10b-5

Rule 10b-5 is a regulation created under the Securities Exchange Act of 1934 that targets securities fraud. This rule makes it illegal for anybody to directly or indirectly use any measure to defraud, make false statements, omit relevant information, or otherwise conduct business operations that would deceive another person in the process of conducting transactions involving stock and other securities.

Rule 10b-5 is formally known as the Employment of Manipulative and Deceptive Devices.

Accelerated Depreciation

Refers to any one of several methods by which a company, for 'financial accounting' or tax purposes, depreciates a fixed asset in such a way that the amount of depreciation taken each year is higher during the earlier years of an asset's life.

Accredited Investor

An investor with a special status under financial regulation laws. The definition of an accredited investor, and the consequences of being classified as such, vary between countries.

Adjusted Working Capital

A method of calculating working capital where certain items are expressly included or excluded from current assets or current liabilities such as deferred tax assets (e.g., loss carryforward) or contingent liabilities (e.g., pending litigation).

Accretion

Earnings and asset growth which occur due to business expansion.

Accounts Payable

Refer to a company's short-term obligations owed to its creditors or suppliers, which have not yet been paid. Payables appear on a company's balance sheet as a current liability.

Accounts Receivable

Refer to a company's short-term obligations owed to its creditors or suppliers, which have not yet been paid. Payables appear on a company's balance sheet as a current liability.

Acquiree or Target

A company purchased or otherwise taken-over during an acquisition or merger.

Acquiror or Buyer or Offeror

The company undertaking the merger or acquisition of another company.

Acquisition

The purchase of the controlling interest in or ownership of one company by another.

Acquisition Premium

The difference between the price paid for a company and its estimated real value.

Add-on

When a private equity firm or other buyer acquires a company and integrates it into an existing business within the buyer's portfolio, which is referred to as a platform company.

Adjusted Earnings

A method of assessing financial performance which compensates for atypical profits and expenses, such as capital gains, new investments, tax liabilities, loss revenues, etc. By removing such factors—factors that are not a part of a company’s typical financial workings—the adjusted earnings metric is intended to more accurately reflect financial robustness.

Adjusted Working Capital

Refers to measuring the business's operating working capital. It considers only the operational aspect and removes the liquid and non-operational items in the business, which are considered while measuring the working capital using the traditional measure.

Advisory Board

A group of people chosen to give expert and unbiased advice to a business. Members are not typically compensated. Advisory boards operate informally.

Affiliated Person

Someone in a position to influence the actions of a corporation. This includes directors, officers, and certain shareholders. Depending on the context, an affiliated person might be referred to simply as an "affiliate."

Alternative Asset Classes

They include all assets that do not fall into the traditional liquid asset classes, such as securities, money market instruments and derivatives. Alternative asset classes include not only commodities, real estate, infrastructure, corporate private equity and corporate private debt but also cryptocurrencies, antiques and art and other physical assets.

Antidilution

Clauses that allow investors the right to maintain their ownership percentages in the event that new shares are issued. Dilution refers to a shareholder's ownership decreasing as a result of new shares being issued.

Amalgamation or Consolidation

An amalgamation occurs when two or more companies blend together to form a new entity. It is a distinct from a merger because none of the amalgamating companies survive as independent legal entities.

Appraisal Report

A detailed document that outlines a property's value based on its quality, condition, location, and surrounding market conditions. A real estate appraiser compiles this objective report after performing an in-depth examination of the property.

Appraisal Rights

a legal right of a company's shareholders to demand a judicial proceeding or independent valuation of the company's shares with the goal of determining a fair value of the stock price.

Asset Acquisition

A form of acquisition in which the acquiror purchases the assets of a target rather than its stocks.

Asset Sale

A form of acquisition in which an acquiror purchases a target company’s assets without purchasing the company itself. The seller must therefore settle all existing liabilities and debts before taking the net cash proceeds.

Asset-Based Approach

A company valuation metric in which total liabilities are subtracted from Net Asset Value. Used primarily to determine what it would cost to re-create a business.

Asset-Based Lending

The business of loaning money in an agreement that is secured by collateral. An asset-based loan or line of credit may be secured by inventory, accounts receivable, equipment, or other property owned by the borrower. The asset-based lending industry serves business, not consumers.

Backward Integration

A form of acquisition in which the target company produces raw materials or other supplies required by the acquiror to operate.

Bankruptcy

A legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.

Base Year

The earliest year in a set of years used to calculate a financial trend.

Basket (Indemnification)

A “basket” (sometimes called a “deductible”) is a threshold amount of losses and damages that a buyer must incur before it is entitled to any indemnification from the seller. A “tipping basket” provides that once the buyer has incurred losses equal to the agreed amount, the buyer is entitled to full recovery of all losses, from the first dollar of losses. A “deductible basket” provides for recovery only to the extent that losses exceed the deductible. A “partially tipping basket” combines a tipping basket with a deductible basket. Often, baskets do not apply to fundamental representations fraud.

Basket (Securities)

A collection of securities (typically fifteen or more) grouped together for simultaneous purchase or sale. Often used as a part of program trading.

Basis Point

The measure used for quoting yields on bonds and notes. A basis point is 0.01% of yield.

Beta

A product that is being tested by potential customers prior to being formally launched into the marketplace.

Black Knight

A company that makes an unwanted takeover offer (hostile takeover) to a target.

Blue Sky

Any amount paid for a company exceeding combined assets and goodwill.

Blue-sky Laws

State regulations governing the sale of securities. These regulations provide investors with full and complete disclosures regarding contemplated investment opportunities.

Board of Advisors

A group of individuals, typically composed of technical and industry experts, who provide guidance and feedback to the company's managers and board of directors. The board of advisors does not have a fiduciary responsibility and is usually established by the senior management and the board of directors.

Board of Directors

A group of individuals, typically composed of manag- ers, investors, and experts, who have a fiduciary responsibility for the well-being and proper guidance of a corporation. The board is elected by the shareholders.

Boat Anchor

In business, a person, project, or activity that hinders the growth of a company.

Bolt-on

A smaller business acquired by a larger company; the term is often used in the context of an acquisition by a platform investment (com- pany) of a private equity investor.

Book Value

The value of a company as determined by subtracting intangible assets and liabilities from total assets.

Bootstrap Effect

A short-lasting illusory boost in earnings per share which occurs when a company acquires a target trading on a lower price-to-earnings ratio.

Boot

Nonstock contribution in a merger or reorganization.

Breakeven

The level of revenue in a business in which sales minus variable costs minus fixed costs equals zero.

Breakup Fee

The amount paid by a selling company to a potential buyer when the seller terminates an agreement in favor of a higher bid for the selling company.

Bridge Financing

Temporary funding that will eventually be replaced by permanent capital from equity investors or debt lenders. In venture capital, a bridge is usually a short-term note (6 to 12 months) that con- verts to preferred stock; in addition to receiving interest, a bridge lender receives warrant coverage to compensate the investor for taking an early risk in the company. Typically, the bridge lender has the right to convert the note to preferred stock at a price equal to the price of the preferred stock in the next financing round that meets minimum specified levels of funding. See Hamburger Helper bridge; wipeout bridge

Bring Down

A bring down is a provision requiring the representations and warranties that were made at signing to be made again on the closing date (or at another specified date)

Broad-based Weighted Average Ratchet

A type of antidilution mechanism. A weighted average ratchet adjusts downward the price per share of the preferred stock of investor A due to the issuance of options, war- rants, convertible securities, or shares to new investor B at a price lower than the price investor A originally paid. Investor A's preferred stock is repriced to a weighted average of investor A's price and investor B's price. A broad-based weighted average antidilution formula uses all common stock outstanding on a fully diluted basis (including all convertible securities, warrants, and options) in the denominator of the formula for determining the new weighted average price. See narrow- based weighted average antidilution.

Burn Rate

The rate at which a company with little or no revenue uses cash to cover expenses, usually expressed on a monthly or weekly basis. The term is typically used in reference to start-ups.

Business Cycle

A recurring cycle of economic expansion and contraction, typically taking place over three to four years.

Business Development Company (BDC)

A publicly traded fund that invests in small private companies primarily using debt. See Chapter 2 for an additional explanation.

Business Judgement Rule

A legal framework protecting companies from litigation, prosecution, or other legal action resulting from unpopular operational decisions.

Business Structures

Legal alternatives of business ownership.

■ Corporation: An ownership structure that allows a number of individuals or companies to own shares of the capital investment in a business. A corporation is a stand-alone legal entity, so it offers risk protection to its owners, managers, and investors from liability resulting from its actions, including bankruptcy. The invested moneys are at risk.

■ C corporation: A designation for tax purposes but not relevant for structural purposes; with respect to taxation, there is no limit to the number of shareholders. Profit and loss remains on the C corporation books. Ownership is represented by the possession of common or preferred stock. The C corporation pays income taxes. Earnings are distributed to shareholders in the form of dividends. Dividends are taxable to the recipients when received. Income taxes on profits are paid twice: once by the corporation each fiscal year and a second time by the shareholders receiving distributions from the corporation.

■ Partnership: A relationship between two or more persons who join to carry on a trade or business, with each person contributing money, property, labor, or skill and each expecting to share in the profits and losses of the business as reported in Form K-1 for each partnership fiscal year. Earnings are taxed only once. Related glossary terms follow:

■Family limited partnership (FLP): A holding company owned by two or more family members, created to retain a family's business interests, real estate, publicly traded and privately held securities, or other assets contributed by its members. The purpose of creating such an entity is generally to achieve creditor protection and reduce ment and distribution of the partnership's assets. gift and estate taxes while maintaining control over the management and distribution of the partnership’s assets.

■ General partner (GP): A class of partner in a partnership. Each general partner retains liability for the actions of the partnership and is personally liable for partnership debts. In the private equity world, the GP is the fund manager while the limited partners (LPs) are the institutional and high-net-worth investors in the partnership. The GP earns a management fee and, after limited partners receive a return of their capital, a percentage of profits (see carried interest) typically based on an 80/20 split, where 80% is distributed to the limited partners.

■ Limited liability company (LLC): An ownership entity formed under state law and designed to limit the founders' and investors' losses to the amount of their investment. An LLC does not pay taxes; rather, its owners pay taxes on their proportion of the LLC profits at their individual tax rates. An LLC may be classified for federal income tax purposes as either a partnership or an entity disregarded as an entity separate from its owner by applying the IRS regulations, and as determined on IRS Form 8832, Entity Classification Election. LLCs may elect to be taxed as corporations.

■ Limited liability partnership (LLP): A legal entity formed under a state limited partnership law for professionals. Generally, a partner in an LLP is responsible for their own actions, but is not personally liable for the debts of the LLP or any other partner, nor is a partner liable for the acts or omissions of any other partner, solely by reason

■ Limited partner (LP): An investor in a limited partnership. The general partner is liable for the actions of the partnership while the limited partners are generally protected from legal actions and any losses beyond their original investment.

■ Limited partnership: A legal entity formed under a state's limited partnership law and composed of at least one general partner and one or more limited partners. The general partner manages the business or trade and is liable for the actions of the partnership while the limited partners are generally protected from legal actions and any losses beyond their investment. The general partner receives a management fee and a percentage of profits (see carried interest), while the limited partners receive income, capital gains, and tax benefits.

■ S corporation: A tax designation that is not relevant for structural purposes; with respect to taxation, an ownership structure that limits its number of shareholders to 100. An S corporation does not pay income taxes; rather, its owners pay income taxes on their proportion of the corporation's profits allocated to them on their K-1 tax form for each fiscal year. Taxes are paid on income allocated to sharehold ers whether or not the income is actually distributed to them. Losses are also passed to shareholders as reported on Form K-1. Losses can be deducted from shareholder taxable income under certain IRS rules. S corporation earnings are taxed only one time because earnings pass through to the investors.

■Sole proprietorship (SP): An unincorporated business owned and con- trolled by one person under their name or doing business as (DBA) a name other than theirs. Many successful SPs start as garage operations and are subsequently converted into entities such as corporations or LLCs.

Business Valuation

The process of determining the economic value of a company.

Buy-n-build

A strategy to acquire a platform company and then add-on or bolt-on additional businesses to scale and grow.

Buyout Firm

An entity in the private equity industry that purchases a controlling interest in a company (as in a leveraged buyout), in many cases accompanied by a management team (as in a management buyout).

Buy-sell Agreement

A contract that sets forth the conditions under which shareholders must first offer their shares for sale to the other shareholders before being allowed to sell to entities outside the company.

Cap

The maximum recovery a buyer may obtain for indemnification claims. Many agreements include separate caps for different types of breaches.

Capital Acquisition Brokers (CABS)

Firms that engage in a limited range of activities, including advising companies and private equity funds on capital raising and corporate restructuring, and acting as placement agents for sales of unregistered securities to institutional investors under limited conditions.

Capital Asset Pricing Model (CAPM)

Used to determine the required rate of return for stocks.

Capital Call

When a general partner requests that an investor in a partner ship or LLC provide additional capital. Usually an investor will agree to a maximum investment amount and the general partner will make a series of capital calls over time to the investor as opportunities arise to finance the capital requirements of targeted companies.

Capital Charge

The product of the cost of capital times the amount of capital used by a particular company or business unit. Typically referred to in the calculation of economic profits versus operating profits.

Capital Efficiency (leverage alliances)

The concept of efficient deployment of capital by venture capitalists. Best practices include offshore development and understanding the sales and distribution model for a start-up business before ramping operations; hire two to four people to experiment and test the market, then ramp.

Capital Expenditure (CAPEX or CapEx)

The investment of funds in fixed or capital assets of a company. Among other things, this can include software, office equipment, buildings, land, factory, and equipment.

Capital Gains (losses)

A tax classification of investment earnings (losses) resulting from the purchase and sale of assets. Typically, an investor prefers that investment earnings be classified as long-term capital gains (held for a year or longer), which are taxed at a lower rate than ordinary income.

Capital Stock

Stock authorized by a company's charter and having par value, stated value, or no par value. Capital stock includes common stock and preferred stock.

Capital Structure

The unique combination of debts, equities, and hybrid securities through which a company finances its assets.

Capitalization

The total sum of a company’s stock, debt, and earnings.

Capitalization Ratio

A series of metrics/indicators which measure the proportion of debt in a company’s total capital structure.

Capitalizing Net Income or Capitalization of Earnings

A method of valuing a business in which the company’s expected future earnings are divided by the Capitalization Factor.

Capitalization Table (cap table)

A table showing the owners of a company's shares and their ownership percentages. It also lists the forms of ownership, such as common stock, preferred stock, warrants, and options.

Capped Participating Preferred

Preferred stock whose participating feature is limited so that an investor cannot receive more than a specified amount without converting to common stock. See participating preferred stock.

Carried Interest

A share in the profits of a private equity fund. Typically, a fund must return the capital given to it by limited partners before the general partner can share in the profits of the fund. The general partner will then receive a 20% carried interest, although some successful firms receive 25 to 30%. Also known as carry or promote.

Cash Consideration

The percentage of the purchase price of a company to be paid to the target in cash.

Cash Cow

A business, investment, or product that provides a steady income or profit.

Cash Flow

The amount by which a company’s net cash income exceeds its net cash expenses.

Cash-free, Debt-free

A concept in M&A transactions whereby the cash and the funded debt of the target remains with the seller of the business. (and cash equivalents)

Cash Flow Loan

A type of business loan in which a company’s cash flow is determined by the lending bank to constitute sufficient collateral.

Cash Flow Statement

A financial statement displaying comprehensive data regarding incoming and outgoing cash flows in a business.

Catch-up

A clause in the agreement between the general partner and the limited partners of a private equity fund. Once the limited partners have received a certain portion of their expected return, the general partner can then receive a majority of profits until the previously agreed on profit split is reached.

CF(q) (corporate finance qualification)

A UK-based credential granted by the Institute of Chartered Accountants in England and Wales (ICAEW) in partnership with the Chartered Institute for Securities and Investments (CISI) confirming expertise and experience in corporate finance. Also see corporate finance.

Change of Control

A merger, consolidation, or acquisition involving all or substantially all of the assets of an entity. Changes in control often trigger acceleration provisions (e.g., vesting of equity compensation paid to officers or other employees or with respect to earnouts)."

Change of Control Bonus

A bonus of cash or stock given to members of a management group upon successful completion of the sale of a company.

Charitable Remainder Trust (CRT)

A giving vehicle, typically used as part of a tax-saving strategy, whereby an appreciated asset, such as a business, is transferred into an irrevocable trust.

Circular merger

One of the three traditional forms of merger, a circular merger occurs when a company acquires targets in the same or related industries in order to diversify its product offering.

Clandestine Takeover

A takeover strategy in which an acquiror slowly and quietly purchasing shares in a target with the ultimate goal of accumulating a controlling stake.

Clawback

A clause in an agreement between the buyer and seller or an investor and a company. The clawback gives one party the right to reclaim a portion of the investment or purchase price from the other in the case of certain negative events or failure to perform.

Closing

The conclusion of a transaction whereby all necessary legal documents are signed.

CM&AA

The Certified Merger & Acquisition Advisor (CM&AA) designation is awarded by the Alliance of Merger & Acquisition Advisors and their academic partners (Loyola University Chicago, DePaul University, University of Maryland, and Pepperdine University) to professionals who evidence mastery of the M&A body of knowledge and a commitment to staying abreast of new developments in the field of investment banking and mergers and acquisitions. It also recognizes professional achievement and competence, serves as a tool to both attract and serve new clients, provides identification with other professionals in the field, and potentially stimulates career advancement.

CM&AA professionals are accredited experts in one or more professional fields (e.g., CPA, accountant, lawyer, corporate finance, valuation expert, CFA, or MBA with Wall Street-type investment banking experience) and understand the overall investment banking process for selling and buying middle market companies.

Collar

An investment strategy that limits potential negative outcomes.

Collateral

Assets of the borrower, such as real estate, accounts receivable, or equipment, for which a lender has an equitable interest until a loan obligation is fully paid.

Comfort Letter

A nonbinding indication of interest by an investor or lender in a potential transaction.

Commercial Bank

Widely known as a source of debt financing for busi- nesses. Commercial banks generally provide lines of credit, term loans, and revolving loans. Traditionally, commercial banks are cash-flow lenders and view collateral as a secondary source of repayment; from experience, bankers' actions do not always evidence this thinking. Focus is placed on lending to borrowers who have durable and predictable cash flows. To assure liquidity and stability for the public, banks are highly regulated by states, by the Federal Deposit Insurance Corpora- tion (FDIC), and by the operating cash cycle (OCC).

Commitment

An obligation, typically the maximum amount that an inves tor or lender agrees to invest in a fund or loan to a company.

Common Stock

A type of security representing ownership rights in a com- pany. Usually, company founders, management, and employees own common stock whereas investors own preferred stock. In the event of a company's liquidation, the claims of secured and unsecured creditors, bondholders, and preferred stockholders take precedence over those of common stockholders. See preferred stock.

Comparable

A publicly traded company with similar characteristics to a private company that is being valued. For example, a telecommunications equipment manufacturer whose market value is two times revenues can be used to estimate the value of a similar and relatively new company with a new product in the same industry. See liquid-

Common Stock

A form of security representing partial ownership of a company. Common stocks are the most basic building blocks of the stock market.

Compensation Manipulation

Occurs when the upper management of a company seeks out mergers and acquisitions with the intent of achieving growth solely in order to receive a corresponding increase in salary.

Competitive Bid

When the decision is made to take a company public, sealed bids—known as competitive bids—are collected from investment banks prior to the initial public offering. The bank who offers the most favorable terms is given the contract to take the company public and broker the IPO.

Confidential Business Profile or Confidential Business Review

A confidential marketing document circulated among potential buyers of a for sale company. The CBP gives an overview of the financial workings of the target company and is usually only distributed following the completion of a non-disclosure agreement.

Confidential Information Memorandum (CIM)

A document that describes a target company for a transaction. It generally describes the target's business, products/services, market, strategy, financial performance, and transaction objectives.

Conglomerate Merger

A merger between two companies in different industries.

Consequential Damages

Damages that are not a direct result of an act, but a consequence of the initial act. To be awarded consequential damages, it typically must be shown that the damages were a foreseeable result of the initial act.

Contingent Value Rights (CVRS)

Provide the holder with the right to sell a share of stock in the underlying company at a fixed price during the life of the right.

Contribution Margin

Selling price minus variable cost. For a business oper ating above breakeven, the contribution margin from incremental sales becomes operating profit.

Control

The authority of an individual or entity that owns more than 50% of equity in a company or owns the largest block of shares compared to other shareholders.

Consolidation

Combining several companies or assets into a single entity.

Consulting Agreement

A term-of-sale in M&A requiring select staff members of the target company (usually upper management) to stay on as consultants for a predetermined span of time.

Continuing Operations

A net income category found in income statements, continuing operations include all expenses necessary to the daily business activities of a company.

Convergence

The Financial Accounting Standards Board (FASB) is working with the International Accounting Standards Board (IASB) to converge their respective accounting standards into a set of rules that will meet the needs of preparers and users of financial statements and other accounting information in all global constituencies.

Conversion

The right of an investor or lender to force a company to replace the investor's preferred shares or the lender's debt with common shares at a preset conversion ratio. A conversion feature was first used in rail-road bonds in the 1800s.

Conversion Price

The price at which a common stock can be obtained in trade for other assets, commonly bonds or preferred shares.

Convertible Debt

A loan that allows the lender to exchange the debt for common shares in a company at a preset conversion ratio.

Convertible Preferred Stock

A type of stock that gives an owner the right to convert to common shares of stock. Preferred stock is granted certain rights not normally granted to the holders of common stock, such as decision-making management control, a guaranteed return on invest ment, or senior priority in receiving proceeds from a sale or liquidation of the company. Convertible preferred is the most common tool for private equity funds to invest in companies.

Convertible Security

A security that gives its owner the right to exchange the security for common shares in a company at a preset conversion ratio. The security is typically preferred stock or debt.

Corporate Charter

The document prepared when a corporation is formed. The charter sets forth the objectives and goals of the corporation, as well as a general statement of what the corporation can and cannot do while pursuing these goals.

Corporate Finance

Addresses the capital structure of a corporation, including its funding and the actions that management takes to increase the value of the business. Corporate finance also includes the tools and analysis utilized to prioritize and distribute financial resources. The ultimate purpose of corporate finance is to maximize the value of a business through planning and implementation of resources, while balancing risk and profitability.

Corporate Liquidation

The various regulated processes to close down an insolvent company.

Corporate Resolution

A document stating that the corporation's board of directors has taken a specified action, such as authorizing management to act on behalf of the corporation.

Corporate Venturing

Venture capital provided by in-house investment funds of large corporations to further their own strategic interests. corporation See business structures.

Cost of Capital

Actual or implied interest rate for the use of money or assets of a company.

Cost of Revenue

Same as cost of goods sold, although the term usually refers to costs incurred to generate service revenues versus those of product revenues. Cost of revenue and cost of goods sold are usually comprised of direct and indirect costs. Direct costs are those that are attributed directly and proportionally to creating the product or service (ie., materials and labor). Indirect costs are those expenses that are attributed to creating the product or service but are general in nature and not easily allocated on a per-unit basis (i.e., engineering support costs and facilities costs related to producing the product or service).

Cost of Sales (COS)

The burdened expenses incurred to generate the revenue of a company; includes direct and indirect costs. covenant A legal promise to do or not do a certain thing. For example, in a financing arrangement, company management may agree to a negative covenant whereby it promises not to incur additional debt. The penalties for violation of a covenant may vary from repairing the mistake to losing control of the company. In a merger agreement, covenants may require the parties to take actions both before and after the closing.12

Covenant

A promise or obligation included in an indenture or other compulsory form of contract. A covenant guarantees that certain actions will or will not be taken out. They are often stipulated by creditors as a part of the business loan process.

Covenant not to Compete or Non-Compete Clause

A covenant, often found in acquisition agreements, that prohibits the seller from engaging in future business in competition with the entity being sold.

Crowdfunding

Generally, the use of the Internet by small businesses to raise capital through limited investments from a large number of investors.

Crown Jewels

The most highly valued aspects of a business as seen in terms of asset value and profitability. The crown jewels are what set a company a part from its peers—its best product, its most powerful service. Sometimes a buyer acquires a target company solely to gain access to its crown jewels, with no intention of integrating the rest of the target’s assets.

Crown Jewels Defense

A scorched earth hostile takeover defense in which a company sells off its crown jewels in order to forestall an acquisition.

Cumulative Dividends

The owner of preferred stock with cumulative dividends has the right to receive accrued (previously unpaid) dividends in full before dividends are paid to any other classes of stock.

Dawn Raid

A form of hostile takeover in which the would-be acquiror attempts to buy all outstanding shares of a target’s stock as the market opens in the morning.

Dead Hand Provision

A special type of poison pill in which the stock position of the bidder is massively diluted by issuing new stock to every shareholder but them.

Deal Structure

The combination of assets with which an acquisition is financed—can include cash, stocks, notes, consulting agreements, etc.

Debt Financing

The use of borrowed money to finance a merger or acquisition. This can include loans from banks, bonds issued by the acquiring company, or other forms of debt.

Deductible Basket

See Basket (Indemnification).

Defensive Merger

A corporate strategy involving the acquisition of or merger with other firms to forestall a market downturn or impending takeover.

Deferred Financing Cost or Debt Issuance Cost

A fee or commision paid to an investment bank in exchange for their issuance of debt.

Demerger or corporate split or division

A demerger occurs when a branch or division within a business is split off to form its own company. In the case of public companies, some stock is transferred to the new entity.

Dilution

A reduction in the percentage of company ownership of stock caused by the release of new shares into the market.

Divestiture

The sale of a segment of a company to an outside party. Distinct from a demerger because the assets in question are liquidated and do not continue to exist as an independent company.

Due Diligence

The formal process by which an acquiror investigates a target company’s finances before signing an acquisition agreement.

Drag-along right

A merger or acquisition agreement provision that allows a majority shareholder to require the minority shareholders to sell their shares to the acquiror.

EBIT

Acronym standing for Earnings Before Interest and Tax. Calculated by subtracting operating costs from total revenue.

EBITA

Earnings before interest, taxes, and amortization (EBITA) is a measure of company profitability used by investors. EBITA helps compare one company to another in the same line of business and can also provide a more accurate view of the company’s real performance over time.

Earnout

A provision included in some acquisition agreements obligating the the acquiror to make additional payments based on the future performance of the company sold.

Economic Life

The span of time over which an entity expects an asset to remain viable.

Economic Value Add

A measure of a company's financial performance that considers the cost of capital and the value of its assets.

Economy of Scale

Term reflecting the proportional decrease in operating costs accomplished by increasing production.

Economy of Scope

Term reflecting the savings realized by manufacturing multiple goods together instead of separately.

Empire Building

An acquisition strategy motivated solely by perceived increases in prestige or status implicit in company growth.

Employee Stock Ownership Plan (ESOP)

A benefit plan providing workers with a stock interest in the employing company.

Enterprise Value (EV)

The value of a company calculated as market capitalization plus long-term debt minus cash and short-term investments. Intended to represent the total cost an acquiror would pay to take over a business.

Equity Carve Out or Split-off IPO

A type of demerger in which a company creates a new entity out one of its subgroups to offer in an IPO. The parent company retains management control.

Equity financing

The use of the acquiring company's own stock or the issuance of new stock to finance a merger or acquisition.

Equity Issuance Fees or Stock Issuance Fees

Fees charged by investment banks to underwrite the release of new stocks to the market.

Excess Purchase Price

The difference between the price paid for a company and the total sum of its assets.

Exercise Price or Strike Price

The price per share at which the owner of a stock is authorized to sell or trade their position.

Fair Market Value

The price of an asset when both buyer and seller are approaching the transaction from a well-informed and unpressured position.

Financial Buyer

A company primarily interested in acquiring for purposes of increased revenue or cash flow. Contrast with Strategic Buyer.

Financial Investor

An investor interested solely in achieving a financial return from an investment, rather than a return coupled with a strategic benefit associated with the investment.

Financing Slack

The difference between the debt that a firm chooses to carry and the optimal debt that it could carry, when the former is less than the latter.

Financing Statement

Document filed with a lender detailing personal prop erty taken as collateral from a borrower. The financing statement, a standard document under the Uniform Commercial Code, is filed with the secretary of state or other designated public official. The document is time stamped, the filing date is noted, and a file number is assigned, placing the public on notice to the lender's claim to the specified collateral.

FINRA (Financial Industry Regulatory Authority)

A private American corporation that acts as a self-regulatory organization that regulates member brokerage firms and exchange markets under the authority of the SEC.

Fire Sale

The sale of merchandise and other assets after a fire at very low prices. It is also used figuratively when merchandise and other assets of companies are sold at very low prices to ensure a fast disposal of surplus items.

Firm Commitment

A commitment by a syndicate of investment banks to purchase all the shares available for sale in a public offering of a company. The shares will then be resold to investors by the syndicate.

Fixed Charge Coverage Ratio

This ratio is used by lenders to compare com mitted fixed payments to available cash flow. Listed here are two actual formulas used by asset-based lenders to illustrate the concept:

1. The ratio calculated on a rolling four-quarter basis of (i) EBITDA to (ii) the sum of (a) cash interest expense, plus (b) cash tax expense, plus (c) current maturities of long-term debt, subordinated debt, and capital leases of the borrower, plus (d) the sum of dividends or distributions paid by the borrower during this period, plus (e) nonfinanced capital expenditures.

2. The ratio of (i) EBITDA plus cash equity minus unfinanced captitalized expenditures made during such period minus cash taxes, dividends and distributions, if any, made during such period to nated debt payments during such period. In this case, senior debt payments include all cash actually expended by borrower to make (a) interest payments on any advances hereunder, plus (b) payments for all fees, commissions, and charges set forth herein and with respect to any advances, plus (c) capitalized lease payments, plus (d) payments with respect to any other indebtedness for borrowed money.

Flip-in

A type of poison pill which allows existing shareholders to buy target company stock at a discounted rate in the event of an attempted takeover.

Flip-over

A poison pill strategy allowing existing target company shareholders to buy acquiring company stock at a discounted rate in the event of a successful takeover.

Flipping

The act of selling shares immediately after an initial public offering. Investment banks that underwrite new stock issues attempt to allocate shares to new investors who indicate they will retain the shares for several months.

Form S-1

Registration statement under the Securities Act of 1933. This form is typically used in conjunction with a company's initial public offering of securities.

Forward Contract

An agreement to buy or sell an underlying asset at a fixed price at a future point in time.

Forward Integration

An acquisition in which the target company uses or retails goods produced by the acquiror.

Founder

A person who participates in the creation of a company. Typically, founders manage the company until it has enough capital to hire professional managers.

Free Cash Flow

The amount of cash a company has after expenses, debt service, capital expenditures, and dividends. Free cash flow measures the financial comfort level of the company as a going concern.

Friends and Family Financing

Capital provided by the friends and family of founders of an early-stage company. Founders should be careful not to create an ownership structure that may hinder the participation of professional investors once the company begins to achieve success.

Friendly Mergers

Acquisitions and mergers taking place as a result of negotiation and mutual interest rather than hostile takeover.

Full Ratchet

An antidilution protection mechanism whereby the price per share of the preferred stock of investor A is adjusted downward due to the issuance of options, warrants, or securities to new investor B at a price lower than the price investor A originally received. Investor A's preferred stock is repriced to match the price of investor B's option, war- rant, or securities. See broad-based weighted average ratchet; narrow- based weighted average antidilution.

Fully Diluted Basis

A methodology for calculating any per-share ratios whereby the denominator is the total number of shares issued by the company on the assumption that all warrants and options are exercised and that all convertible securities have been converted.

Fully Diluted Shares Outstanding

The total number of shares outstanding after all convertibles and options are exercised.

Fundamental Rep

A representation typically made in a purchase agreement that is deemed to be most important and correct. Typical examples include title to assets, authorization and power to execute the agreement, capital structure, and taxes.

Funded Debt

A liability resulting from a financing transaction in which cash was loaned to the business, as opposed to a liability created as a result of company operations. Examples include a bank credit facility, subordinated note from a lender, or a note payable to an investor. Examples that are not funded liabilities include accounts payable or accrued payroll.

Fund of Funds

An investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities.

Generally Accepted Accounting Principles (GAAP)

A voluminous set of standards, interpretations, opinions, and bulletins developed by the Financial Accounting Standards Board.

General Partner (GP) See business structures.

Godfather Offer

An offer made by an acquiror to a target which is too good to refuse.

Going-concern Value

The value of a company to another company or individual in terms of an operating business. The difference between a company's going-concern value and its asset or liquidation value is deemed goodwill and plays a major role in mergers and acquisitions.

Golden Parachute

A large payment or other financial compensation guaranteed to high-level executives should they be dismissed as the result of a merger or takeover.

Golden Parachute

A contractual clause in a management contract that allows the manager to be paid a specified sum of money in the event the control of the firm changes.

Goodwill

An intangible benefit resulting when a company acquires a target at a premium.

Gray Knight

A follow-up bidder in a public offering which attempts to take advantage of problems between the target and initial bidder. The gray knight often offers itself as an alternative to the black knight in an attempted hostile takeover.

Greenmail

A form of extortion in which a substantial block of shares in a business is purchased by an unfriendly company, which then forces the target company to repurchase the stock at an inflated price to prevent takeover.

Grossing Up

An adjustment of an option pool for management and employees of a company that increases the number of shares available over time. This usually occurs after a financing round whereby one or more investors receive a relatively large percentage of the company.

Gross Margin

Revenue associated with the sale of a product or service less the direct costs of providing the product or service.

Growth CAPEX

The amount of CAPEX greater than the maintenance CAPEX that is required to support a business's near- to mid-term growth plans.

Growth Stage

The stage of a company when it has received one or more rounds of financing and is generating revenue from its product or service. Same as middle stage.

Haircut

Reduction in value taken by one party in order to compensate another party or facilitate a transaction.

Hair on the Deal

Refers to certain negative or less-than-desirable attributes, situations, events, or characteristics of a transaction (or the target of an investment or acquisition), particularly those that create additional risk for the buyer or investor.

Hamburger Helper Bridge

A colorful label for a traditional bridge loan that includes the right of the bridge lender to convert the note to preferred stock at a price that is a 20% discount from the price of the preferred stock in the next financing round.

Hart-Scott-Rodino Act

A law permitting the Federal Trade Commission and the U.S. Department of Justice to examine potential investments and acquisitions and to deny permission to the companies to consummate the proposed transaction where they determine that the transaction has the potential for reducing competition in an industry or business segment.

Harvest

To generate cash or stock from the sale or IPO of companies in a private equity portfolio of investments.

Heads of Agreement

(HOA) Another term for letter of intent. Typically used in the UK, Australia, and New Zealand.

Heads of Terms See heads of agreement.

Hedge

A transaction that reduces the risk of an investment.

Hockey Stick

The general shape and form of a chart showing revenue, customers, cash, or some other financial or operational measure that increases dramatically at some point in the future. Entrepreneurs often develop business plans with hockey stick charts to impress potential investors.

Holding Period

The length of time an asset (property) is held by its owner. The holding period for short-term capital gains and losses is one year or less. The holding period for long-term capital gains and losses is more than one year. To figure the holding period, begin counting on the day after you receive the property and include the day you dis- posed of it.

Holding company

A company formed to buy or hold majority shares in other companies.

Horizontal Merger

A merger between two companies in the same industry.

Hostile Takeover or Corporate Raid

Any merger or acquisition undertaken without the support of management at the target company.

Hot Assets

The term hot assets is not found in the tax code but is used to define assets that have an ordinary income taint when a partnership interest (a capital asset) is sold. Since 1997, hot assets in the sale of a partnership interest are unrealized receivables and inventory items of the partnership. When gain is recognized with certain partnership distributions, the hot asset definition is modified to include unrealized receivables and substantially appreciated inventory.

Hot Issue

Stock in an initial public offering that is in high demand.

House of Issue

The investment bank that underwrites an IPO.

Hurdle Rate

A minimum rate of return required before an investor will make an investment.

Identifiable Assets

All company assets—both tangible and intangible—which can be assigned a fair value.

Incidental Damages

Damages that are awarded as compensation for the buyer's commercially reasonable expenses resulting from a breach by the seller. Examples include the costs of handling, shipping, and replacing faulty inventory, costs associated with restatement of the seller's financials, and the costs associated with bringing the seller into compliance with applicable regulations.

Indemnification

Where one party (typically the seller) agrees to reimburse the other (typically the buyer) for any losses they incur as a result of the transaction.

Indicative Offer

Short-form term sheet in which a potential investor, partner, or acquirer provides a target with an informal description of the material terms and conditions of an offer.

Information Asymmetry

An imbalance that arises any time one party to a transaction or agreement has more or better information than others.

Initial Public Offering (IPO)

The first offering of stock by a company to the public. New public offerings must be registered with the Securities and Exchange Commission.

Insider Information

Material information about a company that has not yet been made public. It is illegal for holders of this information to make trades based on it, however received.

Inside Round

A round of financing in which the investors are the same investors as the previous round.

Insiders

Directors and senior officers of a corporation-in effect, those who have access to inside information about a company. An insider also is someone who owns more than 10% of the voting shares of a company.

Insolvency Risk The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk.

Insolvent

Unable to pay debts (i.e., a firm's liabilities exceed its assets).

Installment Sale

A sale of property where you receive at least one payment after the tax year of the sale. If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. This method of reporting gain is called the installment method. You cannot use the installment method to report a loss. You can choose to report all of your gain in the year of sale.

Institutional Investors

Organizations that invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds.

Intangibles

Non-physical business assets including patents, trademarks, business methodologies, brand recognition and public goodwill.

Interlocking Shareholdings or Cross Shareholdings

The mutual exchange of shares between a group of companies—meant to bond the companies together without actually merging them.

Interest

The price paid for borrowing money. It is expressed as a percentage rate over a period of time and reflects the rate of exchange of present consumption for future consumption. Also, a share or title in property.

Interest Coverage Ratio

Earnings before interest and taxes divided by the interest expense. The interest coverage ratio is a measure of the firm's capacity to service its interest payments, with higher coverage ratios representing more safety.

Interest Coverage Test

A debt limitation that prohibits the issuance of additional long-term debt if the issuer's interest coverage would, as a result of the issue, fall below some specified minimum.

Interest Deduction

An interest expense, such as interest on a margin account, that is allowed as a deduction for tax purposes.

Interest Expense

The money a corporation or individual pays out in interest on loans.

Interest in Arrears

Interest that is due only at the maturity date rather than periodically over the life of the loan.

Interest-only Loan

A loan in which payment of principal is deferred and interest payments are the only current obligation.

Interest Tax Shield

The reduction in income taxes that results from the tax- deductibility of interest payments.

Interim Statement

A financial statement that reflects only a limited period of a company's financial statement, not the entire fiscal year.

Internal Finance

Finance generated within a firm by retained earnings and depreciation.

Internal Growth Rate

The maximum rate a firm can expand without outside sources of funding. Growth generated by cash flows retained by the company.

Internal Rate of Return (IRR)

The interest rate that is applied to a stream of cash outflows and inflows that causes the sum of the outflows and inflows to equal zero.

International Accounting Standards Board (IASB)

In March 2001, the International Accounting Standards Committee (IASC) Foundation was formed as a not-for-profit corporation incorporated in the state of Del- aware. The IASC Foundation is the parent entity of the International Accounting Standards Board, an independent accounting standard-setter based in London, UK. On April 1, 2001, the International Accounting Standards Board (IASB) assumed accounting standard-setting responsi- bilities from its predecessor body, the International Accounting Stand- ards Committee.

International Financial Reporting Standards (IFRS)

A set of accounting standards, developed by the International Accounting Standards Board (IASB), that is becoming the global standard for the preparation of public company financial statements.

Intrinsic Value of a Firm

The present value of a firm's expected future net cash flows discounted by the required rate of return.

Intrinsic Value

The value of a company according to a close analysis of its finances rather than its market rate.

Inventory Turnover

A measure of how often a company sells and replaces its inventory. It is the ratio of annual cost of sales to the latest inventory. One can also interpret the ratio as the time for which inventory is held. For example, a ratio of 26 implies that inventory is held, on average, for two weeks. It’s best to use this ratio to compare companies within an industry because there are huge differences in this ratio across industries.

Invested Capital

Total assets minus non-interest-bearing liabilities. This term is used in the calculation of return on invested capital (ROIC).

Investment Banks

Financial intermediaries who perform a variety of services, including aiding in the sale of securities, facilitating mergers and other corporate reorganizations, acting as brokers to both individual and institutional clients, and trading for their own accounts.

Investment Tax Credit

A tax credit provided by some states for investments made into qualified investments.

Investment Thesis/Investment Philosophy

The fundamental ideas that determine the types of investments that an investment fund will choose in order to achieve its financial goals.

Issuer

A company that sells its debt or equity securities.

Joint and Several

When several persons sign a note, loan, or obligation whereby each person is legally obligated to become liable for the payment of the entire note (versus their prorated share).

Joint Venture

A business arrangement in which multiple parties combine resources in the pursuit of a common interest.

Junior Debt

A loan that has a lower priority than a senior loan in case of a liquidation of the assets of the borrowing company. Also referred to as second lien, last-out participation, or tranche B debt. While subor- dinated debt is technically junior to the senior debt in a company, it typically sits below junior debt and is unsecured.

Junk Bond

A high-risk security, typically issued by companies seeking to raise capital quickly, or by those with poor credit history.

Keogh Plan

A type of pension account in which taxes are deferred. Availa- ble to those who are self-employed.

Kicker

An additional feature of a debt obligation that increases its market- ability and attractiveness to investors.

Killer Bee

Firm or individual who helps a company prepare strategies to prevent hostile takeover.

Later Stage

The stage of a company that has proven its concept, achieved significant revenues compared to its competition, and is approaching cash-flow breakeven or positive net income. The rate of return for venture capitalists who invest in later-stage, less risky ventures is lower than in earlier-stage ventures.

Lead Investor

The investor who makes the largest investment in a financing round and manages the documentation and closing of that round. The lead investor sets the price per share of the financing round, thereby determining the valuation of the company.

Legacy

In the context of M&A and selling companies, legacy is what the seller wants the outcome of an ownership-interest transition to be (whether to a family or a third-party buyer) in nonfinancial as well as financial terms. Elements of this desired outcome typically include how the seller's company is perceived in the marketplace; its ongoing reputation with suppliers, customers, employees, and the community; stakeholders' perception of how and how successfully the transition was made; who the new owners are; and how the company is likely to be operated postclosing.

Leverage

The use of debt to acquire assets, build operations, and increase revenues. By using debt, a company is attempting to achieve results faster than if it used only its cash available from pre-leverage operations.

Letter of Intent (LOI)

A letter of intent (LOI) is a written document that outlines an agreement in principle for the buyer to purchase the seller's business, stating the proposed price and terms. Typically, the business terms of an LOI will be non-binding.

Leveraged Buyout (LBO)

A form of buyout in which a management team uses their own company’s revenue to secure a loan to buy it.

Leveraged Recapitalization

A transaction in which a firm borrows money and either buys back stock or pays a dividend, thus increasing its debt ratio substantially.

Line of Credit

An informal loan arrangement between a bank and a customer allowing the customer to borrow up to a prespecified amount. Also called credit line.

Liquidation

The selling off of all assets of a company prior to the complete cessation of operations. Corporations electing formal insolvency proceedings to liquidate declare Chapter 7 bankruptcy. In a liquidation, the claims of secured and unsecured creditors, bondholders, and preferred stockholders take precedence over common stockholders.

Liquidation Analysis

Consideration of the market factors that influence the values of assets to be liquidated in connection with the cessation of a going concern's operations.

Liquidation Balance Sheet

A company's balance sheet adjusted to reflect reductions in the value of assets that are normally experienced when the assets of a going concern are sold off after the entity stops conducting business. See liquidation value.

Liquidation Preference

The contractual right of an investor to priority in receiving the proceeds from the liquidation of a company. For example, a venture capital investor with a 2x liquidation preference has the right to receive two times their original investment upon liquidation.

Liquidation Value

The estimated amount of money that an asset or company could quickly be sold for, such as if it were to go out of business.

Liquidity Discount

A decrease in the value of a private company compared to the value of a similar but publicly traded company. Since an investor in a private company cannot readily sell their investment, the shares in the private company are normally valued less than those of a comparable public company.

Liquidity Event

A transaction whereby owners of a significant portion of the shares of a private company sell their shares in exchange for cash or shares in another, usually larger company. For example, an IPO is a liquidity event.

Lobster Trap

A porcupine provision which prevents any shareholder with a 10% or greater interest in a company from converting their securities into voting stock.

Lockup Agreement

Investors, management, and employees often agree not to sell their shares for a specific time period after an IPO, usually 6 to 12 months.

London Interbank Offered Rate (LIBOR)

A short-term interest rate often quoted as a one-, three-, or six-month rate for U.S. dollars. LP See business structures.

M&A

Acronym for mergers and acquisitions. Used in the middle market to mean the buying and selling of companies.

M&A Broker

A term defined by the SEC, an M&A Broker is a person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately held company through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company, to a buyer who will actively operate the company, or the business conducted with the assets of the company.

Maintenance CAPEX

The amount of CAPEX required to sustain a busi- ness's performance at or near its current level of operations.

Management Buyout (MBO)

A leveraged buyout controlled by the members of the management team of a company or a division of a company.

Management Fee

A fee charged to the limited partners in a fund by the general partner. Management fees in a private equity fund typically range from 0.75% to 3% of capital under management, depending on the management type and size of fund.

Management Presentation

A program presented by the officers, directors, or management of a company in connection with a potential equity sale of a business or product line. or debt transaction, strategic or collaborative partnering agreement, or sale of a business or product line.

Management Rights

The rights often required by a venture capitalist as part of the agreement to invest in a company. The venture capitalist has the right to consult with management on key operational issues, attend board meetings, and review information about the company's financial situation.

Mandatory Bid Rule

A rule obligating a new majority shareholder in a business interest to offer to buy any outstanding shares at a fair price.

Marginal Cost

An increase or a decrease in the total costs of a business firm as the result of one more or one less unit of output. Also called incremental cost or differential cost. A firm is operating at optimum output when marginal cost coincides with average total unit cost. Thus, at less- than-optimum output, an increase in the rate of production will result in a marginal unit cost lower than average total unit cost; production in excess of the optimum point will result in marginal cost higher than average total unit cost.

Market Capitalization

The value of a publicly traded company as determined by multiplying the number of shares outstanding by the current price per share.

Materiality Scrape

A materiality scrape is a provision in the indemnification section of an acquisition agreement that removes qualifiers like “material” or “material adverse effect” from the reps and warranties for purposes of indemnification. A “double materiality scrape” is a materiality scrape provision that includes both a breach scrape and a damages scrape. It's common for a materiality scrape provision to cover damages only (and not breaches), a so-called “single materiality scrape,” but not the opposite - breaches only (and not damages).

Memorandum of Understanding (MOU)

Essentially a letter of intent.

Merchant Banker

The bank which brokers an M&A transaction.

Merchant Banking

A merchant bank invests its own capital in leveraged buyouts, corporate acquisitions, and other structured finance transactions. Merchant banking is a fee-based business, where the bank assumes market risk but no long-term credit risk. The Gramm- Leach-Bliley Act allows financial holding companies, a type of bank holding company created by the Act, to engage in merchant banking activities.

Merger

The fusion of two or more existing companies into one new entity.

Mezzanine

A layer of financing that has intermediate priority (seniority) in the capital structure of a company. For example, mezzanine debt has lower priority than senior debt but higher priority than equity. Mezzanine debt usually has a higher interest rate than senior debt and often includes warrants. In venture capital, a mezzanine round is generally the round of financing that is designed to fund the operations of a company to a liquidity event such as an IPO.

Middle Market

Generally refers to companies with revenues from $5 mil- lion to $1 billion. The core of the middle market (or the middle-middle market) is about $150 million to $500 million and the lower-middle market is $5 million to $150 million.

Middle Stage

The stage of a company when it has received one or more rounds of financing and is generating revenue from its product or service. Same as growth stage.

Monetary Assets and Liabilities

Assets and liabilities in which the amounts are fixed in currency units. If the value of the currency unit changes, it is still settled with the same number of units.

Multiple

A valuation methodology that compares public and private companies in terms of a ratio of value to an operations figure such as revenue or net income. For example, if several publicly traded computer hardware companies are valued at approximately two times revenues, then it is reasonable to assume that a start-up computer hardware company that is growing fast has the potential to achieve a valuation of two times its revenues. Before the start-up issues its IPO, it will likely be valued at less than two times revenue because of the lack of liquidity of its shares. See liquidity discount.

Narrow-based Weighted Average Antidilution

A type of antidilution mechanism that adjusts downward the price per share of the preferred stock of investor A due to the issuance of options, warrants, or securities to new investor B at a price lower than the price investor A originally paid. Investor A's preferred stock is repriced to a weighted average of investor A's price and investor B's price. A narrow-based weighted average anti-dilution formula uses only common stock outstanding in the denominator for determining the new weighted average price.

Nasdaq

Formerly an acronym for the National Association of Securities Dealers Automated Quotation system. An electronic quotation system that provides price quotations to market participants about the more actively traded common stock issues in the over-the-counter market. About 4,000 common stock issues are included in the Nasdaq system.

Net Asset Value

The value of a company’s assets minus its liabilities. Often calculated on a per share basis.

Net Book Value

The value at which a company records its assets in its accounting records.

Net Capital Expenditure

The difference between capital expenditures and depreciation. It is a measure of the financing needed, from internal or external sources, to meet investment needs.

Net Operating Income (or loss)

See operating profit (or loss).

Net Operating Profit Less Adjusted Taxes (NOPLAT)

The after-tax operating profits of a company after adjusting the taxes to a cash basis.

Net Present Value (NPV)

The sum of the discounted present values of the expected cash flows of the investment.

Net Working Capital (NWC)

The sum of the current assets of a business (excluding cash) minus the sum of the current liabilities of a business (excluding funded debt). NWC usually excludes related-party transactions of the target entity.

No-shop

A seller is not permitted to initiate or engage in discussions with a competing acquirer, which gives the present acquirer exclusivity (and incentive to pursue the transaction) for defined period of time.

Nonbinding Offer (NBO)

Sometimes referred to as an indicative offer, it is nearly the same as a letter of intent with less detail.

Noncompete

An agreement often signed by employees and management whereby they agree not to work for competitor companies or form a new competitor company for a certain time period after termination of employment.

Noncumulative Dividends

Dividends that are payable to owners of preferred stock at a specific point in time only if there is sufficient cash flow available after all company expenses have been paid.

Nondisclosure Agreement (NDA)

An agreement issued by entrepreneurs to protect the privacy of their ideas when disclosing those ideas to third parties.

Noninterference

An agreement often signed by employees and management whereby they agree not to interfere with the company's relationships with employees, clients, suppliers, and subcontractors for a certain time period after termination of employment.

Nonrecourse

The absence of any legal claim against a seller or prior endorser. The seller (or the endorser of a check or other negotiable document) is not liable or otherwise responsible for payment to the holder.

Nonsolicitation

An agreement often signed by employees and management whereby they agree not to solicit other employees of the company regarding job opportunities.

NOPLAT

See net operating profit less adjusted taxes (NOPLAT).

Normalized EBITDA

EBITDA adjusted with add-backs and other adjustments so that the operating EBITDA of the business fairly represents the financial performance of the business independent of the specific costs related to the owners (in a privately held company). A mental framework from which to view this concept is to consider what costs the business would incur as a stand-alone entity of a larger company, for example, what is market rate compensation for the individual(s) who will replace the current owners or what perks are beyond market expectations that would go away when the current owner no longer works there.

NYSE See New York Stock Exchange (NYSE).

Offer Price

The price per share offered by an acquiror to a target.

Pac-Man Strategy

A takeover defense strategy in which the target company attempts to take over the hostile acquiror.

Par Value

The face value of a bond.

Partial Bid or Partial Tender Offer

A bid issued to purchase a predetermined number of shares in a company at above market price, often as part of a hostile takeover.

Participating Dividends

The right of holders of certain preferred stock to receive dividends and participate in additional distributions of cash, stock, or other assets.

Participating Preferred Stock

A unit of ownership that repays an investor the face amount of the original investment, plus an amount equal to the investor's pro rata ownership of a company.

Partnership

See business structures.

Payables

Accounts payable resulting from purchases of materials and services from vendors and other creditors on credit terms.

Payback

The length of time it will take for nominal cash flows from a project to cover the initial investment.

Pay to Play

A clause in a financing agreement whereby any investor that does not participate in a future round agrees to suffer significant dilution compared to other investors. The most onerous version of pay to play is automatic conversion to common shares, which in essence ends any preferential rights of an investor, such as the right to influence key management decisions.

PEG

Abbreviation for private equity group.

Piggyback Rights

The rights of an investor to have shares included in a registration filed with the SEC.

PIK

Abbreviation for payment in kind.

Pink Sheets

Refers to over-the-counter trading. Daily publication of the National Quotation Bureau that reports the bid and ask prices of thousands of OTC (over-the-counter) stocks, as well as the market makers who trade each stock.

PIPE

See private investment in public equities (PIPE).

Placement Agent

A company that specializes in finding institutional investors who are willing and able to invest in a transaction. Management typically hires a placement agent so the managers can focus on operating their company rather than on raising capital.

Platform

A company acquired by a private equity group as an entry into a particular market or industry. A platform company is usually a relatively significant investment for the PEG, and is likely the buyer of add-on businesses as part of a buy-and-build strategy.

Poison Pill or Shareholder Rights Plan

A specific variety of porcupine provision which involves offering discounted stock prices to existing shareholders in an attempt to make any hostile takeovers overly costly. Poison pill provisions are usually triggered when an unwanted bidder acquires a company standing in the range of ten to twenty percent.

Poison Put

A type of porcupine provision which allows bondholders to sell their bonds back at a premium, rendering a potential takeover costlier.

Porcupine Provision or Shark Repellent

Any strategy used by a company to discourage hostile takeover.

Portfolio Company (portco)

A company that has received an investment from an investment fund.

PPM

See private placement memorandum (PPM).

Preference

Seniority, usually with respect to dividends and proceeds from a sale or dissolution of a company.

Preferred Stock

A type of stock that has certain rights that common stock does not have. These special rights may include dividends, participation, liquidity preference, antidilution protection, and veto provisions, among others. Private equity investors usually purchase preferred stock when they make investments in companies.

Premium

The amount by which the price paid in a merger or acquisition exceeds the market value of the target company.

Private Equity

Equity investments in nonpublic companies.

Private Investment in Public Equities (PIPE)

A PIPE is a transaction in company, usually below the listed market price. The stock is registered with the SEC so that it may later be resold to the public.

Private Placement

The sale of a security directly to a limited number institutional and qualified individual investors. If structured correctly, a private placement avoids registration with the Securities and Exchange Commission.

Private Placement Memorandum (PPM)

A document explaining the details of an investment to potential investors. For example, a private equity fund will issue a PPM when it is raising capital from institutional investors. Also, a start-up may issue a PPM when it needs growth capital. Same as an offering memorandum.

Private Securities

Securities that are not registered with the Securities and Exchange Commission and do not trade on any exchanges. The price per share is negotiated between the buyer and the seller (the issuer). Shared or divided according to a ratio or in proportion to participation,

Pro rata

Shared or divided according to a ratio or in proportion to participation.

Prospectus

Formal written document to sell securities that describes the plan for a proposed business enterprise, or the facts concerning an existing one, that an investor needs to make an informed decision. Prospectuses are used by mutual funds to describe fund objectives, or circular. risks, and other essential information. Also called an offering circular or circular.

Pro Forma Earnings per Share

The predicted earnings per share should an intended merger or acquisition proceed according to plan.

Pro Forma Shares Outstanding

The predicted number of shares outstanding following the completion of a merger or acquisition.

Program Trading

A type of securities trading carried out by a computer program. Typically consists of the simultaneous execution of baskets of stocks according to predetermined market conditions.

Proxy Fight or Proxy Battle

A shareholder insurrection against corporate governance. Occurs when enough shareholders get together to win a corporate vote.

Prudent Man Rule

A fundamental principle for professional money management, which serves as a basis for the Prudent Investor Act. The principle is based on a statement by Judge Samuel Putnam in 1830: "Those with the responsibility to invest money for others should act with prudence, discretion, intelligence and regard for the safety of capital as well as income."

Public and Private Information

Public information refers to any information that is available to the investing public, whereas private information in the firm. Private information is information that is restricted to only insiders or a few investors

Purchase Order (PO)

Financing Credit obtained from a third party based on advancing a portion of the proceeds of the company's potential sale in connection with the promise by a customer that products or services will be purchased in specific quantities.

Purchase Price Allocation

The breakdown of the total purchase price of a target company into expense categories such as goodwill, property, equipment, and net tangible assets.

Purchase Price Adjustment (PPA)

A common deal feature whereby the transaction consideration is adjusted shortly after closing in accordance with a specified financial metric, given such metrics are generally estimated at the time of closing and more accurately calculable after a certain amount of time after closing. While there are a number of metrics used to determine the adjustment, the most common is some variation of a net working capital formula. The adjustment can be in favor of either the buyer or selling shareholders.

Puts

The right to sell an underlying asset at a price that is fixed at the time the right is issued and during a specified time period.

Qualified Opinion

An auditor's opinion expressing certain limitations of an audit. The opposite of unqualified opinion.

Quartile

One-fourth of the data points in a data set. Often, private equity investors are measured by the results of their investments during a particular period of time. Institutional investors often prefer to invest in private equity funds that demonstrate consistent results over time, placing in the upper quartile of the investment results for all funds.

Quick Ratio or Acid Test

A measure of liquidity obtained by dividing liquid assets by total liabilities.

Quiet Period

Refers to the period of time during which a company makes no public comments, and approximates the period of time during which a company has a registration statement filed with the SEC. Same as waiting period.

Raider

An individual or corporate investor who intends to take control of a company (often ostensibly for greenmail) by buying a controlling interest in its stock and installing new management. Raiders who accumulate 5% or more of the outstanding shares in the target company must report their purchases to the SEC, the exchange of listing, and the target itself.

Ratchet

A mechanism to prevent dilution. An antidilution clause is a contract clause that protects an investor from a reduction in percentage ownership in a company due to the future issuance by the company of additional shares to other entities. A ratchet protects an investor by reducing the effective purchase price paid by the investor to the lowest price paid by a subsequent investor for options, warrants, or securities.

Realization Ratio

The ratio of cumulative distributions to paid-in capital. The realization ratio is used as a measure of the distributions from investment results of a private equity partnership compared to the capital under management.

Recapitalization

The process of restructuring a company's capital structure, often through a merger or acquisition.

Receivables

Accounts receivable resulting from sales of products or services

Reconstruction

A corporate action in which a company substantially restructures its debts in order to mitigate financial harm and improve business functioning.

Recourse

A type of loan. If a loan is with recourse, the lender has the ability to fall back to the guarantor of the loan if the borrower fails to pay. For example, Bank A has a loan with Company X. Bank A sells the loan to Bank B with recourse. If Company X defaults, Bank B can demand that Bank A fulfill the loan obligation.

Redeemable Preferred

Preferred stock that can be purchased by a company in exchange for a specific sum of money, or preferred stock that an investor can force a company to repurchase.

Redemption or Call

The right of the issuer to force holders on a certain date to redeem their convertibles for cash. The objective usually is to deadline. Typically, an issue is not called away unless the conversion price is 15 to 25% below the current level of the common shares. An exception might occur when an issuer's tax rate is high, and the could replace it with debt securities at a lower after-tax cost.

Redemption Rights

The right of an investor to force a company to buy back the shares issued as a result of the investment. In effect, the investor has the right to take back their investment.

Registration

The process whereby shares of a company are registered with the Securities and Exchange Commission under the Securities Act of 1933 in preparation for a sale of the shares to the public.

Registration Rights

The rights of investors to have their shares included in a registration. Demand rights are granted to investors to permit the inves- tors to force management to register the investors' shares for a public offering. Piggyback rights are granted to investors to permit the inves- tors to add their shares to a registration statement filed by the company on behalf of the company or on behalf of other investors.

Regulation D (Reg D)

An SEC regulation that provides a safe harbor from the registration requirements of the Securities Act of 1933. An unlimited number of accredited investors may participate, but only 35 nonaccredited investors can participate.

Regulation S (Reg S)

An SEC regulation that governs offers and sales of securities made outside the United States without registration under the Securities Act of 1933.

REIT See real estate investment trust (REIT).

Representations and Warranties

Representations are statements of fact by the seller regarding the condition of its business, covering virtually all aspects of the company. Warranties are the seller's assurances to the buyer that the representations are true, and that if they are not, the buyer will be entitled to seek legal remedies.

Representations and Warranties Insurance (RWI)

This insurance provides coverage for breaches of representations and warranties given in purchase agreements. RWI protects the buyer or seller from financial loss if misrepresentations are made during transactions.

Reserve

1. In asset-based lending, the difference between the value of the collateral and the amount lent. From the point of view of financial statements, reserves are provided as an estimate of liabilities that have a good probability of arising; bad-debt reserve attempts to estimate what percentage of the firm's debtors will not pay (based on previous records and practical experience). Reserves are always a subjective estimate (since they reflect contingent liabilities).

2. An accounting entry that properly reflects contingent liabilities.

Restricted Stock

Shares that cannot be traded in the public markets. In some instances these shares are subject to transfer restrictions in the private market.

Restructure

A transaction or series of transactions associated with re-arranging the debt or equity structure of a company, and typically associated with poor financial performance of the company.

Return on Assets (ROA)

An indicator of profitability. Determined by dividing net income for the past 12 months by total average assets. The result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets).

Return on Equity (ROE)

An indicator of profitability. Determined by dividing net income for the past 12 months by common stockholder equity (adjusted for stock splits). The result is shown as a percentage. Investors use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets (ROA) multiplied by financial leverage (total assets/total equity).

Return on Invested Capital (ROIC)

NOPLAT divided by invested capital. Invested capital is calculated by subtracting non-interest-bearing liabilities from total assets.

Return on Investment (ROI)

The proceeds from an investment, during a specific time period, calculated as a percentage of the original investment.

Return on Sales (ROS)

A measurement of operational efficiency equaling net pretax profits divided by net sales expressed as a percentage.

Restructuring Charges

One time costs associated with the acquisition of a new business. May include integration expenses, the cost of laying off employees or moving production plants or offices, etc.

Reverse Break-up Fee

A fee paid by the acquiror to the target company if the merger or acquisition is not completed for certain reasons. Also known as a reverse termination fee.

Reverse Merger

A privately held company acquires a publicly traded company and takes on the publicly traded company's name and stock.

Reverse Split

A process by which shares of corporate stock are effectively merged to form a smaller number of proportionally more valuable shares.

Reverse Termination Fee

See Reverse Break-up Fee.

Sarbanes-Oxley

Corporate regulations resulting from the Sarbanes-Oxley to restore confidence in the financial information provided by publicly traded companies to the investing public. The Act creates a five-member Public Company Accounting Oversight Board (PCAOB), which has the authority to set and enforce auditing, attestation, quality control, and ethics (including independence) standards for auditors of public companies. It also is empowered to inspect the auditing operations of public accounting firms that audit public companies as well as impose disciplinary and remedial sanctions for violations of the board's rules, securities laws, and professional auditing and accounting standards.

Sandbagging

The attempted forestalling of a hostile takeover in the hopes that a white knight will appear.

Scalability

A characteristic of a new business concept that entails the growth of sales and revenues with a much slower growth of organizational complexity and expenses. Venture capitalists look for scalability in the start-ups they select to finance.

Scale-up

The process of a company growing quickly while maintaining operational and financial controls in place.

Schedule K-1

An IRS form sent by legal entities that pay no income taxes to each owner of the entity, indicating the recipient's share of income or loss for the fiscal year.

S corporation See business structures.

Scorched Earth Policy

Any porcupine provision in which a company attempts to make itself less attractive to potential hostile takeovers by alerting its internal finances. This can include selling off assets or taking on high levels of debt, among other activities. Even in the event a takeover is averted, the target will still be damaged.

Secondary Market

A market for the sale of partnership interests in private equity funds. Sometimes limited partners choose to sell their interest in a partnership, typically to raise cash or because they cannot meet their obligation to invest more capital according to the takedown schedule. Certain investment companies specialize in buying these partnership interests at a discount.

Second Lien debt See junior debt.

Securities and Exchange Commission (SEC)

The regulatory body that enforces federal securities laws such as the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended over the years. security A document that represents an interest in a company. Shares of stock, notes, and bonds are examples of securities.

Seed Capital

Investment provided by angels, friends, and family to the founders of a start-up in its seed stage.

Seed Stage

The stage of and a company when it has just been incorporated and its founders are developing their product or service.

Seller Financing

A note payable or loan provided by the seller of a property or business to the purchaser.

Senior Debt

A loan that has a higher priority in case of liquidation of the assets of a company.

Seniority

Higher priority.

Sensitivity Analysis

A method of analyzing equation inputs to determine their effect on output variables.

Series A Preferred Stock

Preferred stock issued by a company in exchange for capital from investors in the A round of financing. The preferred stock has priority over common stock for dividends and the proceeds of any liquidation or sale of a company.

Shell

Usually refers to a company with little or no assets with more than public entity. This shell company is used to acquire or merge 300 shareholders that is formed for the purpose of becoming a de facto privately held company as a vehicle for the private company to become public without an initial public offering.

SIC (Standard Industrial Classification)

A four-digit industry code used by most services in the United States to classify firms. For a broader aggregation, the classification is often done using the first two digits of the code.

Share Deal or Stock Deal

A form of acquisition in which the acquiror purchases the stocks of a target rather than its assets.

Share Exchange Ratio

The number of shares an acquiror issues to target stockholders relative to their pre-existing interest.

Shark Repellent

This provision in the target company's bylaws or charter makes it more difficult for the acquiring company to gain control. For example, the provision might require a supermajority vote of the target company's shareholders to approve the acquisition.

Small Business Administration (SBA)

An agency of the United States government that focuses on aiding, counseling, assisting, and protecting the interests of small businesses. As it relates to financing growth companies, the SBA sometimes provides loans directly and through commercial banks for small businesses.

Small Business Investment Company (SBIC)

A company licensed by the Small Business Administration to receive government loans in order to raise capital to use in venture investing.

Sole Proprietor (SP) See business structures.

Special Purpose Acquisition Company (SPAC)

A company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. Also known as a blank check company.

Spin Off or Spin Out or Starburst

A type of a divestiture wherein a parent company sells off shares in an internal division being brought to public market.

Split Off

A method of corporate reorganization in which shareholders of a parent company are offered to exchange their stock for shares in a new subsidiary or affiliate.

Split Up

The division of a company into two or more parts through stock transfer.

Squire

A squire is a third party

Stalking Horse

A third-party bidder in the investment or acquisition process that is used by a company to obtain a higher share or acquisition price.

Stock

A share of ownership in a corporation.

Stock Consideration

The portion of the purchase price of company paid in shares of the acquiror’s stock.

Strategic Buyer

A company primarily interested in acquiring to enhance company functions, processes, or infrastructure. Contrast with Financial Buyer.

Subsidiary

A company which is owned or controlled by another firm but is left to operate largely on its own terms to preserve branding or customer base.

Successor Liability

Successor liability arises when the acquiring company is liable and responsible for the obligations of the target company. Successor liability can arise in certain circumstances even in an asset deal.

Suicide Pill

A strategy by which a company willing forces itself into bankruptcy to avoid a hostile takeover. The most extreme of all hostile takeover defense strategies.

Supermajority Amendment

A hostile takeover defense strategy which requires a supermajority of voting stockholders (from 67% up) to approve a merger.

Swap Ratio

The ratio at which an acquiring company will offer its own shares in exchange for those of the target company.

Synergies

Cost savings or revenue enhancements anticipated as the result of a merger or acquisition.

Takeover

A type of acquisition in which a company attempts to gain ownership of a target, usually by acquiring a controlling interest in its stock.

Takeover Bid

A corporate action in which an acquiring company offers to buy the stock of a target company and take over its business.

Tender Offer

A public offer to the shareholders of a company to sell their stock at a specified price during a specified window of time. The offered buy price is typically higher than the market rate to encourage shareholders to sell.

Termination Fee

See Break-up Fee.

Tipping Basket

See Basket (Indemnification).

Toehold Position

The purchase of less than five percent of a company’s stock to avoid triggering mandatory reports.

Valuation

The process of determining a company's or asset's worth is often an important factor in deciding to pursue a merger or acquisition.

Vertical Merger

A merger of two companies operating in different stages of the production process in the same industry.

Volume Weighted Average Price (VWAP)

The ratio of volume traded to value traded over a particular time period, usually one day.

White Knight

A friendly acquiror who comes to the rescue of a target company in a hostile takeover.