Glossary of Venture Capital Funding Terms

10-K: A 10-K is an annual report required by the U.S. Securities and Exchange Commission (SEC) that gives a comprehensive summary of a public company’s performance. The 10-K includes information such as company history, organizational structure, executive compensation, equity, subsidiaries, and audited financial statements, among other information.

10-Q: A 10-Q is a quarterly report that is required by the U.S. Securities and Exchange Commission (SEC), that contains similar information to the annual form 10-K, however the information is generally less detailed, and the financial statements are generally unaudited. Information for the final quarter of a firm's fiscal year is included in the 10-K, so only three 10-Q filings are made each year. The form 10-Q must be filed within 45 days of the end of the quarter.

Accredited Investor: Rule 501 of the SEC regulations defines an individual accredited investor as: “Any natural person whose individual net worth or joint net worth with that person’s spouse at the time of his purchase exceeds $1,000,000”, OR “Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or a joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.”

Angel Investor: An angel investor is an individual who makes direct investment of personal funds into a venture, typically early-stage businesses. Because the capital is being invested at a risky time in a business venture, the angel must be capable of taking a loss of the entire investment, and, as such, most angel investors are high-net worth individuals. These individuals are nearly always “accredited investors” as defined under the Securities Act of 1933.

Average Selling Price: The price a certain class of good or service is typically sold for in the market. Average selling price is affected by the type of product and the product life cycle. Products, like computers, cameras, televisions and jewelry will tend to have higher average selling prices while products like books and DVDs will have a low average selling price. When a product is the latter part of its product life cycle, the market is most likely saturated with competitors therefore driving down the ASP. ASP can also refer to the average selling price of the product across multiple distribution channels, across a product category within a company or even across the market as a whole.

Balance Sheet: A balance sheet is a summary of a person's or organization's balances. assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a snapshot of a company's financial condition. Of the three basic financial statements, the balance sheet is the only statement which applies to a single point in time.

Bill of Materials: A bill of material (BOM) is a complete, formally structured list of the components making up a technical object or assembly. The list contains the object number of each component together with the quantity and unit of measure. The components can be stock or non-stock spares or assemblies, which in turn can be described by BOMs.

Carried Interest or “Carry”: The portion of any gains realized by the fund to which the fund managers are entitled, generally without having to contribute capital to the fund. Carried interest payments are customary in the finance industry in order to create a significant economic incentive for early-stage fund managers to achieve capital gains.

Cash Flow Statement: A cash flow statement or statement of cash flows is a financial statement that shows a company's flow of cash. The cash flow statement shows how changes in balance sheet and income accounts affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company.

Cost of goods sold, COGS, or "cost of sales": COGS includes the direct costs attributable to the production of the goods sold by a company. This amount includes the materials cost used in creating the goods along with the direct labor costs used to produce the good. COGS appears on the income statement and can be deducted from revenue to calculate a company's gross margin.

Diversification: The process of spreading investments among various types of securities and various companies in different fields.

Due Diligence: A process undertaken by potential investors – individuals or institutions – to analyze and assess the desirability, value, and potential of an investment opportunity. Early Stage: A state of a company that typically has completed its seed stage and has a founding or core senior management team, has proven its concept or completed its beta test has minimal revenues, and no positive earnings or cash flows.

EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of cash flow calculated as: = Revenue – Expenses (including tax, interest, depreciation, and amortization). EBITDA looks at the cash flow of a company.

Elevator Pitch: An extremely concise presentation of an entrepreneur’s idea, business model, company solution, marketing strategy, and competition delivered to potential investors. This should not last more than a few minutes or the duration of an elevator ride.

Equity: Ownership in the capital of a company. In corporations, it is called “stock” in limited partnerships, or in LLCs, it is called “interest” or “units.”

Exit Strategy: A fund’s intended method for liquidating its holdings while achieving the maximum possible return. Exit strategies can include selling or distributing the portfolio company’s shares after an initial public offering (IPO), a sale of the portfolio company, or a recapitalization.

Gross margin, Gross profit margin or Gross Profit Rate: This is defined as the amount of contribution to the business enterprise, after paying for direct-fixed and direct-variable unit costs, required to cover overheads (fixed commitments) and provide a buffer for unknown items. It expresses the relationship between gross profit and sales revenue.