Glossary - Equity
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Bad leaver event
Case of default by the management in any of its material obligations, fraud or any other law-breaking action. Investors usually have the possibility to remove the management by a qualified majority.
Blind pool
A blind pool is a limited partnership that is set up for investment without specifying in which companies the general partner plans to invest.
Buy and build
An investment strategy which buys companies as add-on investments to build up from a number of platform companies.
Carried interest
The share of capital gains (often 20%) that is allocated to the venture capitalists.
Catch-up
A clause that allows the venture capitalist to take, once the agreed hurdle rate (cf. below) has been paid out to the investors, a share of the capital gains until the carried interest level, as agreed, has been reached.
Clawback
A clawback provision ensures that the venture capitalist is obliged, in a legally binding way, to pay back any portion of carried interest paid out to him beyond the agreed percentage on cumulative net capital gains.
Commitment
Pledges of capital contribution to the venture capital fund.
Deal flow
Flow of investment propositions received by a venture capitalist.
Development capital
Capital or quasi capital invested into companies which are generally profitable, but require further equity or quasi equity finance to expand.
Disbursement
The investment made by a venture fund into an investee portfolio company.
Distribution
A return of cash or shares to an investor from a venture capital fund.
Distributions to Paid In Capital (DPI)
DPI calculates overall fund performance on realised investments comparing actual distributions to actual fund takedowns.
Draw down
Capital contribution called by the venture capitalists from the investors, who transfer the money to the fund for investments or to cover management fees.
Draw down period
Period during which draw downs of commitment may be conducted. The draw down period is usually longer than the investment period in order to finance follow-on investments and payment of the management fee.
Dry closing
Allows a fund to be established with subscriptions frozen until they are sufficient to start operations and make a first capital call.
Early stage
Financing to companies before they start commercial manufacturing, sales and revenue generation. Includes seed and start-up financing.
Equalisation payment
Payment which includes two elements: an interest premium and a capital gain participation, to be paid to the existing investors by a newly-admitted investor, or by an existing investor increasing his commitments in any subsequent closing. The interest premium is an amount calculated on the basis of an interest rate applied to the disbursed commitment, from the date of the disbursements by the existing investors until the date of the disbursement by the new investor. On such a basis, all the commitments are supposed to start simultaneously on the date of the first closing. The capital gain participation is a payment designed to compensate the capital gains (realised or unrealised) made by the existing investors before the admittance of the new investor and potentially diluted by this admittance. This capital gain participation by nature only concerns exceptional situations.
Establishment cost
Costs relating to the formation of the fund including but not limited to legal, accountancy, marketing, printing, postage, and other costs of establishment. It can also include placement agent fees.
Exclusivity
Prior to the fund being substantially invested, the team shall concentrate exclusively on the management of the fund in question and not become involved in the management of other similar funds or further fund raising.
Fee offset
All or part of the fees received by the venture capitalist from investee companies will be offset against the management fee.
Follow-on investment
A further round of financing provided for a company subsequent to the initial investment.
Fund governance
Set of rules specifying the decision and participation rights of the different parties in connection to the fund. In particular the range of independence of the management team in its decisions is a fundamental point. The fund governance also encompasses the organisation of the decision-making bodies of the fund (typically board of directors, investment committee, advisory board).
Good leaver event
Case in which investors decide to change the management without the existence of a reason that would qualify for a bad leaver event. The investors have the possibility to remove the management with a qualified majority. Usually the management is entitled to monetary compensation.
Hands-off investor
An investor who does not generally become involved with the management of investee companies. Normally invests as a member of a syndicated deal.
Hands-on investor
An investor who is actively involved in the strategic, or day-to-day management of investee companies.
Home-run companies
Companies with a substantial return potential, generally repaying in excess of 5-10 times the capital invested by the Fund in such a company and expected to return an amount representing all or a substantial portion of the fund size.
Hurdle rate
A priority right on the distribution of capital gains given to the investors: either, (a) the set rate of return that the investors must receive before the venture capitalist can begin sharing in any distributions, or (b) the level that the fund's net asset value must reach before the venture capitalist can begin sharing in any distributions.
Investment period
The period from first closing of the fund until the end of the active investment of capital by the fund in new portfolio companies. Follow-on investments in portfolio companies or add-on acquisitions (in the case of "buy and build" strategy) may be made after this period.
IPO
Initial public offering – the US equivalent of a UK flotation.  
IRR
Internal rate of return – the annual rate of return to the investor. In simple terms, it is a time-weighted return expressed as a percentage.
Key man
Any member of the management team, the contribution of whom is identified as being essential for the appropriate management of the fund.
Key man event
A situation in which, for whatever reason, the number of previously identified key persons in the management team is reduced below a number which is agreed to be the minimum number for the appropriate management of the fund. In the case of a key man event, the management is not allowed to make further investments or divestments in relation to the fund except for the fulfilment of previously agreed commitments. The management will be allowed to resume investments and divestments once an appropriate solution has been found and approved by a qualified majority of the investors.
Management fee
The fee, typically a percentage of committed capital or net asset value that is paid by the venture capital fund to the management to cover salaries and expenses.
MBI
Management buy-in, a new management team brought into a company or division of a company by its present owners with the aim of turning the company around.
MBO
Management buy-out, an existing management team buying a company or division of a company from its present owners. Generally well-established, profitable business.
Multiple on Cost (m.o.c.)
Measure of the gross performance of the investment in one portfolio company comparing the proceeds from and residual value of the investment to the capital invested in that company. The measure can also be applied to a sample of companies or to the whole fund portfolio, measuring the fund gross performance.
Private equity
As opposed to public equity, this term specifies equity investments in private, not quoted companies.
Reinvestment
Investment of the proceeds from the exit of an investee company.
Residual Value to Paid In Capital (RVPI)
RVPI calculates overall fund performance on unrealised investments comparing residual value to actual fund takedowns.
Seed
Financing provided to research, assess and develop an initial concept before a business has reached the start-up phase.
Start-up
Financing provided to companies for product development and initial marketing. Companies may be in the process of being set up or may have been in business for a short time, but have not sold or are starting to sell their product commercially.
Syndicate investment
An investment which has been spread amongst several institutional backers, generally because it is too large for a single investor to provide all of the finance needed.
Total Value to Paid In Capital (TVPI)
TVPI calculates overall fund performance on realised and unrealised investments comparing actual distributions and residual value to actual fund takedowns.
Trade sale
Realisation of an investment by a sale to a third party.
Vesting profile
Determines the allocation of carried interest to the venture capitalists over time (usually the life of the fund).
Vintage year
The year in which the venture firm began making investments.
Wet closing
A closing where subscriptions are sufficient to start operations with a first capital call.