The Outlier Equation · Appendix C

Venture Capital glossary

37 terms, defined the way the book uses them.

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83(b) election: An election to be taxed on restricted stock at grant rather than as it vests; it must be filed within thirty days.

Accredited investor: An individual or entity meeting the SEC's income, net-worth, credential, or entity tests for participation in most private offerings.
Anti-dilution protection: An adjustment to a preferred series' conversion price when the company later issues shares at a lower price.
ARR: Annual recurring revenue: contracted recurring subscription revenue on an annualized basis.

Carried interest: The general partner's share of fund profits, commonly 20% in venture.
Clawback: An obligation of the general partner to return carry received in excess of its entitlement over the life of the fund.
Continuation vehicle: A new vehicle managed by the same general partner that buys one or more companies from an older fund.

Fully diluted shares: All outstanding shares plus options, the available pool, warrants, and, where specified, converting securities.
Fund returner: A single investment whose proceeds equal or exceed the fund's committed capital.

IPO ratchet: A provision granting additional shares if an IPO prices below a threshold.

J-curve: The pattern of early negative and later positive cumulative cash flows to a fund's limited partners.

Liquidation preference: The amount preferred holders receive before common holders in a sale or wind-down.
Lockup: An agreement by pre-IPO holders not to sell for a period, usually about 180 days.

Net revenue retention: Revenue from a customer cohort after twelve months, including expansion, contraction, and churn, divided by its starting revenue.
Non-participating preferred: Preferred stock that receives the greater of its preference or its as-converted share, not both.

Option pool shuffle: Creating or enlarging the option pool inside the pre-money valuation, so that existing holders bear its dilution.

Pay-to-play: A provision penalizing investors who do not take up their share of a new round.
Post-money valuation: The implied value of the company immediately after a financing: investment divided by the new investors' ownership.
Power law: A distribution in which a small number of outcomes account for most of the total value.
Pre-money valuation: Post-money valuation less the new investment.
Pro rata right: The right to invest in later rounds to maintain an ownership percentage.
Protective provisions: Matters requiring a separate vote of the preferred stock.
PME: Public market equivalent: a comparison of a fund's cash flows with the same cash flows invested in an index.

QSBS: Qualified small business stock, eligible for a federal gain exclusion under Section 1202.

Recycling: Reinvesting realized proceeds, up to a cap, rather than distributing them.
Reserves: Capital set aside for follow-on investments in existing portfolio companies.

SAFE: Simple Agreement for Future Equity: a contractual right to future equity without interest or maturity.
Shadow series: A sub-series of preferred stock issued on conversion of SAFEs or notes with a preference equal to the conversion price.

Tender offer: An offer to buy shares from many holders at a fixed price within a set window.
TVPI: Total value to paid-in capital: distributions plus remaining net asset value, divided by paid-in capital.

Valuation cap: The maximum valuation at which a SAFE or note converts.
Venture debt: A loan to a venture-backed company, usually with warrants, underwritten mainly on its equity backers.

Waterfall: The contractual sequence for allocating proceeds among classes of securities or fund participants.