MidMarketWiki - Alphabetical

A legal term referring to the equal treatment of two or more parties in an agreement. For example, a venture capitalists may agree to have registration rights that are pari passu with the other investors in a financing round.

The right of holders of certain preferred stock to receive dividends and participate in additional distributions of cash, stock or other assets.

A unit of ownership composed of preferred stock and common stock. The preferred stock entitles the owner to receive a predetermined sum of cash (usually the original investment plus accrued dividends) if the company is sold or has an IPO. The common stock represents additional continued ownership in the company. Participating preferred stock has been characterized as

A clause in a financing agreement whereby any investor that does not participate in a future round agrees to suffer significant dilution compared to other investors. The most onerous version of

See Price earnings ratio.

Rights of an investor to have his or her shares included in a registration of a startup's shares in preparation for an IPO.

See Private investment in public equities.

A company that specializes in finding institutional investors that are willing and able to invest in a private equity fund. Sometimes a private equity fund will hire a placement agent so the fund partners can focus on making and managing investments in companies rather than on raising capital.

A company that has received an investment from a private equity fund.

The valuation of a company including the capital provided by the current round of financing. For example, a venture capitalist may invest $5 million in a company valued at $2 million

See Private placement memorandum.

The valuation of a company prior to the current round of financing. For example, a venture capitalist may invest $5 million in a company valued at $2 million pre-money. As a result, the startup will have a

Seniority, usually with respect to dividends and proceeds from a sale or dissolution of a company.

A type of stock that has certain rights that common stock does not have. These special rights may include dividends, participation, liquidity preference, anti-dilution protection and veto provisions, among others. Private equity investors usually purchase preferred stock when they make investments in companies.

The ratio of a public company's price per share and its net income after taxes on a per share basis.

The price/earnings ratio is the value multiple that is used most often in practice to apply the guideline companies'valuation approach. A company's price/earnings ratio expresses the relationship between the market price of the company's stock and its net income. It indicates what a knowledgeable investor is willing to pay for $1.00 of the company's net earnings. Using this method, a guideline company's stock price is divided by its earnings for a period of time to arrive at a value multiple. This multiple can then be applied to the earnings of the company being valued to arrive at an estimate of the value of the appropriate ownership interest.

In applying the P/BV method, a comparative company's stock price is divided by its book value (shareholders'equity) as of the valuation date. In many cases it is felt that P/BV does not add anything to the P/E method, and is usually used in instances where there are not other multiples methods available. In some industries, it is a standard measure to use P/BV.

Taxes

A company's gross cash flow is usually defined as adjusted net income before extraordinary items and nonrecurring events, plus non-cash charges to income. The most common non-cash charges to be added back to income are depreciation and amortization expenses and deferred taxes. Deferred taxes should be treated as a non-cash charge only if a company's deferred tax liability is expected to stay the same or increase in the future. In certain cases, the Valuator may use guideline company price/gross cash flow multiples to value an ownership interest in a company. Under this method, a guideline company's stock price as of the valuation date is divided by its gross cash flow for a chosen period of time. P/GCF multiples are more commonly used in the following situation: a. The market would ordinarily use P/E multiples to price a company's stock, but either the company being valued or the guideline companies have recently had negative or marginally positive earnings. b. The stock of companies in the industry of the company being valued are usually priced using gross cash flow multiples. c. The economic life of the company's fixed assets substantially exceeds the depreciable life of the assets for financial reporting purposes. This sometimes occurs when a company has been depreciating its assets using an accelerated method for book purposes, even though the assets have a great deal of economic value remaining. d. Depreciation or amortization is a significant portion of gross cash flow in comparison to net income.

The price/revenue method is used less frequently than other guideline company methods to value an ownership interest in a company. However, price/revenue is often useful as a check to determine the reasonableness of other methods, especially for service and retail oriented businesses.