Venture capital offers a convenient form of financing for startups and early-stage businesses. Rather than taking out a loan, entrepreneurs can sell some of their business to an investor. Investors who purchase an equity stake in early-stage businesses are known as venture capitalists. While venture capital may sound straightforward, though, it encompasses many different terms. Here are some of the most common venture capital-related terms defined.
The ABCs of Venture Capital: Terms You Need to Know
Assets under management is the total value of all assets managed by a venture capitalist or venture capital firm. If you’re looking to finance your business with venture capital, you’ll probably want to choose an experienced venture capitalist with whom to partner. Assets under management can reveal how much experience a venture capitalist has and whether or not other businesses trust the venture capitalist.
Before purchasing an equity stake in your business, venture capitalists may inquire about your business’s debt-to-asset ratio. This financial metric represents your business’s debt relative to its assets. It’s calculated by taking your business’s total debt and dividing it by your business’s total assets.
An exit refers to a founder leaving the business that he or she founded. There are different types of exits. A founder may sell his or her stake to a venture capitalist, or a merger may occur. Regardless, the founder will leave his or her business while forfeiting ownership in exchange for compensation.
A levered buyout is a type of acquisition in which an external party, such as a venture capitalist, uses both capital and debt to purchase a controlling stake in a target business.
Preferred stock consists of stock shares that offer features or advantages not found in common stock. Venture capitalists may seek preferred stock when purchasing an equity stake in your business.
Private equity is a form of equity financing that targets privately owned businesses. Like venture capital, it involves an investor purchasing an equity stake in a business. While venture capital can involve privately owned or publicly traded businesses, though, private equity only involves privately owned businesses.
This article was brought to you by Intrepid Private Capital Group, a Global Financial Services Company. For more information on startup and business funding, or to complete a funding application, please visit our website.