Anti-dilution Protection: Anti-dilution protection is protection from dilution when shares of stock are sold at a price per share less than the price paid by earlier investors. This is known as price-based anti-dilution protection. Anti-dilution protection, along with the liquidation preference, are two of the fundamental features distinguishing preferred stock typically sold to investors from common stock generally held by founders and employees.

Break-up Fee: A breakup fee, or termination fee, is required to compensate the prospective purchaser for the time and resources used to facilitate the deal. Breakup fees are normally 1-3% of the deal’s value.

Change of Control: A change of control occurs when the ownership changess (often a change of more than 50% of a company’s ownership is considered a change of control). Usually a change of control of a company occurs as part of an M&A.

Co-sale: Co-sale is a contractual obligation used to protect a minority shareholder (usually in a venture capital deal). When a majority shareholder sells stake, the minority shareholder has the right to join the transaction to sell.

Contingency Payment: Contingency payment in a M&A deal, is a portion of the purchase price that depends upon the acquired company’s reaching specific performance targets.

Covenant: A covenant is an indenture that states certain activities will or will not be carried out. The purpose of a covenant is to protect the lender. Covenants can cover everything from minimum dividend payments to working capital level.

Double Trigger Acceleration: A double trigger acceleration is when two events are required to accelerate the vesting schedule of a stock option or restricted stock. Typical triggers include acquisition by another company and termination of employment without cause.

Drag Along Right: A drag along right is a right that enables a majority shareholder to force a minority shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms, and conditions as any other seller.

Earnout: An earnout is a portion of the purchase price that is contingent on future performance. It is payable to the seller after certain predefined levels of sales and/or income are achieved in the years after the sale.

Full Ratchet: Full ratchet is an anti-dilution provision that, for any shares of common stock sold by a company after the issuing of an option (or convertible security), applies the lowest sale price as being the adjusted option price or conversion ratio for existing shareholders.

Generational Changes: Change of control of the private company may also take place without an M&A transaction due to the death of the private company’s Founder and passage of the company to the next generation.

Go-shop: Go-shop is a provision that allows a public company that is being sold to seek out competing offers even after it has already received a firm purchase offer. The original offer then functions as a floor for possible better offers. The duration of a go-shop period is usually about one to two months. Go-shop agreements may give the initial bidder the opportunity to match any better offer the company receives and may pay the initial bidder a termination fee if target companies are purchased by another firm.

Indemnification: Indemnification is the process of securing an agreement between two parties to compensate for any damages or losses.

Indemnity: Indemnity is a contractual agreement made between different parties to compensate for any damages or losses.

Information Rights: Information rights are rights (usually a clause in a venture capital investment agreement) that an investor must demand to receive regular updates from the private company about its financials and operations.

Invention Assignment: An invention assignment is a legal document that acknowledges all IP developed by an employee is property of the company and not the individual.

Investor Rights Agreement: An investor rights agreement details rights a VC typically expects with an investment. It often entails: (1) The right to elect directors to the company’s board of directors; (2) The right to receive various reports and information; (3) The right to have its stock registered for sale in a public offering at the company’s cost; (4) The right to maintain its percentage share ownership in the company by participating in future equity issuances; (5) The right to participate in the sale of any shares made by the founders of the company (“co-sale”)

IPO Participation Rights: IPO participation rights are often sought by pre-IPO venture capitalist investors in order to take advantage of escalating first day trading prices when the company conducts an initial public offering. These participation rights, whether in the form of a firm option or a best efforts undertaking, grant the recipient the right to purchase shares offered in the company’s IPO on the same terms as other IPO participants.

Liquidation Preference: Liquidation preference is used in VC contracts to specify the order and amount each investor get paid in a liquidation event such as a sale. VCs are usually repaid before holders of common stock and before the company’s original owners and employees. for example the VC first must receive 2 or 3x their original investment before all stockholders (including the VCs) in the private company start sharing the proceeds of a sale equally.

Lock-up Period: A lock-up period is a window of time in which investors of a hedge fund or other closely-held investment vehicle are not allowed to redeem or sell shares. The lock-up period helps portfolio managers avoid liquidity problems while capital is put to work in sometimes illiquid investments.

No-shop Clause: A no-shop clause is a clause preventing the owner of the target company from attempting to sell the business to someone else while the two named parties are negotiating. The no-shop provision is good for a set period negotiated between the parties.

Non-compete Clause: A non-compete clause or covenant not to compete, is a term used in contract law under which one party (usually an employee) agrees not to pursue a similar profession or trade in competition against another party (usually the employer).

Non-solicitation: Non-solicitation is an agreement that restricts an individual (usually a former employee) from soliciting either (a) employees or (b) customers of a business after leaving the business.

Pro rata: Pro rata (directly defined as proportionately or in proportion) refers to the allocation of materials or resources to multiple holders based on a proportional scale of ownership

Right of First Refusal (ROFR): Right of first refusal is a contractual obligation by an owner of an asset to offer the initial purchase option to the holder of the rights prior to offering the asset for sale to third parties, allowing existing investors to purchase an asset before it is made available for purchase to others.

Shareholders Agreement: The shareholders agreement is a document that governs the relationship between the startup company and the shareholders. The agreement details the rights of the shareholder with regards to first refusal, transfer rights, and redemption rights.

Single Trigger Acceleration: Single trigger acceleration is a clause in the vesting agreement that shortens the vesting schedule by a pre-designated time after a single event occurs such as a acquisition by another company.

Technology Transfer Agreement: A technology transfer agreement is a purchasing agreement for the rights to own, utilize, and possibly produce technology that was previously owned by another.

Board Seat Changes: Since the Board of Directors controls the company, voluntary changes made to the Board will result in a change of control without a merger, acquisition, or other transformative transaction. Changes in the private company’s Board of Directors may be made for a variety of reasons. For example, the company may need additional expertise in a certain area for example. A Director may also be forcibly removed by due to a conflict of interest, lack of separation, or compensation.

Due Diligence: Due diligence is an investigation or audit of a potential investment. Due diligence serves to confirm all material facts regarding a sale. Generally, due diligence refers to the care a reasonable person should take before entering an agreement or a transaction with another party.

Engagement Letter: An engagement letter is a letter that documents and confirms the auditor’s acceptance of the appointment, the objective and scope of the audit, the extent of the auditor’s responsibilities to the entity and the form of any reports.

Fairness Opinion: A fairness opinion is a report evaluating the facts of a merger or acquisition. Fairness opinions are compiled by qualified analysts or advisors, usually of an investment bank, for key decision makers. The report examines the fairness of the offered acquisition price.

Integration: Integration is when a company expands its business into areas that are at different points of the same production path.

Legal Opinion: A legal opinion is a legal opinion published in a case. For example, if a judge sets a precedent, challenges an existing law, or provides a novel interpretation of the law, a legal opinion would be published. Likewise, legal opinions from high courts, in which judges are called upon to interpret very complex legal challenges, are usually published.

Letter of Intent (LOI): A letter of intent is a letter from one company to another acknowledging a willingness and ability to do business.

Stock Purchase Agreement (SPA): A stock purchase agreement is a legal document made between a shareholder and a startup company that details the transfer and sale of the startup’s stock to the share holder. The agreement discloses the amount of shares purchased, share price, and payment method.

Tender Offer: A tender offer is an offer the acquirer to the general shareholders of the acquiree to purchase a majority of the equity at a premium. Tender offers are an attempt to gain management control through voting equity. Tender offers are less common for private companies than they are for publicly traded companies.

Term Sheet: A term sheet is a list of specifications and requests outlining the material terms and conditions of a contract. A term sheet may include a time-line to completion (close) of the transaction.

Acceleration Clause: An acceleration clause is a provision that allows a lender to demand payment of the total outstanding balance or demand additional collateral under certain circumstances, such as failure to make payments, bankruptcy, nonpayment of taxes on mortgaged property, or the breaking of loan covenants.

Bond: A bond is a debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate.

Bridge Financing: Bridge financing is a short-term loan that is used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short-term (typically up to one year and backed by some form of collateral).

Convertible Debt: Convertible debt is can be exchanged for a specified amount of another related security, at the option of the issuer and/or the holder. It is also called convertible.

Convertible Note: A convertible note is a debt instrument that can be converted into stock at the option of the holder or the issuer. More specifically, the investor can choose to convert the note into equity when an institutional investor (such as a VC) makes an investment.

Debt Financing: Raising money for a business through loans or by issuing bonds.

Debt Refinancing: Debt refinancing is the process through which a company reorganizes its debt obligations by replacing or restructuring existing debts. Refinancing may also involve issuing equity to pay off a percentage of debt. Debt is replaced or refunded by a company with money that is raised by issuing or creating other borrowing. In restructuring, a company works with its creditor to change the terms of a loan; these terms can include the reduction of interest rates, the improvement of covenants or the extension of the loan’s terms.

Debtor in Possession: Debtor in possession (DIP bankruptcy) refers to a company that continues to operate while in the Chapter 11 bankruptcy.

Gross Debt: All interest-bearing debt (both current and long-term).

Junior Debt: Junior debt is debt that is either unsecured or has a lower priority than of another debt claim on the same asset or property.

Leverage: Leverage is the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. Leverage (or gearing) is the amount of debt used to finance a firm’s assets.

Secured Debt: Secured debt is debt that is backed or secured by an underlying asset, which is considered collateral. Collateral is used to reduce the risk associated with lending.

Accredited Investor: An accredited investor is an investor who is financially sophisticated and has a reduced need for the protection provided by certain government filings. Most startups or private companies prefer to raise money or from accredited investors because of the vastly reduced paperwork required to be filed with the SEC, and the far fewer disclosures required to be made in writing to the Investor.

Corporate VC: Corporate VC is money provided by investors to startups with perceived growth potential. This is an important source of funding for startups that do not have access to capital markets.

Financial Buyers: Financial buyers include private equity firms (otherwise known as financial sponsors), venture capital firms, hedge funds, family investment offices and ultra high net worth individuals. These buyers are investors and look to identify private companies with attractive future growth opportunities, durable competitive advantages to invest and realize a return on their investment upon exit via a direct sale or an IPO.

Holding Company: A holding company is a parent corporation that owns enough voting stock in another corporation to control its board of directors (and, therefore, controls its policies and management).

Institutional Investor: An institutional investor is an organization that trades securities in large quantities or dollar amounts that sometimes come with the benefit of scale. Institutional investors face fewer protective regulations because it is assumed that they are more knowledgeable and better able to protect themselves.

Investment Advisor: An investment advisor makes investment recommendations or analysis for a fee. An investment advisor who has enough assets to be registered with the SEC is known as a Registered Investment Advisor, or RIA.

NewCo: The term “NewCo” is usually put into Merger and Acquisition Documents as a generic name for a new company that the M&A transaction will create. Example: “After the merger, XY Capital Partners will then invest $50 million into NewCo.“

OldCo: “OldCo” refers to the acquired company in a Merger and Acquisition documents. For example: “As contemplated in this acquisition, Oracle will form Soft Holdings. After the transaction OldCo will cease to exist as a separate entity.”

Private Company: A private company is a company or corporation whose ownership is private. A private company does not have to meet the Securities and Exchange Commission filing requirements of public companies. Private companies issue stock and have shareholders but their shares do not trade on public exchanges and are not issued to the general public. A private company is treated as a single legal entity with rights and liabilities separate from its owners. Owners and other private investors are shareholders in the private company.

SPAC: A special purpose acquisition company (SPAC) is 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. otherwise known as “blank check companies,”

Stockholders: A stockholders is any person, company or legal entity that owns a share of another company.

Strategic Buyers: Strategic buyers search for operating companies that offer products or services like their own. Targets are often competitors, suppliers, or customers. Strategic buyers may also acquire firms that have operations that are unrelated to their core businesses, often to diversify their revenue sources. Their goal is to identify targets whose products or services can create long-term shareholder value.

Surviving Corporation: A surviving corporation is the company in the merger or acquisition transaction that acquires the targets assets and continues the operations of the preceding company. The surviving company may be a newly organized legal entity or an existing one.

Venture Capital: Venture capital is capital provided by investors to small business and start-up firms that have potential high growth opportunities.

Cap Table: A capitalization table (otherwise known as a “cap table”) is a table showing the securities and their capitalization ratios.

Common Stock: Common stock is a security that represents ownership in a corporation. Holders of common stock exercise control by electing board of directors and voting on corporate policy. Common stockholders are on the bottom of the ownership structure.

Convertible Preferred Stock: Most convertible preferred stock is exchanged at the request of the shareholder, but sometimes there is a provision that allows the company (or issuer) to force the conversion. The value of convertible common stock is ultimately based on the performance of the common stock.

Cumulative Stock: Cumulative Stock (usually Cumulative Preferred Stock) is stock that must be paid all past unpaid dividends first, before any dividends can be made to other stockholders such as Common Stockholders).

Dividend Recapitalization: A dividend recapitalization (or “dividend recap”) typically involves the company’s borrowing money in order to make a large cash distribution to its shareholders. After the dividend re-cap, the company’s capital structure has changed significantly (for example, it may have had no debt prior and now is debt-laden). Investors benefit by receiving a large cash distribution from the company and “taking money off the table“.

Equity Carve-Out: An Equity Carve-Out is a sale of a portion of equity in a subsidiary to the public via a public offering. The private parent company retains the majority stake in the now public subsidiary, usually greater than 80%. With ownership of over 80%, the private parent company still retains the right to undertake spin-offs and split-offs on a tax-free basis.

Equity Financing: The money acquired from the business owners themselves or from other investors.

Equity Multiples: A ratio used to determine the value of a company’s equity. An example of an equity multiple is price to earnings.

Fully-Diluted Basis: Fully-diluted basis is the total number of shares that would be outstanding if all possible sources of conversion, such as convertible bonds and stock options, were exercised. Companies often release specific financial figures in terms of fully diluted shares outstanding (such as the company’s profits reported on a fully diluted per share basis) to allow investors the ability to properly assess the company’s financial situation.

Issued Shares: Issued shares is the number of authorized shares that is sold to and held by the shareholders of a company, regardless of whether they are insiders, institutional investors or the general public.

Participating Dividends: Participating dividends is a type of preferred stock that gives the holder the right to receive dividends (usually specified as a rate and/or based on predetermined conditions). Usually, the additional dividend is structured to be paid only if the dividends to common shareholders exceeds a specified per-share amount.

Preferred Stock: Preferred stock is a specific class of stock that has a higher claim on assets and earnings than common stock. Preferred shares, depending on the issuing company, have characteristics akin to both debt and equity, having both potential appreciation and fixed payments. Dividends on preferred stock are paid before the dividends on common stock.

Restricted Stock :Purchase Agreement A restricted stock purchase agreement is a legal document made between the shareholder and the startup company that details the transfer and purchase of stock by the shareholder, its price, amount, and restrictions placed on the sale of the stock through a vesting schedule.

Tranche: Tranche is a portion of a security offered in a transaction that has distinct risk specifications and maturity dates than the other layers of the multiple-class security.

Accretion/Dilution Analysis: Accretion/dilution analysis is the assessment of the transaction’s impact on the earnings per share of a private company. If earnings per share have increased, the transaction is accretive while if the earnings per share have decreased after the transaction, the transaction is dilutive.

Burn Rate: Burn rate is the rate at which a new company uses up its venture capital to finance overhead before generating positive cash flow from operations. In other words, it’s a measure of negative cash flow.

Compounding: The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.

Discounting: The process of determining the present value of a payment or a stream of payments that is to be received

Dividends: A share of a company’s net profits distributed by the company to a class of its shareholders.

EBIT: Earnings Before Interest and Tax. Sometimes referred to as operating profit.

EBITDA: Earnings Before Interest, Taxation, Depreciation, and Amortization.

Enterprise Value: Enterprise Value (EV), also known as Total Enterprise Value (TEV), Entity Value, or Firm Value (FV) is a measure reflecting the market value of a whole business. It is the sum of claims of all the security-holders: debt holders, preferred shareholders, minority interest, common equity holders, and others.

Entity Value: See Enterprise Value.

Equity Total: assets less total liabilities. Also called total shareholders’ equity or net worth.

Free Cash Flow: Free cash flow (FCF) yield is a measure of value that investors often look at to determine the potential return on investment.

Hurdle Rate: A hurdle rate is the minimum amount of return that a person requires before they will make an investment in something.

Internal Rate of Return: Internal rate of return (IRR) is the discount rate often used in capital budgeting that makes the net present value of all cash flows from a project equal to zero. The higher a project’s internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering.

Net Debt: Net debt is all interest bearing debt (often referred to as gross debt) less cash, cash equivalents and marketable securities. Net debt assumes that cash and marketable securities are “surplus” or “redundant” and can be used to pay down debt. In practice, It is important to assess whether all cash, cash equivalents, and marketable securities truly are “redundant” or readily disposable.

Net Income: Net income is a company’s total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. This number is found on a company’s income statement and is an important measure of how profitable the company is over a period. The measure is also used to calculate earnings per share.

Net Operating Profit After Tax Net Operating Profit After Tax (NOPAT): is a company’s after-tax operating profit for all investors, including shareholders and debt holders.

Net Present Value: Net Present Value is the sum of the present values of a time series of future cash flows.

Non-operating assets:  Classes of assets that are not essential to the operations of a business, but may still generate income or provide return on investment.

NOPLAT / NOPAT:  NOPAT is typically defined as EBIT x (1 – effective tax rate).

Internal Rate of Return: Internal rate of return (IRR) is the discount rate often used in capital budgeting that makes the net present value of all cash flows from a project equal to zero. The higher a project’s internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering.

Net Debt :Net debt is all interest bearing debt (often referred to as gross debt) less cash, cash equivalents and marketable securities. Net debt assumes that cash and marketable securities are “surplus” or “redundant” and can be used to pay down debt. In practice, It is important to assess whether all cash, cash equivalents, and marketable securities truly are “redundant” or readily disposable.

Net Income: Net income is a company’s total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. This number is found on a company’s income statement and is an important measure of how profitable the company is over a period. The measure is also used to calculate earnings per share.

Net Operating Profit After Tax Net Operating Profit After Tax (NOPAT): is a company’s after-tax operating profit for all investors, including shareholders and debt holders.

Net Present Value: Net Present Value is the sum of the present values of a time series of future cash flows.

Non-operating assets: Classes of assets that are not essential to the operations of a business, but may still generate income or provide return on investment.

NOPLAT / NOPAT: NOPAT is typically defined as EBIT x (1 – effective tax rate).

Normalized Earnings: Earnings adjusted for non-recurring items, over/under depreciation, profit/loss on sale of assets, etc. so that earnings reflect the ongoing performance of the company.

Capital Structure Analysis: Leverage is an important factor when considering restructurings. Leverage can be increased to defend against takeovers, pay out special dividends, repurchase shares, or optimize capital structures. During a divestiture transaction, leverage of the parent company and the intended divestiture target needs to be considered.

Follow-on Financing: Follow-on financing is a subsequent private equity fund established after the investment period of a prior fund.

Friends and Family Round: A friends and family round occurs at the start up of a new company. Often the first place they look for seed financing is from friends and family.

Recapitalization: Recapitalization requires that the private company take on additional debt or reduce their equity by repurchasing shares. Recapitalizations are usually done to alter the ownership of the private company. The main goal of initiating a recapitalization is to keep the private company’s capital structure more stable and, in some cases, boost the stock prices of private companies. Recapitalizations are also done by cash-rich public companies that are threatened by a takeover.

Capital Call: A capital call (otherwise known as a draw down) is the legal right of an investment firm or an insurance firm to demand a portion of the money promised to it by an investor.

Carried Interest: Carried interest is a share of profits that the general partners of private equity and hedge funds receive as compensation, despite not contributing any initial funds. This method of compensation seeks to motivate the general partner to work toward improving the fund’s performance.

Drawdown: A drawdown is the peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted as the percentage between the peak and the trough.

Hedge Fund: A hedge fund is an investment partnership which employs aggressive leverage to multiply gains (or losses) from fluctuations in the prices of financial instruments (bonds, notes, securities). Hedge funds are restricted under US law to less than 100 investors or to have only qualified investors.

Private equity: Private equity represents a class of investors, their funds, and their subsequent investments, which are made in private companies or in public companies with the goal of taking them private.

SEC Filing :An SEC filing is a required formal document submitted to the U.S. Securities and Exchange Commission (SEC), thus making it available to the public through the SEC’s online database. The document often includes a financial statement that details the company’s financial performance. Publicly traded companies are required to make regular SEC filings.

SEC Form 10-K: SEC Form 10-K is the name of the Securities and Exchange Commission form on which a public company (or private company with publicly traded debt) must file its Annual Report making full disclosure to investors of its financial position, income statement, business operations etc.

SEC Form 10-Q: SEC Form 10-Q is the name of the Securities and Exchange Commission form on which a public company (or private company with publicly traded debt) must file its Quarterly Report making full disclosure to investors of its financial position, income statement, business operations etc.

SEC Form 8-K: SEC Form 8-K is the name of the Securities and Exchange Commission form on which a public company (or private company with publicly traded debt) must file to disclose any significant change or event to investors. Examples of events that require an 8-K Form to be filed are: a merger or acquisition, bankruptcy, departure of key executive, or notice of delisting.

SEC Form D: SEC Form D is the name of the Securities and Exchange Commission form that is required to be filed by a private company using an exemption under Regulation D when selling its securities to investors. Under Regulation D, a private company does not have to register its securities and does not have to file reports with the SEC and thus not have to disclose its financial position.

SEC Form S-1: SEC Form S-1 is the name of the Securities and Exchange Commission that is required to be filed by a company before an initial public offering (IPO) of securities. The form requires full disclosure to investors of its financial position, income statement, business operations etc., as well as a complete description of the security being offered and terms of the sale.

Securities Exchange Act of 1934: The Securities Exchange Act of 1934 is an act passed to form a governing body of laws to regulate securities transactions after they are issued, broker-dealers, and exchanges in order to protect the interests of the investing public. The Securities and Exchange Commission was formed to enforce the laws passed by the act.

APV approach: A multivariate model for estimating the cost of equity capital, which incorporates several systematic risk factors.

Book Value: Book value is the net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities.

Break-Up Valuation Analysis: Break-up valuation is the central technique used in all types of transactional restructurings, specifically all transactions that involve any types of divestitures.

Comparable Company Analysis: Comps or Comparable Company Analysis involves identifying valuation multiples from comparable listed companies and applying these to the financials of the company to be valued.

Comparable Transaction Analysis: Comparable transactions analysis or analysis of selected acquisitions is very similar to trading comps except deal comps utilize actual transaction multiples instead of trading multiples from the universe of comparable private companies. The analysis uses multiples and premiums paid in comparable transactions to value target private companies.

Comps: See Comparable Company Analysis.

Deal Comparables: Deal comparables (or “deal comps”) are comparable M&A transactions used to help value a current similar M&A transaction.

Discounted Cash Flow (DCF) Valuation Approach: Discounted Cash Flow (DCF) valuation is a method of valuing a company using the concept of the time value of money. All future cash flows are estimated and discounted to give their present values. The sum of all future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the value or price of the cash flows in question.

Down Round: A down round is a round of financing where investors purchase stock from a company at a lower valuation than that by earlier investors.

Enterprise Value Multiples: A ratio used to determine the value of a company. The enterprise value multiple looks at a company as a potential acquirer would, because it takes debt into account – an item which other multiples like the P/E ratio do not include. An example of an enterprise value multiple is EV/EBITDA.

Equity Value: Equity Value is the value of a company available to shareholders. It is the enterprise value plus all cash and cash equivalents, short and long-term investments, and less all short-term debt, long-term debt, and minority interests.

Firm Value: See Enterprise Value.

Flat Round: A flat round is a round of financing (usually venture capital financing) where investors purchase stock from a private company at the same valuation as the valuation placed upon the company by earlier investors.

Liquidation value: The net amount that would be realized if a business is discounted and its assets are sold individually. The appropriate bases of value and any appropriate additional qualifying assumptions should also be stated.

Market Cap / Market capitalisation: Market Capitalization is the share prices times the number of shares outstanding for a publicly traded company.
Market Capitalization Market capitalization is an on-going market valuation of a public firm (whose shares are publicly traded) computed by multiplying the number of outstanding shares (held by the shareholders) with the current per share market price. It is, however, not necessarily the price a buyer would pay for the entire firm. Market capitalization is not a realistic estimate of the firm’s actual size, because a share’s market price is based on trading in only a fraction of the firm’s total outstanding shares.

Multiples Valuation Approach: The Multiples Valuation Approach is a valuation theory based on the idea that similar assets sell at similar prices. It assumes that a ratio comparing value to some firm-specific variable (operating margins, cash flow, etc.) is the same across similar firms.

Post-money Valuation: Post-money valuation is the value of a company directly after an equity investment in the company is made, i.e. pre-money valuation plus the equity investment amount.

Pre-money Valuation: Pre-money valuation is the value of a company just before an equity investment in the company is made. The valuation is agreed upon between investors preparing to participate in a new funding round and the company. It is used to determine the price per share to be paid by investors in the new funding round (subscription price).

Precedent Transaction Analysis: Precedents or Precedent Transaction Analysis involves identifying recent acquisitions in the same sector and applying the multiples from these transactions to the financials of the company to be valued.

Private Company Valuation: Valuation is a process used to determine what a business is worth. Determining a private company’s worth and knowing what drives its value is a prerequisite for deciding on the appropriate price to pay or receive in an acquisition, merger transaction, corporate restructuring, sale of securities, and other taxable events.

Private Company Valuation Techniques: Private companies have major importance in the world’s economy albeit often smaller in size and less financially transparent than their publicly traded peers.

Trading Multiple Analysis: Comparable company trading multiples analysis or trading comps use the valuation multiples of similar or comparable publicly-traded companies to value a target private company. Peers can be grouped based on any number of criteria, such as industry focus, private company size, or growth. The multiples can be Enterprise Value (EV) based multiples like EV/Sales, EV/EBITDA or EV/EBIT, and Equity-based multiples like Price to Earnings (P/E). The multiples derived from this type of analysis are at a given point in time and generally change over time. It is important to note that trading multiples do not reflect control premiums or potential synergies.

Valuation: Valuation is a method of determining the current worth of an asset or company; an appraisal of value using various techniques which include analysis of financial statements, management profiles, competitive space, industry, and markets. Valutico is your tool to perform these valuations more effectively.

Valuation Methodologies: Private companies may manage their balance sheets and earnings for alternative purposes, discounted cash flow analysis or comparable valuation techniques require additional research. Earnings and capital structure might need to be reorganized or modified accordingly. When it comes to private companies, some nontraditional valuation techniques may be appropriate such as analysis of invested capital, replacement cost, asset appraisal and capitalization of earnings.

Valuation of Private vs. Public Companies: Private company valuations are discounted based on several risk factors associated with private sector investment, which results in a marked difference between the valuation of a privately held company, subsidiary or a division and a publicly traded corporation. There is a number of distinctions between private and public companies that have an impact on the private company’s value.

Alpha: See firm-specific risk for the definition of Alpha.

Beta: A measure of systemic risk of a stock; the tendency of a stock’s price to correlate with changes in a specific index.

Capital Asset Pricing Model (CAPM): The Capital Asset Pricing (CAPM) Model is the most widely used risk/return model used to calculate the equity cost of capital.

Covariance: A statistical measure of the variance of two random variables that are observed or measured in the same mean time period.

Discount Rate: The discount rate is the percentage rate required to calculate the present value of a future cash flow.

Diversifiable Risk: See firm-specific risk.

EV/EBIT: The EV to EBIT multiple is defined as the enterprise value divided by earnings before interest and tax.

EV/EBITDA: The EV to EBITDA multiple is defined as the enterprise value divided by earnings before interest, tax, depreciation, and amortization.

EV/Sales: The EV to sales multiple is defined as the enterprise value divided by sales (also called revenue or turnover).

Firm-specific Risk: Firm-specific risk is sometimes called unsystematic risk, specific risk, diversifiable risk or alpha. The category includes risks associated with a firm’s management team, operations, projects, products, profits, and so on.

Free Cash Flows to Equity: Free Cash Flows to Equity is the cash flow available for distribution to equity holders. If net borrowings remain unchanged, the formula is free cash flows to the firm – Interest Expense x (1 – Tax Rate).

Free Cash Flows to the Firm: This is the cash flow available for distribution among all the securities holders of an organization (i.e. debt holders, equity holders, etc.). The standard definition is EBIT x (1 – Tax Rate) + Depreciation & Amortization +/- Changes in Working Capital – Capital Expenditure. The can also be referred to as unlevered free cash flow.

Market Risk: Market Risk is often referred to as systematic risk, non-specific risk, non-diversifiable risk or beta. This category includes risks such as interest rates, the economic cycle, inflation, legislation and socio-economic developments.

Non-diversifiable Risk: See market risk.

Non-specific Risk: See market risk.

Price to Book: The price to book multiple is defined as the market capitalization (or equity value of common shares) divided by the book value of equity which is total common shareholders’ equity excluding preference shares and minority interest.

Price to Earnings: The Price to Earnings Multiple is defined as the market capitalization (or equity value of common shares) divided by the earnings belonging to common shareholders.

Risk Premium: Risk Premium is the excess return that the overall stock market provides over the risk-free rate.

Risk-free Rate: Most analysts use the yield on government bonds to determine the risk-free rate even though they are not entirely risk-free. This is because it is virtually impossible to get a truly risk free rate.

Specific Risk: See firm-specific risk.

Systematic Risk: See market risk.

Unsystematic Risk: See firm-specific risk.

Weighted Average Cost of Capital (WACC): The Weighted Average Cost of Capital (WACC) incorporates the individual costs of capital for each provider of finance (e.g. debt and equity), weighted by the relative size of their contribution to the overall pool of finance.