Glossary of private markets and pre-IPO terms

Unicorn

A company that is still private and valued at more than 1 billion dollars.

Decacorn

Same idea as a unicorn, with the bar set at 10 billion dollars of private valuation.

Hectocorn

The top tier: a private company valued at more than 100 billion dollars.

Pre-IPO

The stretch of a company's life before its shares list on a stock exchange.

IPO (initial public offering)

The first time a company sells its shares to the public on a stock exchange.

Secondary transaction

A sale of shares that already exist, by someone who holds them (an employee, an early investor). The company issues nothing new.

Primary round

A funding round in which the company issues new shares and the money goes to the company.

Tender offer

An organized offer to buy shares from employees and early holders. The company often runs it.

SPV (special purpose vehicle)

A legal entity set up to hold an investment for several investors, often the shares of a single company.

ROFR (right of first refusal)

A contractual right: before shares go to a third party, the company or existing investors can buy them on the same terms.

Co-sale right

The right of certain shareholders to sell alongside another shareholder, on the same terms.

Liquidation preference

A term that puts holders of certain share classes first in line for the proceeds when the company is sold or liquidated.

Preferred shares

A share class that carries rights common shares lack, liquidation preference for one.

Common shares

The basic share class. Founders and employees usually hold it.

Lock-up

The period after an IPO in which existing holders face restrictions on selling their shares.

Greenshoe (over-allotment option)

An option that lets the underwriters sell extra shares, up to a set percentage, when demand in the IPO is strong.

Cap table

The record of who owns a company: every shareholder, how many shares, which class.

Post-money valuation

What a company is worth right after a funding round, new capital included.

Pre-money valuation

What a company is worth just before a funding round, without the new capital.

Qualified or professional investor

An investor who meets the legal criteria for certain private and restricted offerings. The criteria change from one jurisdiction to another.

Accredited investor

The US label for an investor who passes income or net worth tests and can therefore join certain private offerings.

Family office

A private firm that runs the money and investments of one wealthy family, or several.

Carried interest

The manager's share of the investment profits in a fund or SPV, paid on top of management fees.

Private equity

Investing in companies not listed on a public exchange. Traditionally that meant buying out mature businesses.

Secondary market (private)

Where existing shares of private companies change hands between holders and buyers, usually with the company's approval.

Series A, B, C

A private company's priced funding rounds, lettered in sequence. As a rule, the further down the alphabet, the larger the company and the higher the valuation.

Seed round

A startup's first institutional funding round. It comes before the Series A.

Bridge round

Money raised between two priced rounds to keep the company going until the next round or an exit.

Down round

A round priced below the valuation of the previous round.

Up round

A round priced above the valuation of the previous round.

Flat round

A round priced at the same valuation as the previous one.

Convertible note

A loan that turns into shares at a later round, usually at a discount or under a valuation cap.

SAFE (simple agreement for future equity)

An agreement that gives the investor shares in a future priced round. It is not structured as debt.

Valuation cap

The highest valuation at which a convertible note or SAFE converts into shares. If the next round prices higher, the early investor still converts at the cap.

Late-stage company

A private company that is already large and has revenue, usually several rounds past seed and nearer an IPO or a sale.

Growth equity

Minority stakes in established companies that are still growing. It sits between venture capital and buyout private equity.

Venture capital

Equity investment in private companies at an early or growth stage, usually made through a fund.

Buyout

Buying a controlling stake in a company. The classic form of private equity.

Direct listing

A listing in which existing shares start trading. The company issues no new shares and uses no underwriters to place them.

SPAC (special purpose acquisition company)

A listed shell company that raises money to merge with a private company. The merger is how the private company goes public.

Underwriter

The investment bank that runs an IPO: it prices the shares and places them with investors.

Bookbuilding

How underwriters set an IPO price: they collect investor orders at different price levels.

Price range

The indicative price band published before an IPO. The final price can land inside it or outside it.

Prospectus

The registration document a company publishes before listing, with its financial statements and risk factors. In the United States it is filed as Form S-1.

Free float

The part of a listed company's shares that can actually trade. Locked-up and closely held stakes are left out.

Dilution

The drop in an existing shareholder's percentage of the company when new shares are issued.

Anti-dilution provision

A clause that adjusts how preferred shares convert if the company later issues shares at a lower price.

Drag-along right

Lets majority shareholders force minority shareholders to join a sale of the company.

Tag-along right

Lets minority shareholders join a sale on the same terms a majority shareholder has obtained.

Pro rata right

An existing investor's right to put money into later rounds so that its percentage of the company stays the same.

Vesting

The schedule by which an employee or founder earns the right to their shares or options, bit by bit.

Cliff

The opening stretch of a vesting schedule. Nothing vests during it; when it ends, a first block vests at once.

Stock option

An employee's right to buy company shares at a fixed exercise price.

RSU (restricted stock unit)

A promise to give an employee company shares once conditions are met: usually time, sometimes a liquidity event as well.

409A valuation

An independent valuation of a US private company's common shares, used to set option exercise prices. It normally comes in below the price of the latest preferred round.

Forward contract

An agreement to deliver shares, or their economic value, at a future date. In private markets it sometimes stands in for a direct transfer of shares that is not permitted.

Secondary market platform

A marketplace that matches buyers and sellers of private company shares and handles the transfer.

Broker-dealer

A regulated intermediary licensed to arrange securities transactions for clients.

Transfer restriction

A clause in a company's constitutional documents or shareholder agreements that limits whether shares can be sold, and to whom.

Information rights

Contractual rights that give certain shareholders access to financial statements and other company information.

Data room

The controlled set of documents a company opens to investors or buyers during due diligence.

Term sheet

A short document with the main commercial terms of an investment, agreed before the full legal documents are drafted.

Due diligence

The checks an investor runs on a company and on the deal terms before committing capital.

GP and LP (general partner, limited partner)

The fund manager and the fund's investors. The general partner runs the fund; the limited partners put up the capital.

Management fee

The yearly fee a fund or SPV manager charges, calculated on committed or invested capital.

Hurdle rate

The minimum return a fund has to deliver to its investors before the manager earns any carried interest.

Capital call

A fund manager's request to investors to pay in part of the capital they committed.

Dry powder

Money committed to funds that has not been invested yet.

NAV (net asset value)

The estimated value of a fund's holdings minus its liabilities. Funds use it to report performance between transactions.

Mark to model

Valuing a holding with an internal model instead of an observed transaction price. Common when the shares rarely trade.

J-curve

The usual shape of private fund returns over time: negative in the first years because of fees and write-downs, positive later if the exits work.

Illiquidity premium

The extra return an investor expects for tying up capital that cannot be withdrawn on demand.

Holding period

How long an investor expects to hold an investment before an exit becomes possible.

Exit

The event that turns a holding into cash or listed shares. Usually an IPO, a trade sale or a secondary sale.

Trade sale

Selling a company to another company instead of listing it.

Burn rate

How fast a company spends cash beyond what its revenue brings in.

Runway

How long a company can keep operating on the cash it has before it needs new funding.

ARR (annual recurring revenue)

The annualized value of a company's recurring contracts. For software businesses it is a common valuation reference.

Regulation D

The US regime that lets companies raise capital privately without registering the offering, with limits on who can invest.

Rule 144

The US rule on reselling restricted securities, holding period requirements included.

Qualified purchaser

A US category above accredited investor, based on the amount of investments owned. Certain private funds use it.

Insider

In a listing, a director, officer or significant shareholder. Insiders normally get the longest lock-up.

Staggered release

A lock-up structure in which shares become sellable in tranches on different dates, not all at once.