Glossary of Venture Capital Funding Terms

Intellectual Property (IP): is a legal term that refers to creations of the mind such as musical, literary, and artistic works; inventions; and symbols, names, images, and designs used in commerce, including copyrights, trademarks, patents, and related rights. Under intellectual property law, the holder of one of these abstract properties has certain exclusive rights to the creative work, commercial symbol, or invention by which it is covered.

Initial Public Offering (IPO): The sale or distribution of a stock of a portfolio company to the public for the first time. At an IPO, existing investors including angels and venture capitalists receive significant returns on their original investment.

Management Fee: Compensation for the management of a venture fund’s activities, paid from the fund to the general partner or investment advisor/manager. This compensation generally includes an annual management fee.

Manager/Management Team: Person(s) who oversees the activities of an early-stage investment fund.

Non-Recurring Engineering (NRE): Non-recurring engineering refers to the one-time cost of researching, designing, and testing a new product. When budgeting for a project, NRE must be considered in order to analyze if a new product will be profitable. Even though a company will pay for NRE on a project only once, NRE can be considerably high and the product will have to sell well enough to produce a return on the initial investment. NRE is unlike production costs, which must be paid continually in order to maintain production of a product.

Original Equipment Manufacturer (OEM): The original manufacturer of a component for a product, which may be resold by another company

Outstanding Stock: The amount of common stock of a corporation that is in the hands of investors. It is equal to the amount of issued shares less treasury stock.

Post-Money Valuation: The valuation of a company immediately after the most recent round of financing.

Pre-Money Valuation: The valuation of a company prior to a round of investment.

Pro Forma Statements: Financial projections for a given future period of time, based on certain assumptions regarding the performance of the target markets, company, and competitors.

Return On Investment: The rate of return (ROR), or return on investment (ROI), can be preferably described as the annual rate of return or interest on a specific investment, or the ratio of money gained or lost (realized or unrealized) on an investment relative to the amount of money invested. It is usually expressed as a percentage. ROI does not indicate how long an investment is held. However, ROI is most often stated in an annual or annualized basis rate, and it is most often stated for a calendar or fiscal year. In this article, "ROI" indicates an annual or annualized rate of return, unless otherwise noted.

Securities Exchange Commission (SEC): The U.S. Securities and Exchange Commission is an independent agency of the United States government which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets. The SEC was created by section 4 of the Securities Exchange Act of 1934. In addition to the 1934 Act that created it, the SEC enforces the Securities Act of 1933, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Sarbanes-Oxley Act of 2002 and other statutes.

Seed Money: The first round of capital for a start-up business. Seed money usually takes the structure of a loan or an investment in preferred stock or convertible bonds, although sometimes it is common stock. Seed money provides start-up companies with the capital required for their initial development and growth. Angel investors and early-stage venture capital funds often provide seed money.

Seed Stage Financing: An initial start of a company’s growth characterized by a founding management team, business-plan development, prototype development, and beta testing.

Share of Available Market (SAM): SAM represents a subset of the TAM (total available market). SAM is that portion of the TAM that is addressable by your company’s technology, product, or service offering.

Share of Market (SOM): SOM is that share of the SAM that is to be secured by your company. That is, it is the amount of market share that you project your company securing for the foreseeable future.

SIC Code (SIC): The Standard Industrial Classification (SIC) is a United States government system for classifying industries by a four-digit code. Established in 1937, it was supplanted by the six-digit North American Industry Classification System, which was released in 1997; however certain government departments and agencies, such as the U.S. Securities and Exchange Commission (SEC), still use the SIC codes.

Total Available Market (TAM): TAM is the largest number and is used to represent the whole universe of a given market. This can include multiple sub-markets that may or may not be addressable for a given company or competitor’s technology, product, or service offering.

Term Sheet: A summary of the terms the investor is prepared to accept. A non-binding outline of the principal points that the stock purchase agreement and related agreements will cover in detail.

Venture Capital Financing: An investment in a start-up business that is perceived to have excellent growth prospects but does not have access to capital markets. It is a type of financing sought by early-stage companies seeking to grow rapidly.

Venture Capitalist: A venture capitalist is a private firm, usually a partnership, which finances a company after it is beyond the start-up phase but before the IPO phase.

Venture Funding Syndicate: A venture funding syndicate is a group of venture capital companies that work together to fund a particular company. This syndicate type of partnership is used to spread the financial risk across multiple entities. The syndicate that finances a company after it is beyond the start-up phase but before the IPO phase.