GUIDE. Entrepreneurs. A guide to investment jargon

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1 GUIDE Entrepreneurs A guide to investment jargon

2 What does this guide cover? Angel investors, venture capital funds, accountants, lawyers and fundraisers use jargon. To anyone raising funds for the first time this can be very confusing. This guide sets out, in plain English, what some of these terms mean. It s impossible for this to be a complete guide to all the terms used but we hope you find it useful. If you have any suggestions for future issues of this guide then do please get in touch. This guide cannot replace legal advice about a specific issue. If you have a specific question, please contact us. The terms in bold text are defined elsewhere within the guide.

3 Glossary Angel Investors Angel Networks Anti-Dilution Provisions Articles Bad Leaver Burn Rate Business Plan Investors who have experience and cash to assist Early Stage companies. Typically these are wealthy people who have a significant amount of industry or investment experience. Groups of experienced investment professionals who provide guidance to Early Stage companies on how to attract Investors. A right, typically held by a Venture Capital Fund, which requires an Investee Company to issue Shares to the Venture Capital Fund for a nominal sum in the event that the Investee Company issues Shares to a new Investor on a funding round where the price per Share is less than that paid by the Venture Capital Fund. The provisions will state that, the lower the price the new Shares are issued at, the greater the number of Shares which will need to be issued to the Venture Capital Fund. The articles of association of a company. This is the constitution of the company and sets out the agreement between the Shareholders as to what rights each of the Shares will have. A Shareholder who leaves employment with the company in circumstances which have been agreed as being bad. These typically include voluntary resignation and gross misconduct. In these circumstances, Articles will generally provide that the Bad Leaver must sell their Shares for Nominal Value or their original subscription price. The rate at which a company spends cash. This is typically tested on a monthly basis. A feasibility study prepared by an entrepreneur in relation to the prospects of the company he or she is trying to attract Investors to invest in.

4 Come Along Right Compulsory Transfer Provisions Conditions Precedent Conditions Subsequent Convertible Loan Notes Coupon Debenture Debt A right, typically held by a Venture Capital Fund, which requires any one party selling a percentage of their Shares (which is less than the percentage at which a Drag Along Right or a Tag Along Right would apply) to a third party to have that third party buy the same percentage of Shares from the Venture Capital Fund. Found in the Articles. Provisions in the Articles which set out when Shares must, at the election of the company or a third party, be transferred. Typically when an individual is a Good Leaver or a Bad Leaver. Can also be in the event of death, insolvency or certain behaviour (e.g. breach of a provision of the Articles) on the part of a Shareholder. Tasks that must be completed before an investment occurs. Tasks which must be completed within a certain period of time after completion of an investment. Loan Notes which are convertible into Shares. This conversion, in venture capital or Early Stage funding, will normally be at a specific point in time and at a specific price. Refers to the interest rate paid on a Loan Note or the fixed dividend paid on a Preference Share. A written instrument issued by a company acknowledging a Debt. Tends to constitute a charge over the assets of the company which means that, if the Debt is not paid, the assets can be sold to pay the Debt. Any sum of money lent to a company. This can be done in a number of different ways. A loan agreement is the most straightforward. However, Loan Notes or Convertible Loan Notes can also be used.

5 Disclosure Dividend Downround right Drag Along Rights Early Stage EIS EIS1 EIS3 A statement which qualifies a warranty. Will typically be included in a disclosure letter that sets out a set of qualifications to Warranties. For instance, if a Warranty is contained within an SSA which states that the company is not being sued and that is untrue, the disclosure letter will provide details of the litigation. An amount paid to Shareholders out of the profits of a company. See Anti-Dilution Provisions. A right for Shareholders who own more than a set percentage of the Shares in a company to require all other Shareholders to sell their Shares to a third party (i.e. the other Shareholders are dragged into selling their Shares). Found in the Articles. A definition open to different interpretations. Typically used in relation to a company which has been trading and taking investment but has not yet received funding from a Venture Capital Fund. Can be used in relation to any company which has not yet made a profit. The Enterprise Investment Scheme. Introduced by the government to encourage investment into small, higher risk businesses. Provides relief on 30% of the invested sum against income tax for the Investor. The Investor will also receive full exemption from capital gains tax on any Sale of Shares issued under EIS. Strict criteria apply to the granting of EIS relief. The form to be filed with HMRC in the event a company issues Shares subject to EIS. The certificate supplied by HMRC to a company that has issued Shares under EIS. This certificate should be passed to the Investor so that the Investor can claim the associated reliefs on their tax return.

6 EMI Scheme Entire Issued Share Capital Equity Exercise Price Exit Founder Fully Diluted Shareholding Fund Funding Gap The Enterprise Management Incentive Scheme. HMRC approved scheme under which Share Options are issued to employees. Subject to certain criteria, options valued up to 250,000 can be issued to an employee with no tax consequences on the issue of the Share Options or exercise of the Share Options. All of the Shares in a company. A sum of money invested into a company in return for a stake in the Share Capital of a company. These funds will not generally be repayable and will therefore represent true investment capital. See Strike Price. An event which results in the Investors getting a return on their investment into Shares. Typically a Sale or a Listing. A Shareholder who sets up a company. The percentage shareholding a Shareholder has following the exercise of all rights to acquire Shares in the Company. This is most often used to describe a percentage holding that an individual would have following the exercise of all Share Options. A partnership into which individuals, companies, pension funds or other Investors have invested money. This Fund will then make investments into companies. Funds often have a specific focus: see Venture Capital Funds and VCTs. This has different meanings to different people. It typically refers to the difference between fundraisings of 500,000 and 2,000,000. Anything falling in this gap is typically too large for individual Angel Investors and too small for Venture Capital Funds.

7 Good Leaver Heads of Terms Indemnity Information Memorandum or IM Intercreditor Agreement Investee Company Investor IPO Letter of Intent A Shareholder who leaves employment with the company in circumstances which have been agreed as being good. These typically include death, ill health or some other event out of the Shareholder s control. In these circumstances, Articles will generally provide that the Good Leaver must sell their Shares for Market Value (or a discounted Market Value). A set of outline terms for an Investment which are not legally binding or are legally binding only to a certain extent (e.g. No Shop). They will be signed by both the Investors and the Investee Company and will be followed by the formal investment documentation. A contractual obligation to make a payment to an Investor if a fact or circumstance changes. For instance, an Investor may demand an indemnity from an Investee Company if he is concerned about the outcome of a piece of litigation which is ongoing at the time of the investment. A document detailing the investment proposition offered by an Investee Company. An agreement which states that major lenders will be paid out ahead of other lenders and holders of Preference Shares. Applies on later stage investments in the event that bank financing is to be involved. A company taking investment from Investors. Any person, company or Fund investing into a company. This can be done by way of Debt or Equity. An Initial Public Offering. This describes the first time that a company lists Shares on a Stock Exchange. See Heads of Terms.

8 Limitation on Warranty Claims Liquidation Liquidation Preference Waterfall (sometimes just known as the Waterfall) Listing Loan Notes Lock-in A series of limits which apply to any claim under the Warranties. Will typically provide a time period in which the claims can be made (after which no claim will be available). Will also likely provide that the claim must be above a certain amount before it can be made. The winding up of a company. In the event that Preferred Ordinary Shares have been issued, the proceeds of the winding up will be distributed in accordance with the Liquidation Preference Waterfall. A provision in the Articles which sets out the priority for Liquidation payments. Holders of Preferred Ordinary Shares will be paid the amount of their investment (subject to any Preference Multiple) before the holders of Ordinary Shares. Holders of Preferred Ordinary Shares may also have agreed an order of priority amongst themselves (so, for instance, holders of B Preferred Ordinary Shares, having provided New Money, will be paid out before holders of A Preferred Ordinary Shares). A Participating Preference may apply here. It is often agreed contractually that a Liquidation Preference Waterfall would apply to a Sale or a Listing (which would not automatically be the case if no winding up occurred). See IPO. A written instrument evidencing a Debt due by a company to an Investor or any other person that lends the Company money. These instruments are issued in the same way that Shares are issued. These can be issued on a variety of different terms. Typically, Early Stage companies borrow money at a low interest rate and with a long repayment window. They can also typically issue Convertible Loan Notes. A mechanism which prevents a Shareholder, usually a Founder, from selling Shares for a certain period of time.

9 Market Value Model Articles Nabarro LLP New Money Non-Disclosure Agreement Non-Executive Director Nominal Value Non-Participating Preference No Shop The commercial value of a Share. The standard articles set out in Companies Act regulations. Tend to form the basis of most Articles and then amended to reflect provisions negotiated by Investors. A law firm specialising in Early Stage and Venture Capital deals. Should be consulted early on in your fundraising process so that they can help you with every step of the process. Any new funds invested into an Investee Company. For example, funds invested into an Investee Company on a Series B would be New Money as compared to the funds invested on a Series A. New Money is often described as trumping old money. This means those investing the New Money often have a better negotiation standpoint than those who have previously invested. An agreement between the Investee Company and an Investor under which the Investee Company will disclose confidential information to the Investor in exchange for the Investor s agreement that it will remain confidential. A director who does not have any specific duties but attends board meetings to decide on policy and strategy matters. Venture Capital Funds will usually appoint a Non-Executive Director to the board of an Investee Company. The basic value of a share. This is typically one pound or a fraction of that (so ten pence, one pence, one tenth of a penny etc.). A Preference Share which, once it has been paid out in a Liquidation, does not then participate in any further sums to be paid out to Shareholders. A provision in a set of Heads of Terms which restricts the Investee Company from seeking funding from other Investors until such time as negotiations with the Investors who are party to the Heads of Terms have broken down.

10 Observer One Year Cliff Pari Passu Participating Preference Pay to Play Permitted Transfers Pre-Emption Rights on a Share Issue Pre-Emption Rights on a Share Transfer A person who attends a board meeting of a company but does not speak or vote at that meeting. Some Venture Capital Funds will appoint these instead of a Non-Executive Director in order for the person to avoid the responsibilities of a statutory director. On the Vesting of Shares, a provision which states that no Shares or Share Options will vest before the first anniversary of the Vesting process commencing. At the One Year Cliff, an amount of Shares (typically 25%) will Vest. At an equal rate or preference. Used to describe Shares which have the same rights in certain circumstances. A Preferred Ordinary Share which, once it has been paid out in a Liquidation, will also participate in any amount left over for distribution. The Shareholder then further participates, Pro Rata to their shareholding in the Company, in any balance left over once the Participating Preference has been paid out. An obligation which requires current Investors, on any new funding round, to match the Funds which they previously invested into an Investee Company or otherwise be diluted at a greater rate on that new funding round. Provisions in Articles which allow Shareholders to transfer Shares without going through the process associated with Pre-Emption Rights. Permitted transferees will typically be family trusts, spouses, civil partners and children. A right for existing Shareholders to subscribe for Shares before any new Shares are issued to new Shareholders. That right will normally be Pari Passu to the Shareholders ownership of Shares. A right for existing Shareholders to buy Shares from any Shareholding selling them before any of those Shares can be sold to a new Shareholder. That right will normally be Pari Passu to the Shareholders ownership of Shares.

11 Preference Multiple Preference Shares Preferred Ordinary Shares Premium Pro Rata Ratchet Reserved Matters Rights Issue Sale Seed Funding Any multiple of the price paid for Preferred Ordinary Shares. A Share which entitles a Shareholder to receive a specific amount of money, perhaps together with a Coupon, ahead of all other Shareholders. An equity Share which entitles the Shareholder to receive profits or proceeds of a Liquidation in priority to other Shareholders. The price paid for a Share on issue to an Investor over and above the Nominal Value. For example, if an Investor pays 10 for a share with a Nominal Value of 1, the Investor will have paid a 9 Premium. In proportion to the Shareholders interest in the Entire Issued Share Capital of a company. An arrangement whereby the Founder or management Shareholders of an Investee Company can win back some of the Equity held by Venture Capital Funds or Angel Investors. Usually applies when certain profit criteria are met. Often used as an incentive or as a compromise if there is a disagreement as to the value of the Shares when an Investor invests. Decisions relating to the operations of the business of an Investee Company which must be referred to the Investors before the Investee Company takes those decisions. The matters which are subject to this position and whose approval will be required will be the subject of negotiation. An offer to existing Shareholders to subscribe for more Shares in a company on a Pro Rata basis. The sale of all or a majority of the Shares in a company. Can also be the sale of a majority of the assets of a company to a third party. The first investment made into a company by Investors. Typically made by Angel Investors. Precedes a Series A funding.

12 SEIS SEIS1 SEIS3 Series A Series B/C/D etc. Share or Shares Share Capital Shareholder Shareholders Agreement Share Options The Seed Enterprise Investment Scheme. Introduced by the government to encourage investment into very small, higher risk businesses. Provides relief on 50% of the invested sum against income tax for the Investor. The Investor will also receive full exemption from capital gains tax on any Sale of Shares issued under SEIS. Strict criteria apply to the granting of SEIS relief. The form to be filed with HMRC in the event a company issues Shares subject to EIS. The certificate supplied by HMRC to a company that has issued Shares under EIS. This certificate should be passed to the Investor so that the Investor can claim the associated reliefs on their tax return. The first round of investment taken from a Fund by an Investee Company. Each subsequent funding round taken by an Investee Company. The share class issued will typically match the description of the round (so, for instance, A Preferred Ordinary Shares will be issued on a Series A funding, B Preferred Ordinary Shares on a Series B funding etc.). A unit of ownership in, or right to share in the profits of, a company. Will be issued by the company in exchange for an investment. That investment is typically formed of Nominal Value and/or Premium. The Shares in issue in a company. A person who holds Shares in a company. See SSA. A right to subscribe for a Share at a specific price and at a specific point in time. Typically issued to employees to allow them to subscribe Shares in the event of an Exit.

13 SSA Start-up Capital Strike Price Subscription Agreement Sweat Equity Sweet Equity Tag Along Rights Teaser Term Sheet VCTs Venture Capital Funds Subscription and Shareholders Agreement. This document is the basis on which an Investor will subscribe for Shares in a company and how that investment will be managed. This document may be broken up into a standalone subscription agreement with a separate shareholders agreement. Capital provided to a very Early Stage company. The price at which a Share Option can be exercised. See SSA. Shares earned by an employee of a company. Typically the Shares will be earned over a period of time subject to Vesting. Shares issued to an employee of a company on preferential terms. In the event Shareholders holding more than 50% of the Shares in a company have found a third party buyer for their Shares, Tag Along Rights will require those selling Shareholders to get the third party to make the same offer to all Shareholders. Found in the Articles. A short form of the IM or Business Plan. See Heads of Terms. A venture capital trust which is a type of Fund. Makes investments in accordance with a similar set of rules to EIS relief in order that those who have invested into the venture capital trust can share in the relief available. The VCT will be listed on a stock exchange. Funds which make investments into Early Stage businesses with a view to growing those businesses rather than taking profits throughout the life of the business. There are a wide variety of these, each having specific interests and investment criteria.

14 Vesting Veto Rights Warranties Warrantors Warrants The process by which the right to hold Shares or exercise a Share Option grows. So, for instance, an employee may be granted Share Options which will vest on a One Year Cliff with the balancing number of Shares or Share Options Vesting in equal amounts on a monthly basis. See Reserved Matters. A series of contractual statements about a company which give the Investor comfort as to the operations of the company and a right to sue for damages if they turn out to be incorrect. Those people liable for any breach of the Warranties. Will always be the Company on an investment but may also be the Founder. Options to subscribe for a Share on a specific circumstance or point in time. Venture Capital Funds may require these. Angel Networks may also require them as part payment for fees due to them.

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16 CONTACT Please talk to your usual Nabarro contact or Graham Stedman, Senior Partner T +44 (0) g.stedman@nabarro.com For further information visit: London Lacon House 84 Theobald s Road London WC1X 8RW T +44 (0) Sheffield 1 South Quay Victoria Quays Sheffield S2 5SY T +44 (0) Brussels 209A Avenue Louise 1050 Brussels Belgium T Singapore 50 Raffles Place Singapore Land Tower Singapore T Alliance firms: France August & Debouzy Gilles August T +33 (0) Nabarro LLP Registered office: Lacon House, 84 Theobald s Road, London, WC1X 8RW. Nabarro LLP is a limited liability partnership registered in England and Wales (registered number OC334031). It is a law firm authorised and regulated by the Solicitors Regulation Authority. A list of members of Nabarro LLP and of the non-members who are designated as partners is open to inspection at the registered office. The term partner is used to refer to a member of Nabarro LLP or to an employee or consultant with equivalent standing and qualifications in one of Nabarro LLP s affiliated undertakings. Detailed specialist advice should be obtained before taking or refraining from any action as a result of the comments made in this publication, which are only intended as a brief introduction to the particular subject. This information is correct on the date of publication. Nabarro LLP 2013 Germany GSK Stockmann + Kollegen Rainer Stockmann T +49 (30) Italy Nunziante Magrone Gianmatteo Nunziante T Spain Roca Junyent Miquel Roca Junyent T