C Corporation

(USA) A corporation that is subject to taxation as a separate entity. Compare with ‘S Corporation’ and ‘Limited Liability Company.’

Call Option or Call

A contract that gives the holder the right to purchase securities at a specified price during a specified period of time. Compare with ‘Put Option.’

Capital Asset Pricing Model (CAPM)

Determines the cost of equity of a quoted company. This cost depends on the risk free interest rate, return of a market index and security’s volatility, compared to the overall market. See ‘Beta.’

Capital Gain

When an asset is sold at a higher price than that at which it was bought.

Capital Stock or Share Capital

Stock that a company may issue evidencing its equity ownership. The capital stock may be either common stock (USA), ordinary shares (UK), and/or preferred stock or shares. A company’s organizational documents usually indicate the amount of authorized capital stock or share capital that a company may issue.

Capital Under Management

The total amount of funds available to fund managers for future investments plus the amount of funds already invested (at cost) and not yet divested.

Capital Weighted Average IRR

The average IRR weighted by fund size.

Capitalization

Generally accepted as referring to the sum of a company’s long-term debt, stock and retained earnings. Also called “Invested Capital.” The items comprising ‘capitalization’ may vary in different jurisdictions. See also ‘Market Capitalization.’

Capitalization Rate

The discount rate used to determine the present value of a stream of future earnings. Equals normalized earnings after taxes divided by present value, expressed as a percentage.

Capitalization Ratios

The percentage of a company’s total capitalization that each capital component (debt, preferred stock, common stock, other equity) contributes.

Capitalization Table or Cap Table

A table showing the total amount of the various securities issued by a company. This typically includes the amount of investment obtained from each source and the securities distributed -- e.g., common and preferred shares, options, warrants, etc. -- and respective capitalization ratios.

Capped-Style Option

An option with an established profit cap. A capped-style option is automatically exercised when the underlying security closes at or above the option’s cap price for a call, or at or below the option’s cap price for a put.

Captive Fund

A fund in which the main shareholder of the management company contributes most of the capital, i.e., where parent organization allocates money to a captive fund from its own internal sources and reinvests realized capital gains into the fund. Compare with ‘Semi-captive Fund.’ ‘Independent Fund.’

Carried Interest

The percentage of a venture capital fund’s profits allocated to the general partner/ sponsors of the fund as compensation for their entrepreneurial efforts in organizing and running the fund.

Cash Alternative

If the offeror offers shareholders of the target company the choice between offeror securities and cash, the cash element is known as the ‘Cash Alternative.’

Cash Basis

The accounting practice of recording sales and expenses only when cash is actually received or paid out, as opposed to accrual basis. Generally, Cash Basis accounting is simpler than Accrual Basis accounting. See ‘Accrual Basis.’

Cash Flow

Net earnings after tax plus depreciation plus non-cash items.

Cash Flows to Equity Valuation

A variant of the DCF model, where future cash flows to the equity owners of the company are discounted at the cost of the equity, thus directly calculating the equity value.

Cede & Co.

(USA) The nominee of depository trust company that acts as the record owner of securities held in ‘street name’ for a large number of major brokerage firms and other financial institutions. See ‘Street Name’ or ‘Nominee Name.’ See also ‘Depository Trust Company.’

Chapter 11

The part of the U.S. Bankruptcy Code that provides for reorganization of a bankrupt company’s assets.

Chapter 7

The part of the U.S. Bankruptcy Code that provides for liquidation of a company’s assets.

Cheap Stock

Stock (or rights to acquire stock) issued to employees, consultants, promoters, etc., of the issuer at a price lower than the public offering price, particularly if issued within one year prior to the public offering.

Chinese Wall

The term used for the procedures within a multi-dimensional securities firm or universal bank to separate non-public information obtained by the corporate finance department from use by the trading desk, lending functions, or analysts.

Churning

The unethical practice of buying and selling shares simply in order to earn more commission.

City Code

The City Code on Takeovers and Mergers is a non-statutory code regulating takeover activity of publicly traded companies in the UK. See ‘Takeover Code.’

Class Action Suit

A lawsuit brought by one person on behalf of a larger group of individuals, all having the same legal claim.

Class or Class of Securities

Classes of Securities are securities that share the same terms and benefits. Classes of Capital Stock are generally alphabetically designated, e.g., ‘Class C Common Stock’ or ‘Class A Preferred Stock.’

Classified Stock

(USA) The separation of a company’s capital stock into multiple classes (e.g., Class A, Class B, etc.).

Claw Back Option

The right to require repayment of funds set aside for a specific purpose that have been disbursed in a manner inconsistent with or contrary to the rules or agreements governing the disbursement. In the context of an acquisition, a buyer may have ‘Claw Back Rights’ with respect to part of the purchase price if the target company fails to meet agreed upon milestones after the acquisition. In the context of a venture capital fund, investors may have claw back rights if interim distributions result in the fund promoters receiving more than the contemplated carried interest.

Clearstream

An international clearing and settlement organization offering a comprehensive service for bonds and equities – both domestic and cross-border. Clearstream was formed in 2000 from the merger of Cedel International and Deutsche Bank Clearing. Clearstream is now a subsidiary of Deutsche Borse. See ‘Euroclear.’

Cliff Vesting

A feature of some stock option plans and pension plans. When used in stock options, a large portion of the stock options granted by the employer are vested (become the property of the employee) after a certain specified date, rather than vesting gradually over time. When used in pension plans, all matching contributions provided by the employer become the property of the employee after a certain specified date, rather than accrue gradually. See ‘Stock Option.’

Closed Corporation

A corporation in which all of the voting stock is held by a few shareholders, such as management or family members. Also called a ‘Private Company.’

Closed-End Fund

Fund with a fixed number of shares. These are offered during an initial subscription period. Unlike Open-end Mutual Funds, Closed-end Funds do not stand ready to issue and redeem shares on a continuous basis.

Closely Held

A corporation in which most of the stock is held by a small number of shareholders.

Closing or Completion

The date on which a financing or acquisition closes or is formally completed.

Collateral

Securities or other property pledged by a borrower to secure repayment of a loan.

Combination Stock Option Plan

(USA) A plan under which a company can grant both Incentive Stock Options and Non-Qualified Stock Options. See ‘Incentive Stock Options’ and ‘Non-Qualified Stock Options.’

Comfort Factor

An indication of the extent to which an investor can seek to reduce his risk by checking up on aspects of the business such as the state of relationships with its customers or whether its products are highly rated by reputable authorities. Comfort factors can often be provided by due diligence.

Comfort Letter or Cold Comfort Letter

A letter delivered by the auditors for an issuer at the time of a registered public offering which typically (a) confirms certain numerical information in the registration statement which can be derived from the issuer’s financial records, and (b) provides limited negative assurances concerning changes in the issuer’s financial condition since the last audit. See ‘Long Form Report’ and ‘Short Form Report.’

Comment Letter

(USA) A letter prepared by an examiner at the SEC setting forth the SEC’s questions and comments with regard to an SEC filing, such as a registration statement.

Commercial Paper

Commercial Paper

Commission Bancaire et Financiere / Commissie voor het Bank en Financiewezen (CBF)

The Belgian Banking and Finance Commission is the competent authority regulating the securities industry in Belgium. See ‘Competent Authority.’

Commission des Operations de Bourse (COB)

The Commission des Operations de Bourse, or COB, is the competent authority regulating the securities industry in France. See ‘Competent Authority.’

Commitment

A limited partner’s obligation to provide a certain amount of capital to a private equity fund when the general partner asks for capital. See ‘Drawdown.’

Common shares/stock

See ‘Ordinary Shares.’

Common Stock

(USA) The basic form of equity ownership in a corporation. Generally equivalent to ordinary shares in the United Kingdom.

Common Stock Equivalents

Debt and/or equity type securities capable of subscription, exchange or conversion into common stock of the corporation. In calculating dilution, earnings per share, etc., the amount of common stock is often adjusted to reflect conversion of common stock equivalents.

Common Stock Ratio

A company’s common stock divided by its total capitalization, expressed as a percentage.

Compagnie des Agents de Change 40 Index (CAC-40)

An index based on 40 of the largest and most liquid stocks traded on the Paris Stock Exchange. See ‘Index.’

Company Buyback

Redemption or repurchase by an issuer of its securities.

Compensation Committee

A committee of the board of directors responsible for reviewing and setting the compensation of certain executive officers of the company. The Compensation Committee may also be responsible for the allocation of stock options to employees. The Committee is typically comprised of independent (i.e., non-employee) directors of the company. The definition of an ‘independent’ director may vary from one market to another.

Competent Authority

A term used within directives produced by the European Commission (see ‘Investment Services Directive’ and ‘Prospectus Directive’) to describe a body that has been identified by a member state of the European Union as being responsible for specified functions related to the securities market within that member state. Areas of competence include the recognition of firms permitted to offer investment services, approval of prospectuses for public offerings, recognition and surveillance of stock markets, etc. A member state may nominate different competent authorities for different areas of responsibility.

Completion or Consummation

The moment when legal documents are signed. Normally, also the moment at which funds are transferred by investors.

Compliance

The process of ensuring that any other person or entity operating within the financial services industry complies at all times with the regulations currently in force. Many of these regulations are designed to protect the public from misleading claims about returns they could receive from investments, while others outlaw insider trading. Especially in the UK, regulation of the financial services industry has developed beyond recognition in recent years.

Conditions Precedent

Certain conditions a venture capitalist may insist be satisfied before a deal is completed. See also ‘Comfort Factor.’

Confidentiality and Proprietary Rights Agreement

An agreement by which an employee, customer, or vendor agrees not to disclose the company’s trade secrets or other confidential information to any third party or to use such trade secrets or confidential information other than in connection with company business. Also referred to as a ‘Non-disclosure Agreement.’ If such an agreement is made between a company and its employee, the employee typically also agrees to convey to the company all inventions which the employee develops while employed by the company, and represents that the employee is not bound by obligations to a former employer that would restrict the employee’s services to the company.

Conflict of Interest

Term used when fiduciaries also have a private interest or potential gain in a matter.

Connected Persons

Companies related by ownership or control of each other or common ownership or control by a third person or company, and individuals connected by family relationships, or, in some instances, by existing business relationships (such as individuals who are partners).

Consolidated Financial Statements

Financial statements for a company and all of its subsidiaries as if for a single enterprise rather than for the company on a stand-alone basis.

Contributed Capital

Contributed capital represents the portion of capital that was initially raised (committed by investors) which has been drawn down in a private equity fund.

Conversion

The act of exchanging one form of security for another security of the same company (i.e., preferred stock for common stock, debt securities for equity.)

Conversion Parity

The equal dollar relationship between the price of a convertible security and that of the underlying security into which it can be converted. As an example, if a $1,000 debt instrument is convertible into 50 shares of common stock, conversion parity occurs when the common stock price is at $20.00 per share. If the prevailing common stock price is other than $20.00 per share, conversion parity does not exist.

Conversion Premium

The dollar or percentage amount by which the price of the convertible security exceeds the current market value of the common stock into which it could be converted.

Conversion Ratio

The ratio indicating the number of underlying securities that can be acquired upon exchange of a convertible security.

Conversion Rights

Rights by which preferred stock “converts” into common stock. Usually, one has this right at any time after making an investment. Company may want rights to force a conversion upon an IPO; upon reaching of certain sales or earnings’ targets, or upon a majority or supermajority vote of the preferred stock. Conversion rights may carry with them anti-dilution protections.

Convertible Debt or Convertible/Equity Related Loan

A debt obligation of a company that is convertible into stock.

Convertible Preferred Stock

Preferred stock that is convertible into common stock.

Convertible Security

A financial security (usually preferred stock or bonds) that is exchangeable for another type of security (usually ordinary shares) at a fixed price. The convertible feature is designed to enhance marketability of preferred stock as an additional incentive to investors.

Cooling-off Period

(USA) A delay imposed informally by the SEC before declaring a registration statement effective in those cases where it believes the issuer has engaged in ‘gun-jumping’ or other impermissible marketing activities in relation to a public offering. The delay, which can be anywhere from a few days to 30 days or more, is to allow the effect of the promotional activities to dissipate and the market to ‘cool off.’ This is different from the waiting period and quiet period. The basic concept of a cooling-off period exists in other markets, although its exact meaning may vary from market to market. See ‘Gun-Jumping.’ ‘Quiet Period,’ and ‘Waiting Period.’

Corporate Venturing

There is no single definition of corporate venturing that seems to satisfy all parties, so we distinguish indirect corporate venturing – in which a corporate invests directly in a fund managed by an independent venture capitalist – from a direct corporate venturing program, in which a corporate invests directly by buying a minority stake in a smaller, unquoted company.

Co-sale Agreement

See ‘Tag Along Agreement.’

Co-sale Provisions or Rights

Allows investors to sell their shares of stock in proportion to and on the same terms as the founders, managers, or other investors, should any of those parties receive an offer.

Cost Basis

See ‘Basis.’

Covenants

Provisions in a venture capital investment agreement, underwriting agreement, or other financing document whereby the investee company agrees whether or not to do something in the future. Covenants may remain in effect as long as the investors hold a stated amount of securities or may terminate on the occurrence of certain events (i.e., completion of a public offering). Affirmative covenants define acts that the company must perform, and may include payment of taxes, maintenance of corporate existence, insurance, property and equipment, environmental and legal compliance, representation of venture capital firm on the board, etc. Negative covenants define acts that the company may not perform, and could include a prohibition on mergers, sale or purchase of assets, amendments to its organizational documents, incurring of indebtedness, issuance of securities, distributions and redemption of securities, etc.

Cram-down Round

A financing round whereby previous investors, founders, and management suffer significant dilution. Usually as a result of a Cram-down Round, the new investor gains majority ownership and control of the company. Also known as ‘Burn-out Round.’ or ‘wash-out round.’

CREST

The UK’s share settlement system, based in London. In September 2002, CREST merged with Euroclear. See ‘Euroclear.’

Cross-collateralization

When collateral for one loan or obligation is also serving as collateral for other loans or obligations.

Crossover Fund

A mutual fund that invests in both public and private equity.

Cumulative Dividend

A dividend that accumulates if not paid in the period when due and must be paid in full before other dividends are paid on the company’s common stock. See ‘Arrearage.’

Cumulative Preferred Stock

A form of preferred stock that provides if one or more dividends is omitted, those dividends accumulate and must be paid in full before other dividends may be paid on the company’s common stock.

Cumulative Voting

A technique permitted by the laws of some states in the USA that is intended to assure minority shareholder representation on the board of directors. A shareholder is allowed to cumulate votes equal to the number of shares owned multiplied by the number of directors to be elected, and vote them all for one nominee.