The Game Glossary Acceleration A provision in employment agreements that allow employees to exercise all or some of their stock options before the vesting schedule allows, typically in the event of the acquisition of the firm. Anti-dilution provision In a preferred stock agreement, a provision that adjusts upward the number of shares (or percentage of the company) held by the holders of the preferred shares if the firm subsequently undertakes a financing at a lower valuation than the one at which the preferred investors purchased the shares. See full ratchet and weighted average. Basis points One hundredth of 1%, or 0.01%. Interest rates are frequently specified as LIBOR plus a certain number of basis points. Book-to-market ratio The ratio of a firm s accounting (book) value of its equity to the value of the equity assigned by the market (i.e., the product of the number of shares outstanding and the share price). Buyout See Leveraged buyout. Capital structure The mixture of equity and debt that a firm has raised. Capital under management See Committed capital. Carried interest The substantial share, often around 20%, of profits that are allocated to the general partners of a private equity partnership.
Closing The signing of the contract by an investor or group of investors that binds them to supply a set amount of capital to a private equity fund. Often a fraction of that capital is provided at the time of the closing. A single fund may have multiple closings. Co-investment The syndication of a private equity financing round (see syndication). In the Game, the various teams must all agree although one team (the one that inputs the term sheet) has Lead powers. In co-investment, the total amount invested is split evenly among the teams in the syndicate, so a three-team syndicate making a $150 million investment would each put in $50 million. Committed capital Pledges of capital to a private equity fund. Typically, this money is not received all at once, but rather taken down over three to five years starting in the year the fund is formed. Common stock The equity typically held by management and founders. Typically, at the time of an initial public offering, all equity is converted into common stock. Consolidation A private equity investment strategy that involves merging several small firms together and exploiting economies of scale or scope. Conversion ratio The number of shares for which a convertible debt or equity issue can be exchanged. Convertible preferred stock Stock that has preference over common stock with respect to any dividends or payments made in association with the liquidation of the firm and can be converted into a common equity position at the shareholder s option. The holder must choose whether to be compensated through the security s liquidation preference feature (that is, the return of the face value) or through the ownership position upon conversion to common (the percentage ownership in the company). Which is chosen will depend on the value being offered for the company. The VCPE game s basic security is convertible preferred stock. Crank The period of time that the algorithms are running and the game is off line.
Credit crunch A period when, due to regulatory actions or shifts in the economic conditions, a sharp reduction occurs in the availability of bank loans or other debt financing, particularly for small businesses. The early 1990s were one such period in the United States. Cumulative redeemable preferred stock See redeemable preferred stock. Debt In the Game, only companies that have revenue can take on debt. Once a company has taken on debt, it must pay that off before it can take more. This is senior debt, not subordinated. Deposit-oriented lease In venture leasing, a lease that requires the lessee to put up a cash deposit, usually ranging from 30% to 50% of the total lease line. Dilution The reduction in the fraction of a firm s equity owned by the founders and existing shareholders that is associated with a new financing round. Disbursement An investment by a private equity fund into a company. Distress flag The indicator (set by the Game) that the company will go bankrupt over the course of the next year unless it is financed. Distressed debt A private equity investment strategy that involves purchasing discounted bonds of a financially distressed firm. Distressed debt investors frequent convert their holdings into equity and become actively involved with the management of the distressed firm. Distribution The transfer of shares in a (typically publicly traded) portfolio firm or cash from a private equity fund to each limited partner and (frequently) each general partner.
Dividend Payments made by a company out of its profits to its shareholders. Down round A financing round where the valuation of the firm is lower than that in the previous round. Due diligence The review of a business plan and assessment of a management team prior to a private equity investment. Exercise price The price at which an option or a warrant can be exercised. Expansion capital See Growth capital. Fill investor An investor whose terms are compatible with those of the Lead investor but did not offer a desirable enough financing package to be selected as Lead. Financing round The provision of capital by a private equity group to a firm. Since venture capital organizations generally provide capital in stages, a typical venture-backed firm will receive several financing rounds over a series of years. First closing The initial closing of a fund. For some funds, the first closing is also the final closing; others will have multiple closings. Follow-on fund A fund that is subsequent to a private equity organization s first fund. Free cash flow problem The temptation to undertake wasteful expenditures often posed by the presence of cash not needed for operations or investments.
Full ratchet anti-dilution A system of compensating investors in earlier rounds for a lower price in a subsequent round based on the difference between the price of each round, ensuring that the investor s ownership percentage remains the same as if it had occurred at the new lower price. Even a small financing at a lower price leads to a significant adjustment. Fund A pool of capital raised periodically by a private equity organization. Usually in the form of limited partnerships, private equity funds typically have a ten-year life, though extensions of several years are often possible. General partner A partner in a limited partnership is responsible for the day-to-day operations of the fund. In the case of a private equity fund, the venture capitalists either are general partners or own the corporation that serves as the general partner. The general partners assume all liability for the fund s debts. Grandstanding problem The strategy, sometimes employed by young private equity organizations, of rushing young firms to the public marketplace in order to demonstrate a successful track record, even if the companies are not ready to go public. Growth capital The sale of equity in a (typically) privately held operating company, frequently one that is profitable, to raise funds to increase production capacity, supply working capital, or further develop the product. Both venture capital funds and mid-market buyout funds do growth capital investing. In the money An option or a warrant that would have a positive value if it was immediately exercised. Internal rate of return (IRR) The annualized effective compounded return rate that can be earned on the invested capital; the investment s yield. For both venture capital and buyout firms, the longer the money is tied up in the investment, the higher the multiple of the original investment must be returned to have an adequate IRR. Lead investor
The investor with the largest ownership of the investee company. The lead may change over subsequent financings. Leverage For the way leverage works in the Game, see Debt. Leveraged buyout (LBO) The acquisition of a firm or business unit, typically in a mature industry, with a considerable amount of debt. The debt is then repaid according to a strict schedule that absorbs most of the firm s cash flow. Leveraged buyout fund A fund, typically organized in a similar manner to a venture capital fund, specializing in leveraged buyout investments. Some of these funds also make venture capital investments. Liquidation The process of selling an investment and achieving liquidity for a fund s investors. Liquidation events can be either positive and generate profits, or negative and create losses. In the Game, when a company is liquidated, its investors are paid back according to the terms of each round in which they participated. Liquidation preference provision In a preferred stock agreement, a provision that insures preference over common stock with respect to any dividends or payments in association with the liquidation of the firm. An investor with 2x liquidation would receive twice its investment at a liquidity event. Management fee The fee, typically a percentage of committed capital or net asset value, that is paid by a private equity fund to the general partners to cover salaries and expenses. The monies come not from additional levies on the LPs but out of the fund itself. Marked for liquidation The situation when the Lead investor has set a liquidation value of 0 or above. If the company s outcome hits or exceeds that value in the next Phase 4 crank, the company will be liquidated. Mega-fund
One of the largest venture capital or private equity funds, measured by the amount of committed capital. Mid-market Companies somewhere between small and large, variously defined in terms of ownership (most often, family-owned), employees, revenues (e.g., between $200 million and $600 million), enterprise value, and equity investment (e.g., between $25 million and $200 million). Minority Position A situation in which an investor purchases less than majority control of a company. Frequently this occurs in venture capital and in growth or expansion capital investments; less frequently with buyouts. Net cash flow A company s results less all expenses (operating expenses and interest, if any). Net income A firm s profits after taxes. Option The right, but not the obligation, to buy or sell a security at a set price (or range of prices) in a given period. Option pool Shares in a private company that have been set aside for possible issuance to employees at a later date. Out of the money An option or a warrant that would have a negative value if it was immediately exercised. Outcomes table The probability that a company will achieve a particular result in the next year, assuming it is fully funded. Participating convertible preferred stock See Participating preferred stock.
Participating preferred stock Convertible stock where, under certain conditions, the holder receives both the return of the original investment and a share of the company s equity. Participation The quality of having participating preferred stock. Portfolio management The process of ensuring that the risk in a portfolio of investments is balanced along a variety of dimensions, which can include geography, stage, sector, and/or partner time requirements. Post-money valuation The product of the price paid per share in a financing round and the shares outstanding after the financing round. Preferred stock Stock that has preference over common stock with respect to any dividends or payments in association with the liquidation of the firm. Preferred stockholders may also have additional rights, such as the ability to block mergers or displace management. Pre-money valuation The product of the price paid per share in a financing round and the shares outstanding before the financing round. Private equity Organizations devoted to venture capital, leveraged buyout, consolidation, mezzanine, and distressed debt investments, as well as a variety of hybrids such as venture leasing and venture factoring. Increasingly, this term is applying only to leveraged buyout funds. Recapitalization (Recap) An investment that essentially eliminates the company s existing capital structure and restarts the company, often with a new set of investors and always with a new set of preferences and a simplified structure. Redeemable preferred stock
Preferred stock where the holders have no right to convert the security into common equity. The return to the investor, like that of a bond, consists of a series of dividend payments and the return of the face value of the shares, which is paid out at the contractually specified time when the company must redeem the shares. Refer (a deal) To send a deal to another firm in case they might want to invest. Being known for referring good deals can have happy consequences. Reputation In the Game, a complex reflection of a team s performance, likeability, and portfolio management prowess. Roll-up See Consolidation. Round See Financing round. Run rate A company s results if the performance of the current period were to be extrapolated to a full year. This can be a useful approach in fast-growing companies; it can be misleading if the company is distinctly seasonal and the base period corresponds to a seasonal peak or trough. Seniority An investor s place in the capital structure of a firm. Investors in a financing round with seniority will receive any returns from a liquidation event first. In the Game, the company s debt providers have seniority to the equity holders. Shares outstanding The number of shares that the company has issued. Straight preferred stock See Redeemable preferred stock. Syndication The joint purchase of shares by two or more private equity organizations.
Term sheet A preliminary outline of the structure of a private equity partnership or stock purchase agreement, frequently agreed to by the key parties before the formal contractual language is negotiated. Trade sale A European term for the exiting of an investment by a private equity group by selling it to a corporation. Usually called a merger or an acquisition in the United States. Uncertainty problem The array of potential outcomes for a company or project. The wider the dispersion of potential outcomes, the greater the uncertainty. Venture capital Independently managed, dedicated pools of capital that focus on equity or equity-linked investments in privately held, high growth companies. Many venture capital funds, however, occasionally make other types of private equity investments. Outside of the United States, this phrase is often used as a synonym for private equity. Venture capitalist A general partner or associate at a private equity organization. Venture returns The general range of returns expected from venture capital firms, usually between 15% and 20%. This expected return may have little correlation to returns actually generated. Vesting A provision in employment agreements that restricts employees from exercising all or some of their stock options immediately. These agreements typically include a schedule specifying the percent of shares that the employee is allowed to exercise over time, known as a vesting schedule. Vintage year The group of funds whose first closing was in a certain year. Volatility
The standard deviation of returns around the mean, or the degree to which portfolio performance may vary over time. Weighted average anti-dilution A method of compensating investors in earlier rounds for a lower price in a subsequent round based on the averaged price of each round weighted by the number of shares. See also Full ratchet anti-dilution.