Financial Terms

Collateral - is an asset pledged to assure the repayment of a loan.

Common Stock - Units of ownership, or equity, in a company. Considered expensive in terms of ownership given to the venture capitalist because it has the most risk. It provides no protection, allows the least amount of control over management, and since there is no guaranteed dividend, common stock often doesn’t provide a return until the stock is sold.

Debt Ratios - are intended to measure the degree of the financial risk. The larger the debt position the client currently has, the higher the interest rates and the higher the term payments must be. Higher payments may make it more difficult for the firm to meet its other financial obligations. This ratio provides a sense of how much of the firm’s assets have been financed, the degree of indebtedness, and the ability to service the debt. Different industries will have different industry standards as to what the maximum ratio should be.

           Debt ratio = total debt divided by total assets.

Preferred Stock - A special form of ownership having a fixed periodic dividend that must be paid prior to payment of any common stock dividends. Preferred stock can be converted to common stock., but until then, it provides the VC preference over common shareholders. From the companies perspective it improves the company’s debt-to-equity ratio. Preferred stock allows the venture capitalist a waiting period to determine if the company performs as expected and to see if management’s objectives are similar to those of the VC, before the VC converts to common stock.

Senior Debt - Securities that have a preferential rights to payment before payments on any other securities.

Subordinated Debenture - Unsecured debt instruments whose claims are not satisfied until those of the creditors holding senior debt have been fully satisfied. Subordinated debt is often convertible to common stock or accompanied by warrants to purchase common shares. Therefore although it is a debt instrument senior lenders may accept it as an equity position allowing increased debt from other sources.