Glossary

Ratchet antidilution provisions, which are the tougher form of antidilution protection, increase the conversion rate of the preferred stock based on the price per share at which the company sells its stock in a future down round, regardless of how few or how many new shares are sold at the lower price. This has the effect of retroactively reducing the price per share which the preferred was sold in the current round to the new, lower valuation of a future down round.

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. Re-capitalization can be an alternative exit strategy for venture capitalists and leveraged buyout sponsors. (See Exit Strategy and Leveraged Buyout)

The act a broker/dealer makes with an investor to confirm a transaction.

The common name for a preliminary prospectus, due to the red SEC required legend on the cover. (See Prospectus)

Redeemable preferred stock, also known as exploding preferred, at the holder's option after (typically) five years, which in turn gives the holders (potentially converting to creditors) leverage to induce the company to arrange a liquidity event. The threat of creditor status can move the founders off the dime if a liquidity event is not occurring with sufficient rapidity.

Redemption provisions allow investors to require the company to repurchase their preferred stock under certain circumstances, typically for the price originally paid. Redemption rights usually cannot be exercised unless the holders of at least a majority (sometimes more) of the preferred stock so request and usually cannot be exercised for four to five years after the financing. In certain circumstances, redemption provisions may provide for a right of exercise more quickly or for a repurchase at more than the original purchase price.

The SEC's review process of all securities intended to be sold to the public. The SEC requires that a registration statement be filed in conjunction with any public securities offering. This document includes operational and financial information about the company, the management and the purpose of the offering. The registration statement and the prospectus are often referred to interchangeably. Technically, the SEC does not "approve" the disclosures in prospectuses.

The right to require that a company register restricted shares. Demand Registered Rights enable the shareholder to request registration at any time, while Piggy Back Registration Rights enable the shareholder to request that the company register his or her shares when the company files a registration statement (for a public offering with the SEC).

SEC provision for simplified registration for small issues of securities. A Reg. A issue may require a shorter prospectus and carries lesser liability for directors and officers for misleading statements. The conditional small issues securities exemption of the Securities Act of 1933 is allowed if the offering is a maximum of $5,000,000 U.S. Dollars.

The regulation that outlines registration requirements for Securities Act of 1933.

Regulation D is the rule (Reg. D is a "regulation" comprising a series of "rules") that allow for the issuance and sale of securities to purchasers if they qualify as accredited investors.

(See Private Placement)

The rules relating to Offers and Sales made outside the US without SEC Registration.

Reg. S-B of the Securities Act of 1933 governs the Integrated Disclosure System for Small Business Issuers.

The Standard Instructions for Filing Forms Under Securities Act of 1933, Securities Exchange Act of 1934 and Energy Policy and Conservation Act of 1975.

The regulation that governs the requirements for financial statements under the Securities Act of 1933, and the Securities Exchange Act of 1934.

Reorganizations are significant changes in the equity base of a company such as converting all outstanding shares to Common Stock, or combining outstanding shares into a smaller number of shares (a reverse split). A Reorganization is frequently done when a company has already had a few rounds of venture financing but has not been able to successfully increase the value of the company and therefore is doing a Down Round that is essentially a restart of the company.

Public securities that are not freely tradable due to SEC regulations. (See Securities and Exchange Commission)

Shares acquired in a private placement are considered restricted shares and may not be sold in a public offering absent registration, or after an appropriate holding period has expired. Non-affiliates must wait one year after purchasing the shares, after which time they may sell less than 1% of their outstanding shares each quarter. For affiliates, there is a two-year holding period.

The legal principle that actions, such as anti-takeover measures, that promote the value of an auction process are allowable, whereas those that thwart the value of an auction process are not allowed. The duty is triggered when a company is in play as a target acquisition.

The right of first refusal gives the holder the right to meet any other offer before the proposed contract is accepted.

Issuance of "rights" to current shareholders allowing them to purchase additional shares, usually at a discount to market price. Shareholders who do not exercise these rights are usually diluted by the offering. Rights are often transferable, allowing the holder to sell them on the open market to others who may wish to exercise them. Rights offerings are particularly common to closed-end funds, which cannot otherwise issue additional ordinary shares.

The chance of loss on an investment due to many factors including inflation, interest rates, default, politics, foreign exchange, call provisions, etc. In Private Equity, risks are outlined in the Risk Factors section of the Placement Memorandum.

the gain or loss generated on an investment versus how much was invested.

Rule 144 provides for the sale of restricted stock and control stock. Filing with the SEC is required prior to selling restricted and control stock, and the number of shares that may be sold is limited.

A safe harbor exemption from the registration requirements of Section 5 of the 1933 Act for re-sales of certain restricted securities to qualified institutional buyers, which are commonly referred to as "QIBs." In particular, Rule 144A affords safe harbor treatment for re-offers or re-sales to QIBs - by persons other than issuers - of securities of domestic and foreign issuers that are not listed on a U.S. securities exchange or quoted on a U.S. automated inter-dealer quotation system. Rule 144A provides that re-offers and re-sales in compliance with the rule are not "distributions" and that the reseller is therefore not an "underwriter" within the meaning of Section 2(a)(11) of the 1933 Act. If the reseller is not the issuer or a dealer, it can rely on the exemption provided by Section 4(1) of the 1933 Act. If the reseller is a dealer, it can rely on the exemption provided by Section 4(3) of the 1933 Act.

Provides an exemption from the registration requirements of the Securities Act of 1933 for intrastate offerings, if certain requirements are met. One requirement is that 100% of the purchasers must be from within one state.

Rule 501 of Regulation D defines Accredited Investor.

Rule 505 of Regulation D is an exemption for limited offers and sales of securities not exceeding $5,000,000.

Rule 506 of Regulation D is considered a "safe harbor" for the private offering exemption of Section 4(2) of the Securities Act of 1933. Companies using the Rule 506 exemption can raise an unlimited amount of money if they meet certain exemptions.

the amount of time until a startup runs out of money (assuming that expenses remain constant). Determined by dividing the current cash position by the burn rate. Ex. if a company’s cash position is $100,000 and it costs $10,000 per month to run the company (that’s the burn rate), then the runway is 10 months.