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The Outlier Equation · Appendix C

Venture Capital glossary

37 terms, defined the way the book uses them.

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83(b) election
An election to be taxed on restricted stock at grant rather than as it vests; it must be filed within thirty days.

A

Accredited investor
An individual or entity meeting the SEC's income, net-worth, credential, or entity tests for participation in most private offerings.
Anti-dilution protection
An adjustment to a preferred series' conversion price when the company later issues shares at a lower price.
ARR
Annual recurring revenue: contracted recurring subscription revenue on an annualized basis.

B

Burn multiple
Net cash burn divided by net new annual recurring revenue.

C

Carried interest
The general partner's share of fund profits, commonly 20% in venture.
Clawback
An obligation of the general partner to return carry received in excess of its entitlement over the life of the fund.
Continuation vehicle
A new vehicle managed by the same general partner that buys one or more companies from an older fund.

D

Down round
A financing at a lower price per share than the previous round.
DPI
Distributions to paid-in capital.
Drag-along
A right that compels other holders to join an approved sale.

F

Fully diluted shares
All outstanding shares plus options, the available pool, warrants, and, where specified, converting securities.
Fund returner
A single investment whose proceeds equal or exceed the fund's committed capital.

I

IPO ratchet
A provision granting additional shares if an IPO prices below a threshold.

J

J-curve
The pattern of early negative and later positive cumulative cash flows to a fund's limited partners.

L

Liquidation preference
The amount preferred holders receive before common holders in a sale or wind-down.
Lockup
An agreement by pre-IPO holders not to sell for a period, usually about 180 days.

N

Net revenue retention
Revenue from a customer cohort after twelve months, including expansion, contraction, and churn, divided by its starting revenue.
Non-participating preferred
Preferred stock that receives the greater of its preference or its as-converted share, not both.

O

Option pool shuffle
Creating or enlarging the option pool inside the pre-money valuation, so that existing holders bear its dilution.

P

Pay-to-play
A provision penalizing investors who do not take up their share of a new round.
Post-money valuation
The implied value of the company immediately after a financing: investment divided by the new investors' ownership.
Power law
A distribution in which a small number of outcomes account for most of the total value.
Pre-money valuation
Post-money valuation less the new investment.
Pro rata right
The right to invest in later rounds to maintain an ownership percentage.
Protective provisions
Matters requiring a separate vote of the preferred stock.
PME
Public market equivalent: a comparison of a fund's cash flows with the same cash flows invested in an index.

Q

QSBS
Qualified small business stock, eligible for a federal gain exclusion under Section 1202.

R

Recycling
Reinvesting realized proceeds, up to a cap, rather than distributing them.
Reserves
Capital set aside for follow-on investments in existing portfolio companies.

S

SAFE
Simple Agreement for Future Equity: a contractual right to future equity without interest or maturity.
Shadow series
A sub-series of preferred stock issued on conversion of SAFEs or notes with a preference equal to the conversion price.

T

Tender offer
An offer to buy shares from many holders at a fixed price within a set window.
TVPI
Total value to paid-in capital: distributions plus remaining net asset value, divided by paid-in capital.

V

Valuation cap
The maximum valuation at which a SAFE or note converts.
Venture debt
A loan to a venture-backed company, usually with warrants, underwritten mainly on its equity backers.

W

Waterfall
The contractual sequence for allocating proceeds among classes of securities or fund participants.