Glossary
Accounts payable. Amount owed to creditors for goods and services.
Accounts receivable. Amount due from customers for merchandise or services.
Accredited investor. A person with a net worth exceeding $1 million or income over $200,000 annually in the past two years, or an institution deemed capable of understanding and able to afford the financial risks associated with purchasing unregistered securities.
Angels. Friends, family, or wealthy individuals who invest their money, usually in start-up or early-stage companies.
Asset. Anything owned by a business or individual that has commercial or exchange value.
Balance sheet. Financial statement that presents a snapshot of what the business owns (assets), what it owes (liabilities), and what equity it has on a given date.
Board of directors. These are the individuals who control a corporation for the benefit of the stockholders. They listen to management's recommendations and set policy for the corporation.
Capital. Money invested in a business by the owner(s).Also called equity.
Capital expenditures. Purchases of long-term assets, such as equipment.
Closing. The event that occurs when you sign legal documents binding your company and transferring cash from the venture capitalist to your company.
Common stock. Units representing ownership of a corporation. The owners (shareholders) are typically entitled to vote on the selection of directors and other company matters, as well as receive dividends on their holdings. If the company is liquidated, the claims of its creditors and owners of bonds or preferred stock take precedence over the common stockholders.
Convertible. Usually refers to debt or preferred stock, each of which is convertible into common stock of the company. Obviously, it is possible to have debt convertible into preferred stock and it is even possible to have preferred stock convertible into debt, although the latter is unusual.
Covenant. Paragraphs in the legal documents stating the things you agree you will do and paragraphs stating what you will not do.
Corporation. Form of business ownership with unlimited life and limited liability for its owners (shareholders).
Debt service. The amount of money you have to pay on a debt in order to keep it from being in default. If you make the payments that are called for under a note or loan, then you are servicing the debt.
Dilution. A term used to describe an increase or decrease in the amount of shareholders equity (net worth/book value) whenever new shares are issued by a company.
Dividends. A taxable distribution made to shareholders disbursed from a portion of the company's earnings; usually paid in cash, but may be paid in additional, newly issued shares.
Double taxation. In a corporation, income is taxed at the corporate level and again as part of the personal income of shareholders to whom it is distributed as dividends.
Due diligence. The process of gathering and confirming information about a company and its business, management, and financial affairs to determine its feasibility and level of risk for an investment.
Equity. Normally, it describes the preferred and common stock of a business. Also, it is frequently used to describe the amount of ownership of one person or a venture capitalist in a business.
Factoring. Occurs when a financial institution buys a firm's accounts receivable (at a discount) and then collects the full value of the accounts from customers. Banks, through their Visa and Mastercard programs, do a form of factoring for merchants who accept their credit cards.
Ficticious name. The name a person or business uses to conduct business with the public, but is not its actual, legal name.
General partner. A partner who shares ownership and has full liability for the debts of the business.
Gross income. Sales less cost of goods sold.
Issuer. An entity, usually a corporation, that has the ability to issue and distribute securities.
Junior lien. A lien that is subordinate to another lien. A junior lien will be paid only after any liens above it are satisfied.
Limited liability company (LLC). A form of business organization that combines characteristics of a corporation and a partnership. Owners have limited liability like a corporation, but the LLC is taxed as a partnership.
Memorandum. A document similar to a prospectus, sometimes also referred to as an offering circular, that is the official document by which private placements are offered and sold.
Net income. The profit remaining after all expenses have been deducted from income.
Net worth. Excess of assets over liabilities.
Offering circular. A disclosure and information document used to furnish information about a company and its stock offering to prospective investors; commonly used for exempt offerings and patterned after a prospectus.
Options. The right given to someone to buy stock in your company.
Partnership. An unincorporated business with more than one owner. The tax burden is shared by all the partners at their personal rate. General partners have unlimited liability. Limited partners have limited liability.
Preferred shares. A separate class of a company's stock with certain preferential features over common stock that often include a right of its owners to be repaid before shareholders of common stock in the event of liquidation, rights to dividends before owners of common stock, and sometimes certain voting rights superior to those of common stock.
Private placement. An offering of securities exempt from full SEC registration requirements that is usually made directly by the issuing company but may also be made by an underwriter.
Pro forma financial statements. Estimated income statement showing anticipated revenues, costs, and expenses over a period of time, and a balance sheet showing assets, liabilities, and equity at a fixed point in time.
Profit and loss statement. Summary of the revenues, costs, and expenses over a period of time. Also called an income statement.
Raising capital. Raising capital refers to obtaining capital from investors or venture capital sources.
Regulation A. An exemption made by the SEC from filing a full registration statement under the Securities Act of 1933.
Regulation D. An exemption made by the SEC from filing a full registration statement under the Securities Act of 1933.
Small Business Administration (SBA). A federal agency created in 1953 to provide assistance to small businesses by guaranteeing loans through financial institutions and assisting the management of qualified businesses.
Small Corporate Offering Registration (SCOR). An SEC-exempt offering for the sale of securities up to the amount of $1 million that must be qualified under state blue sky laws. Also known as ULOR.
SEC. The U. S. Securities and Exchange Commission, which is charged with the administration and enforcement of federal securities laws.
Securities Act of 1933. The federal law, including amendments, pertaining to the offering of securities administrated by the SEC.
Securities Exchange Act of 1934. The federal law, including amendments, pertaining to the trading of securities, stock exchanges, firms, and brokers administrated by the SEC.
Senior lien. A lien that is superior to another lien. A senior lien will be paid before liens subordinate to it.
Shareholders. Individuals or entities who own the securities (shares/stocks) of a company.
Shares outstanding. The total number of shares of stock held by all shareholders.
Sole proprietorship. A business form with a single owner in which the owner has total control, total liability, and the proceeds of the business are taxed at the proprietor's individual rate.
S corporation. A tax option for corporations formed under subchapter S of the federal Tax Code, in which shareholders can unanimously consent to be taxed like a partnership, permitting income and expense to flow through to their personal tax returns. Originally designed to avoid double taxation yet preserve limited liability, the S corporation form is now giving way in some states to the limited liability company (LLC).
Venture capitalists. Individuals or institutions that fund early stage, highrisk businesses. They generally want some ownership in the business and expect a 20% to 50% return on investment.
Warrants. A certificate giving its holder the right to purchase securities at a defined price within a specified time.
Working capital. The excess of current assets over current liabilities.
