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Regulation D (504, 505, 506) Private Placement Offering Glossary - Regulation D and PPM Lawyers

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4 Years with a 1 Year Cliff:

A standard vesting schedule for company founders and workers who are compensated with equity. Under this schedule, 25% of the total equity awarded will vest after one year, and over the next three years the remaining 75% will generally vest on either a quarterly or monthly basis. The one year “cliff” is to incentivize the recipient to stay with the company for at least one year in order to receive any equity.

83(b) Election:

An 83(b) election refers to section 83(b) of the Internal Revenue Code, which allows the receiver of property in exchange for services that is subject to forfeiture (ex: stock that vests over a period of time) to be taxed on its value at the time of receipt instead of when it vests. To be effective, the election must be made within 30 days of receipt of the property. If no 83(b) election is made, each vesting milestone will be a taxable event for the receiver, with the income received calculated as the difference between the fair market value of the portion of stock that vested and the original purchase price of the newly-vested stock.

A

Accredited Investor:

Defined under SEC Rule 501, a party investor that satisfies key income and/or net worth standards.  Typically, in a Regulation D private placement offering , these individuals present lower risk to the issuer in terms of potential liability for non-compliance and fraud.  For certain Reg D rules (i.e., 506), all investors may need to be accredited to forego disclosure materials, such as a private placement memorandum (PPM). As of 2014, the standard is an annual minimum income of $200,000 for the past two years with a reasonable expectation of that income level in the year of the investment  for single investors, or $300,000 for married investors. In terms of net worth, an investor can also be accredited if he/she/it has $1,000,000 excluding of the value of the investor’s primary residence.

All or Nothing Offerings: 

A particular kind of offering where all the offered securities must be sold or the offering is shut down and abandoned, with investor money being returned. These offerings will typically employ an escrow account to hold investor funds until the earlier of: a set deadline or the raising of the target amount.

Amended and Restated Articles of Incorporation or Operating Agreement:

Often, when there is a series A or seed round into a company, that company’s previous formation/governance paperwork, such as a certificate (articles) of incorporation or operating agreement is replaced.  This is usually to facilitate inclusion of previously missing terms, management structure, new stock classes, relative rights and other features of an investor/management relationship.  The Amended and Restated Articles of Incorporation is typically filed with the secretary of state in order to formalize the restatement and amendment of the original articles of incorporation of the startup or mature issuer company (Note: an amended and restated operating agreement typically is not filed with the state).

Angel Fund:

An organization or entity comprised of individual angel investors (usually high net worth individuals) who routinely or semi-routinely invest in extremely early stage or start-up companies, usually for an equity stake in the company, but sometimes for convertible debt.

Angel Investor/Fund:

Usually a high net worth individual who routinely or semi-routinely invests in extremely early stage or start-up companies, usually for an equity stake in the company, but sometimes for convertible debt.

Annual Meeting: 

In setting up private placement offerings, the relationship between management and investors is critical.  At the center of that relationship is the meeting structure and requirements.  An annual meeting is usually statutorily mandated for corporations and is usually the default rule for LLCs. At an annual meeting, the shareholders elect members of the Board of Directors and vote on other important corporate issues.

Anti-Fraud Provisions under Securities Laws:

Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 impose required disclosures upon issuers for investors in their securities offering and sales. These provisions are often mirrored or complimented on the state level.

AntiDilution:

A provision or set of provisions that protect investors (typically venture capital investors) from dilution of their equity holdings by additional issuances of securities by the company at a lower price per security than the investors actually paid.  These provisions typically call for a conversion of the equity securities held by the investors based on a particular formula.  These formulas often take the following form: 1) Full Ratchet; 2) Weighted Average; 3) Broad-based Weighted Average; or 4) Narrow-Based Weighted Average.

Associated Person:

A party who is a director, officer, manager, or employee of a securities issuer in a private placement offering.

Articles of Incorporation (sometimes referred to as “Certificate”):

The charter document(s) that are filed with a state to commence the legal existence of a corporation. These documents typically contain the following key items: the corporation’s legal name, address, number of authorized (but not issued) shares, address, registered agent address, etc. (each state may vary somewhat in what information is recited).

Articles of Organization:

The charter document that is filed with a state to commence the legal existence of a limited liability company. This document typically contains the following key items: the LLC’s legal name, LLC address, registered agent address, etc. (each state may vary somewhat in what information is recited).

Authorized Shares or Membership Interests:

The ceiling imposed on the maximum number of equity interests an LLC or corporation has authority to actually issue as set in the corporation’s articles of incorporation or the LLC’s articles of organization.

Automatic Conversion:

A typical clause in convertible securities (such as a convertible note) that specifies a trigger event upon which a class of securities held by an investor is automatically converted into another class (or debt into securities). For example, many convertible notes commonly contain an automatic conversion upon a Qualified Financing (a minimum threshold investment into the company).

B

Bankruptcy:

The financial state whereby a company is unable to pay its debts as well as the legal process aimed at responsibly implementing an exit framework for the company’s creditors.

Best Efforts Offering:

This is a particular type of private placement securities offering (typically through Regulation D), whereby the issuer makes no guarantee that all of the shares or units will actually be sold. In other words, the issuer (or broker/underwriter) simply pledges to use their “best efforts.” The practical result of this is that the issuer may not raise enough money for particular undertaking, and belatedly, they may be able to spend money as it is raised.

Blue Sky Laws:

A critical component of the overall Regulation D private placement process, whereby various states are provided notice as to the issuer soliciting, and/or selling securities to residents within that state. Each state typically has its own Blue Sky Law and securities regulatory agency, coupled with their own set of rules and regulations. Typically, great care has to be made to a sure the issuer’s compliance with these laws, rules and regulations.

Board of Directors:

In a corporation, this is typically that group of individuals elected by the shareholders to oversee high-level management issues related to the company (e.g., the hiring and/or firing of “C-level” executive employees, such as CEOs). 

Board of Advisors:

Typically utilized by early-stage or startup companies, this is a board of knowledgeable and reputable individuals who assist the company in its strategy and act as brand investors for the company.

Bootstrapping:

This term refers to the process by which a company self-finances operations by effectively managing cash flow and expenditures to avoid third-party investment. In some instances, this term refers to company founders financing their own company to their own investment monies.

Broker-Dealer:

A party (either an individual or an institution) that is authorized to purchase or sell securities for itself or on behalf of others. Generally, brokers are registered with the SEC in order to allow them to perform the services for compensation. In private placement offerings, it is common for the officers of the issuer to sell the securities of issuing company as a particular exception to SEC registration.

Bridge Financing:

This is a short term funding arrangement for early-stage or mature companies that, due to the nature of its time frame, is likely to be supplanted or followed by a more substantial capital investment. 

Business Plan:

A singular document that lays out the value proposition of the business, its strategic goals, its management principles, and how it intends to achieve the strategic goals. It typically lays out in detail overall strategy, competitive landscape, implementation strategies, revenue targets, forecasts, etc. often, a significant amount of materials from the business plan may be incorporated in the company’s private placement memorandum.

Buy-Sell Agreement:

This is an agreement typically used in a corporation that establishes a mechanism for company continuity in the event of a shareholder leaving the company for any reason, including, disability, etc. A common trigger for these agreements to come into play is a bona fide third-party offer by an unrelated arm’s-length purchaser to purchase equity from a shareholder.

Bylaws:

In a corporation, the bylaws are rules of corporate governance set forth in a core charter document. These rules can have far reaching implications for the overall management and operation of the corporation (e.g., election and removal of directors, timing, quorum, notice of meetings).

C

C-Corporation:

A type of business entity. The number of owners a c-corporation may have is unlimited, and ownership is represented by shares of stock. C-Corporations are subject to double taxation, which means that the company’s income is taxed twice: once when it is received and again when it is distributed to the shareholders. A c-corporation’s directors, officers, and shareholders are protected from being held liable for the company’s actions except under certain circumstances. The operation of a c-corporation is generally governed by its Certificate of Incorporation and Bylaws, although additional terms may be set forth elsewhere, such as in a Shareholders’ Agreement and/or Investors’ Rights Agreement.

Capital Call:

The contractual right of a company to require its investors to invest additional funds or else face penalties.

Cliff:

A period of time a founder, employee, or contractor must wait before any portion of his or her equity grant will first vest. A typical cliff is for one year.

Collateral:

An asset that is used to secure a loan, meaning that the lender has the right to take the asset if the loan is not repaid. Assets that are typically used as collateral include real estate, equipment, and automobiles.

Convertible Note:

A loan that will convert into equity upon the occurrence of certain events if it is repaid before then. Typically, conversion into equity will happen upon the issuer obtaining an equity financing of at least a certain amount, upon maturity, or at the option of the holder or issuer. Conversion may be at a discount or with a price cap, and will include interest on the debt. Convertible notes are often used as seed financing for startups in order to delay establishing a valuation for the company.

Covenants:

Promises made by a party in an agreement. For example, a company may covenant to an investor that it will offer a portion of any new issuances of stock by the company to the investor first.

D

Distressed Securities:

Debt of a company that are either in or approaching default, or other securities of a company that is experiencing financial or operational distress. Sometimes investors will purchase distressed securities at a deep discount in hopes of taking control of the company, restructuring it, and then selling the distressed securities once the company has recovered.

Down Round:

A fundraising round where the company’s valuation is less than it was during its previous fundraising round.

Drag-Along Rights:

A contractual right that protects majority owners when a majority owner sells its equity to a third party by giving them the right to require minority owners to sell their ownership interest to the third party purchaser on the same terms as the majority owner(s).

Due Diligence:

The investigation conducted by a potential buyer or investor prior to completing a transaction in order to assess its viability and the accuracy of any information provided or representations made.

E

Earnout:

A provision in a contract for the sale of a business that provides that the seller of the business will receive additional compensation based on the performance of the business after the sale, which is usually measured by gross sales or net income. For example, in addition to the purchase price, the seller might also receive 3% of the company’s net income above a certain threshold over the next two years.

EBITDA:

An acronym that stands for Earnings Before Interest, Tax, Depreciation, and Amortization. It is a calculation that is often used to measure actual cash flow for purposes of determining a purchase price for equity.

EIN:

An Employer Identification Number is the federal tax identification number for a business entity. It functions similarly to the way a Social Security Number functions for an individual and is typically obtained soon after the entity is formed, as one is required to open a bank account in the company’s name.

Equity:

A broad term for an ownership interest in a company, including shares in a corporation or membership interests in an LLC.

Escrow:

Assets (typically money) that are held by a third party on behalf of the parties to a transaction, until certain obligations have been fulfilled.

F

Face Value:

The original or stated cost of something. For example, the face value of a stock would be the original price printed on the stock certificate. For bonds, it would be the amount paid to the holder upon maturity. Face value may differ from the market value. Also referred to as “par” or “par value”.

Fair Market Value (FMV):

The price that a reasonable buyer would pay for an asset in an arm’s length transaction, assuming that both buyer and seller both have knowledge of the relevant facts, are acting only in their best interests, and are not under any undue pressure to enter into the transaction.

Fiduciary Duty:

A legal duty to act solely in the interest of a third party with whom you have a relationship. Directors of a corporation owe the company the fiduciary duties of loyalty and care. The duty of loyalty requires that the director put the corporation’s interests ahead of his or her own, such as not taking a business opportunity unless the corporation has passed on it. The duty of care requires directors to exercise good business judgment and exercise ordinary care in operating the company. Another example is that lawyers have a fiduciary relationship with their clients.

Finder’s Fee:

Compensation paid to a person who identifies and facilitates a transaction if the transaction is completed. A typical scenario would be a person who introduces potential investors to a company. The compensation would only be paid to the finder if an introduced investor actually makes an investment in the company.

FINRA:

The Financial Industry Regulatory Authority (FINRA) is a private, self-regulatory organization that oversees the registration of broker-dealers and regulates trading in equities, corporate bonds, securities futures, and options in the United States.

Friends and Family Round:

A fundraising round where the capital is provided by friends and family of the company’s principals. A friends and family round is typically relatively small and only done as the first round of investment for the company.

Fully-Diluted Basis:

A methodology for calculating ownership percentage where the nominator is the number of shares/units owned and the denominator is the total number of shares/units issued by the company on the assumption that all warrants, options, and preferred stocks/units convertible into common stock/units are exercised.

Fund of Funds:

An investment fund with an investment strategy of investing in other investment funds, instead of directly in companies, bonds, commodities, or other securities.

G

GAAP:

GAAP stands for Generally Accepted Accounting Principles, which are the standards for financial accounting set by the Financial Accounting Standards Board. Disclosure and reporting forms filed with the SEC should be prepared using GAAP, and investors will often require that the company’s financial documents are prepared in accordance with GAAP.

General Partner:

A partner in a Limited Partnership that controls the company’s day-to-day operations and is personally liable for the company’s debts.

General Solicitation:

The advertising of the sale of securities to the public. General solicitation is not allowed for companies raising funds under Regulation D exemptions, except under Rule 506(c).

H

Hedge Fund:

A pooled investment fund that may use a number of different investment strategies of varying risk levels in hopes of generating high returns, including hedging against market downturns, investing in asset classes such as currencies or distressed securities, and utilizing return-enhancing tools such as leverage, derivatives, and arbitrage. Hedge funds are typically structured as limited partnerships that only accept accredited investors willing to make a large initial investment.

Holding Company:

An entity that does not have any operations of its own and was created for the sole purpose of owning assets. A holding company will often be used to hold equity in another company that it controls.

Holding Period:

The time between the purchase and sale of an asset or securities, or the length of time in which an investment is held by an investor.

Hostile Takeover:

A type of acquisition or merger where the company’s management does not wish to go through with the transaction. A hostile takeover is usually accomplished via a tender offer to the company’s shareholders or members, such that the acquirer can gain a majority of the company’s ownership and therefore control the management.

I

Illiquid:

A security or other asset that is not easily converted into cash. Securities sold in private placements are considered illiquid because they cannot be sold on the open market, whereas the securities of public companies can be easily sold and are therefore considered to be “liquid”.

Indemnification:

A contractual promise to compensate the other party for any future damage, loss, or injury. For example, a corporation may indemnify its directors by paying their legal fees if they are sued by a third party in the course of performing their duties for the company.

Initial Coin Offering (ICO):

An offering of a cryptocurrency or other digital token to the public by its creator in exchange for fiat money or another, more established cryptocurrency (usually Bitcoin or Ethereum). An ICO may be considered an offering of securities depending on several factors, including whether the token has any other utility outside of the offering at the time of the offering.

Initial Public Offering (IPO):

The first offering of securities by a company to the public, rather than through a private offering. The securities must be registered with the SEC, which involves meeting a number of requirements, filing a prospectus, and making periodic filings. Once a company has “gone public”, the registered securities will be able to be traded by anyone on the open market.

Integration:

A doctrine that applies to offerings under Regulation D, where separate but similar offerings of securities will be seen as one, such that taken together they must meet the requirements of an exemption. This prevents issuers from ignoring the requirements of an exemption by structuring a single offering as separate, smaller offerings.

Intellectual Property:

A creation or invention of the mind protected by law from copying or use by others in order to enable the creator or inventor to to earn recognition or financial benefit from what s/he created or invented. In the United States, intellectual property may be protected under copyright, trademark, patent, and/or trade secret law.

Invention Assignment Agreement:

An agreement that transfers all rights in certain intellectual property related to the business of the company created by a director, officer, member, manager, employee, or contractor in the course of providing services to the company. An Invention Assignment Agreement may be paired with with a Purchase Agreement for stock or units in the company and serve as full or partial consideration for the purchase of company stock or units. May also be referred to as a Technology Transfer Agreement.

J

JOBS Act:

The Jumpstart Our Business Startups Act (“JOBS Act”) is a federal law enacted in 2012 that sought to ease the restrictions of securities laws and regulations for small businesses. Among the reforms authorized by the Act are equity crowdfunding, general solicitation under Rule 506(c), and Regulation A+.

Joinder Page:

A signature page to a document (such as an LLC Operating Agreement or Shareholder’s Agreement) signed by a party that is agreeing to the document at a time after it has already been signed by the other parties.

K

Key Person Clause:

A contractual clause that prohibits an investment fund from making additional investments after certain high-level executives have left until they have been replaced. This insures that investment decisions are made by the most qualified people.

L

Letter of Intent:

A Letter of Intent (LOI) outlines the material terms of an agreement and generally serves as an “agreement to agree” between the parties. It serves a similar purpose as a Term Sheet, but is written in a letter format instead of a chart and/or bullet-points and is typically used in an acquisition context rather than a round of financing.

Leverage:

(1) The use of borrowed funds by a company to acquire assets, build operations, and/or increase revenues in hopes that the company’s increase in value will be greater than the debt incurred.

(2) The amount of power a party has in the negotiation of a contract.

Leveraged Buyout:

When a company is purchased (typically a majority interest in the company) mainly using borrowed funds.

Limited Partner:

A partner in a Limited Partnership that is a passive investor who does not act in any management role for the company. A limited partner’s liability is limited to the amount of that partner’s capital investment.

Limited Partnership:

A business entity that has two classes of owners: general partners and limited partners. The general partner(s) manage the company and are liable for its actions. The limited partners do not have any management rights and are protected from liability. Investment funds are typically set up as LPs, with the management company LLC as the general partner.

M

Management Fee:

A fee that is charged to the limited partners by the general partner of an investment fund, which is calculated as a percentage of the total assets under management of the fund. The general partner is entitled to its management fee regardless of the performance of the fund.

Material Adverse Change:

A clause often found in company purchase or merger agreements allows one party to back out of the deal if there is a change in the business of the other party that will significantly change the value of the deal for the worse. Such a change is called a “material adverse change”.

Milestone:

An operational or financial goal that determines whether the company or one of its founders, employees, or contractors receives something of value. For example, a contractor’s equity vesting schedule may provide that the contractor will receive a certain amount of stock once a certain deliverable is provided and accepted by the company.

Most Favored Nation:

A Most Favored Nation (MFN) clause provides that the contracting party will receive terms that are at least as favorable to it as the most favorable terms given to any other party. For example, if an investor has a convertible note that provides that it will receive a 15% discount upon conversion with a MFN clause and later the company gives another investor a 20% discount on conversion of its note, then the first investor would also receive a 20% discount.

N

No-Action Letter:

A letter written by the staff members of a government agency, such as the Securities and Exchange Commission, on the request of an entity, which states that the agency will not take any action against the entity if it engages in the behavior described by the entity in its request.

Non-Compete:

An agreement to not engage in the same business as another for a set period of time after a business relationship has ended.  Non-competes are typically signed by employees, but may also be made by contractors or business partners.

Non-Disclosure Agreement:

A non-disclosure agreement (NDA) is an agreement where a party agrees to keep another party’s business information confidential, generally in connection with contemplating or performing a business relationship. An NDA can be one-way (only one party has confidentiality obligations) or mutual (both parties agree to keep the information of the other secret).

O

Offering Documents:

The suite of documents given to a potential investor in a company regarding a private placement, which typically includes a purchase agreement, private placement memorandum, and any other documents related to the transaction (such as a convertible promissory note).

Option Pool:

An Option Pool is a set amount of equity that a company has reserved to be awarded to future employees, directors, advisors, and consultants as incentive equity (typically in the form of stock options).

P

Pari Passu:

Latin for “on equal footing”, it means that all will be treated equally. For example, if investors’ capital contributions will be repaid pari passu, then the investors will all each be paid back at the same rate without one having any preference over the others.

Payment-in-Kind (PIK):

A financial instrument that pays dividends or interest with additional equity or debt instead of cash. While the ability to avoid cash payments is generally beneficial to the issuer of the PIK instrument, it is very risky for the investor or holder.

Portfolio Company:

A company that a venture capital fund or other private investment fund has invested in, as it is now a part of the investment fund’s investment portfolio.

Pre-Money Valuation:

The calculation of how much a company is worth prior to an investment round. A company’s pre-money valuation determines the portion of equity in the company an investment will purchase.

Pre-Money Valuation + Total Investment = Post-Money Valuation

Private Placement Memorandum (PPM):

A document given to potential investors that explains the company’s management, its business plan, financial information, the terms of the investment, what the investment funds will be used for, and the risks of investment.

Prospectus:

A disclosure document that, much like a PPM, provides material information about an investment offering. A prospectus must be filed with the SEC in connection with the registration of securities for sale to the public.

Proxy Vote:

A ballot cast on by one person on behalf of another at a meeting of a corporation’s shareholders or directors. This allows shareholders and directors to vote on corporate matters without attending the annual or a special meeting.

Q

Qualified Financing:

A Qualified Financing is a defined term in a convertible note. It is typically defined as an equity financing by the company in which the aggregate amount of $1,000,000 (or some other amount) is raised by the company from investors. A Qualified Financing provision is used to determine the investment threshold required to trigger the automatic conversion of the convertible note into equity.

Quiet Period:

The length of time between when a company files a registration statement with the SEC and the time the statement is declared effective by the SEC. During this time, the company and its management cannot announce any new non-public information that would cause a reasonable investor to change its position on the company’s stock. are limited in what business information they can release to the public. May also be referred to as the “waiting period”.

Quorum:

A quorum is the minimum number of directors, shareholders, managers, or members that must be present to hold a meeting or vote on company matters. This number is generally set forth in the Bylaws, Shareholder’s Agreement, Operating Agreement, or other organizational document of the company.

R

Rachet:

An anti-dilution mechanism that protects an investor from a reduction in its percentage ownership in a company as a result of the company issuing additional shares to others in the future.

Redemption Right:

The contractual right of an investor to force the company to repurchase his, her, or its interest in the company after a specified period of time. Redemption rights are one of the special rights that may be given to holders of preferred stock.

Regulation D:

The federal exemption from registration most commonly used by startups and private investment funds. Rules 504, 505, and 506 of Regulation D each allow issuers to raise a certain amount of funds via certain means from certain types of investors without registering the securities to be sold with the SEC. Issuers must file a Form D with the SEC and comply with state “blue sky” laws where purchasers reside.

Restricted Stock:

Stock that has restrictions on its transfer and is therefore not freely transferable until certain conditions are met.

Reverse Stock Split:

A corporate action in which the corporation reduces the number of its total outstanding shares by dividing the number of shares and the price per share by a predetermined number. This does not dilute the interest of current shareholders.

Right of First Offer:

A contractual right held by a company owner that requires the company to offer the owner at least the owner’s pro rata ownership in the company to the owner when it issues new securities. This gives the owner the ability to prevent the dilution of his, her, or its interest in the company.

Rule 144:

An SEC rule that allows the public resale of restricted stock, provided that certain conditions are met.

Rule 701:

An SEC rule that allows equity incentives to be given to service providers (whether an employee or a contractor) under a written agreement (such as a stock option plan) without registration of the securities.

Runway:

The amount of time that a company can continue to operate before running out of capital, assuming that all current expenses and income remain the same.

S

S-Corporation:

A C-Corporation that has elected pass-through tax status by filing Form 2553 with the IRS, meaning that its income is only taxed once. S-Corporations operate like C-Corporations, except that (1) they are limited to 100 shareholders, (2) partnerships, corporations, and non-resident aliens may not be shareholders, (3) they may only have one class of stock, and (4) shareholders must receive reasonable compensation for their services.

Secured Debt:

A loan that is backed by collateral. If the borrower cannot pay back the loan, then the lender has the right to take the collateral in order to satisfy the debt. This results in a lower amount of risk for the lender and typically a lower interest rate for the borrower.

Shell Corporation:

A company that does not have any significant assets or active business operations. While not illegal, they may be used for fraudulent or illegitimate purposes.

Staggered Board:

When not all of the directors are elected to the board at the same time. For example, if there are 6 directors who all serve 3 year terms, then 1/3 of the directors would be elected each year, “staggering” their election. Having a staggered board makes it more difficult to complete a hostile takeover, since it will take years to gain full control of the board.

Stock Split:

A corporate action in which the company increases the number of outstanding shares by splitting them into multiple shares. Current shareholders receive additional shares such that their interest in the company is equal to their interest prior to the split.

Subscription Agreement:

The agreement under which an investor agrees to make an investment in a company’s private offering. The subscription agreement is typically provided to potential investors at the same time as the company’s PPM.

Sweat Equity:

When an ownership interest in a company is earned by providing services to the company, rather than by contributing funds or property. Sweat equity is typically earned over time based on certain milestones, such as by working for the company for a certain amount of time or completion of certain deliverables.

T

Tag-Along Rights:

A contractual right that protects minority owners when a majority owner sells its equity to a third party by giving them the right to join in the transaction and sell their minority stakes to the third party purchaser on the same terms as the majority owner. Also referred to as “co-sale rights”.

Term Sheet:

A term sheet is short form, summary version of a particular transaction document (e.g., convertible note, joint venture, share or unit offering, etc.). Typically, it takes the form of a tabular or bullet-point document that summarizes the material terms and conditions of the particular transaction, instrument, or agreement. In many instances, term sheets are not binding. However, there are some instances where a term sheet is expressly, by its own terms, declared as binding, restricting the ability of the parties to the term sheet to change the terms as detailed in the term sheet. The goal of a term sheet is to shorten the drafting time necessary by the lawyers, by agreeing on the major terms beforehand. Once it has been “executed”, it guides legal counsel in the preparation of a proposed “final agreement”.

A more exhaustive article on term sheets is available here.

Time Value of Money:

The idea that money received now is more valuable than the same amount received at a later date due to its potential earning capacity. For example, if you received $100 today and put it in an interest-bearing account, one year later it would be worth more than $100 received a year from now. This idea is also sometimes referred to as present discounted value, since the $100 received a year from now is worth less than $100 now in present day terms.

Trade Secret:

Valuable information used by a business to gain a competitive advantage over its competitors that is not generally known or ascertainable and is kept secret. Trade secrets may include formulas, algorithms, practices, processes, designs, patterns, commercial methods, or compilations of information.

Tranches:

Portions of an overall payment structure in an investment. For example, an investor may invest funds in an initial tranche with additional tranches of investment funds to be paid at a later time or upon the occurrence of some event.

U

Uniform Commercial Code (UCC):

The Uniform Commercial Code, typically referred to as the “UCC”, is a standard set of laws regarding business transactions. The purpose is to regulate commercial transactions across different states, and it has been adopted in whole or in part by most United States jurisdictions. It includes articles on Sales/Leases; Negotiable Instruments; Bank Deposits and Collections/Funds Transfers; Letters of Credit; Bulk Transfers and Bulk Sales; Warehouse Receipes, Bills of Lading and Other Documents of Title; Investment Securities; and Secured Transactions.

Unsecured Debt:

A loan that is not backed by collateral and that does not have any priority over any other debt of the debtor. Unsecured debt has a higher level of risk for the lender than secured debt.

V

Valuation:

The process of determining the value of a company or an asset. Depending on the maturity of a company, its valuation may be based on the valuation of similar companies, how much an investor is willing to pay for an ownership interest, and/or the company’s assets, management, revenues, and other factors.

Vesting Schedule:

A timeline that sets forth how much equity a service provider may earn and when it will be earned. Equity may be earned (or “vest”) based upon how much time has passed, when milestones are completed, or a combination of both.

Voting Rights:

The ability or obligation of shareholders or a class of shareholders to participate in voting on certain matters regarding the corporation, such as who will serve on the board of directors.

W

Warrant:

A warrant is a securities contract that gives the holder the right (but not the obligation) to purchase at a later juncture a set number of securities (typically common stock) at a preset price before within certain time frame. They share characteristics of options for stock purchase rights but are their own particular instrument.  Classically, warrants are used as a “sweetener” or, “kicker” to incentivize a particular transaction involving the purchase of securities. For example, in convertible note transactions, the lender is often incentivized to purchase the convertible note, through the issuance of “cashless exercise” warrant coverage to give them additional free equity at a later juncture.

White Knight:

An individual or a corporation that acquires a company on the verge of a hostile takeover. The white knight is sought out by the company’s management and is preferable to the threatened hostile takeover because the white knight will typically preserve the business and keep the current management in place.

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