposed commercial and legal terms for an investment or financing.
V terms
- Valuation multiple
- A ratio expressing a business value as a multiple of a specified earnings, revenue or other financial measure.
- Vesting
- The process by which a person earns an entitlement to shares or options over time or after meeting conditions.
W terms
- Warranties and indemnities
- Contractual promises and risk-allocation provisions that may give a buyer recourse when agreed conditions are breached.
- Working capital
- The resources tied up in day-to-day trading, commonly measured as current assets less current liabilities.