Inside Secrets to Angel Investing, Chapter 3 Excerpt

Angel Investing: The Private Equity Investment Glossary

When you enter a new field or pursue a professional degree, whether it is business school, music school or medical school, or just learning a  new hobby like wood working or a to play a musical instrument, there are terms and phrases that are common to that arena but foreign to you.     Mastering the language of angel investing and venture capital is one step in the process of learning how to be an angel investor.  You will need to learn to recognize terms in the offering documents and phrases used to describe the valuation of the company or stage of the company so that you are more informed about the decisions you will make.

All of this information and the other chapters of the Inside Secrets was assembled because people like yourself needed the information and didn’t know where to find it.  Their wealth managers and financial advisors are told by the SEC and FINRA that they can’t offer that advice so where can they go to get educated?  There is a lot of information for entrepreneurs to learn how to attract investment from people like yourself, but not for investor to understand how to make an investment in a private company and avoid foolish mistakes.  As Inside Secrets was being researched and written, and we continued to interview investors and host our entrepreneur pitch events, it was clear that a dictionary was needed… or at least a handy guide that could be referenced whenever needed.   It isn’t at the end, it is right in the middle because understanding the language of private investment is at the heart of learning about making money with this asset class.

To learn more about how to buy Inside Secrets to Angel Investing, plus the 6 Bonuses that are included in your purchase, click here.

Here is a sampling of some of the words and phrases we define in the full chapter within “The Inside Secrets of Angel Investing.”

Anti-dilution Provisions Contractual measures that allow investors to keep a constant share of a firm’s equity in light of subsequent equity issues. These measures may give investors pre-emptive rights to purchase new stock at the offering price. In the event a company sells stock at a lower price than the investors paid, then an adjustment is made to the number of shares held by the investors of that round.

Bridge Loans  Bridge loans are short-term financing agreements that fund a company’s operations until it can arrange more comprehensive longer-term financing. The need for a bridge loan arises when a company runs out of cash before it can obtain more capital investment through long-term debt or equity.

Burn Rate The rate at which the company consumes cash, usually expressed on a monthly basis. This is an important quantitative measurement because it can reflect the company’s fiscal perspective. If the company is creative, conserves its limited funds, outsources operations when it can, gets competitive bids on services, then investors may feel more comfortable that the company will use investor dollars wisely.  In the hey-day of the dot-com, founders ensured they were paid and rewarded before many other critical things for the business development happened. This is no longer acceptable.

Capitalization Table (Cap Table) A detailed schedule showing the number of shares owned by various classes owners typically broken down by common stock holders vs. preferred vs. stock option holders. This is the definitive document used by entrepreneurs and VCs to determine what part of the company each owns.  It is a great document to plan valuations and funding strategies to show each stage investors how their stock will appreciate after different milestones are met and to show the later-round investors, secure equity in the company.

Capital Structure The mix of a firm’s debt (short-term and long-term) and owner’s equity (used to fund the firm’s operation).

Capital Under Management The amount of capital available to a fund’s management team for venture investments.

Equity Financing  Selling an interest in the business to an outside party or investor to raise money. Sometimes referred to as an Equity Offering, because the business owners are  raising funds by offering ownership in a corporation through the issuing of shares of a corporation’s common or preferred stock.

Equity Gap A stage of business financing, usually involving less than $500K in which outside funds are difficult to obtain. This absence of small amounts of risk capital is due to the high fixed costs of appraisal and monitoring which those institutional investors must assume, making it uneconomical for them to invest in small, young firms. The gap is further widened by banks’ reluctance to make unsecured loans to small ventures. Business Angels make investments that fall in the equity gap, partly relieving the unfortunate situation.

Jumping to the end of the glossary…..

Pre-Money Valuation The value of the company before a VC’s cash goes into the business. VCs use the Pre-Money Valuation to determine what percent of the company they will own.

Ratchets A financial arrangement that allows one party to increase the share of their equity stake in a venture depending on the performance of the enterprise. Venture Capitalists often use such agreements to increase their equity stake (and thus gain more control) in investments that are performing poorly.

Recapitalization The reorganization of a company’s capital structure. A company may seek to save on taxes by replacing preferred stock with bonds in order to gain interest deductibility.

Series A Preferred Stock The first round of stock offered during the seed or early-stage round by a portfolio company to the venture investor or fund. This stock is convertible into common stock in certain cases such as an IPO or the sale of the company. Later rounds of preferred stock in a private company are called Series B, Series C and so on.

Small Business Investment Companies (SBIC) SBICs (Small Business Investment Companies) are lending and investment firms that are licensed by the federal government. Licensing enables these firms to borrow from the federal government to supplement the private funds of their investors. Some of these funds engage only in making loans to small businesses or invest only in specific industries. The majority, however, are organized to make Venture Capital investments in a wide variety of businesses.

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You get the idea.   These terms are a sampling of what you will find in the full chapter of Inside Secrets of Angel Investing when you choose to buy the full book:   Click here to learn more about the book and the 6 bonuses you will receive with your purchase.

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About The Author

karen-rands-bioKaren Rands is the founder of Kugarand Capital Holdings, LLC (www.kugarandholdings.com). For over a decade, she has taught entrepreneurs how to attract capital from investors and lenders, and high net worth men and women how to invest in early stage private companies. She has provided opportunities for qualified companies to meet and court qualified investors leading to the investment of over $35,000,000, growth of dozens of companies and the creation of hundreds of jobs. Through that she has interviewed, analyzed and observed and then applied that knowledge in ebooks, podcasts and blog reports. Now she is taking it to a whole new level by building a national network of investors that want be a part of the expected seismic shift in investment in the public markets to the private markets. High net worth men and women want their investments to be relevant and rewarding. Investing in an aspiring entrepreneur’s endeavor to help bring innovation to the market and create jobs, while creating wealth, just makes sense. It’s the win-win of investing. To learn more about Karen Rands, visit her bio page.

Disclaimer: Every effort has been made to accurately represent our products, their sources and their potential when applied by the student. Any information offered regarding actual earnings or examples of actual results can be verified upon request or the source can be made available. Purchasing equity in private companies is an extremely risky business. The information provided during the online orientation to Angel Investing is drawn from personal experience with Angel Investors and companies seeking funding, and from recognized authors and columnists, and is not intended to represent or guarantee that anyone will achieve the same or similar results. Each individual’s success depends on his or her background, dedication, desire and motivation. As with any business endeavor, there is an inherent risk of loss of capital and there is no guarantee that you will earn a return on your investment.

To learn more about how to buy Inside Secrets to Angel Investing, plus the 6 Bonuses that are included in your purchase, click here.

“Inside Secrets to Angel Investing” is copyright protected and the information held within this website and the derivative content of the electronic courses are the sole property of Kugarand Holdings, LLC. You may not distribute it for financial gain without express approval from Kugarand Holdings, LLC. You may use the online material for educational purposes and link this and the Kugarand Holdings website to your website if you do not modify any of the content or credits.

©2005 Karen Rands & Kugarand Capital Holdings, LLC