INTANGIBLE CAPITAL VALUE
by Erwan COATNOAN DE KERDU
Your copilot in creating a successful company
ABSA : share with share subscription warrants
Hybrid security, composed of one ordinary share as well as one or more options to purchase new shares. The attachment of warrants gives additional value insofar as the investor holder will have the possibility, but not the obligation, to buy other shares of the company on a given date and at a fixed price. in advance. The subscription warrant can be conditioned and allow the shareholder to replay in the event of a decline in the value of the company : it is then a “ratchet” (see below).
Capital increase at a lowered share valuation which dilutes shareholders who do not have the capacity to follow or do not wish to do so.
Management body of a company. Its exact name varies according to the country and the form of the company. In the usual case of French simplified joint-stock companies (SAS), this is generally a “ strategic committee ”. The scope of the decisions taken by this committee are determined by the shareholders’ agreement.
Financial compensation which may in certain cases be contractually provided for in the event of a breach of the termsheet, payable by the party at the origin of the breach.
Bridge financing, provided before a new arrival of capital investors or before an IPO, generally by existing investors, in the form of convertible bonds and at preferential conditions compared to subsequent investors.
BSA (Share Warrants)
This voucher enables the purchase of new shares, under conditions set in advance by the General Meeting of shareholders on the proposal of the board. BSA are a ” call “, ie a right to buy. In France, these warrants must generally be purchased from the company for a fraction of the price of the underlying share.
BSPCE (Warrants of Subscription of Shares of Company Founders)
Category of BSA reserved for employees of an unlisted company. It is a form of ” stock option “, which can be granted by the company free of charge and which is associated with a condition of presence in the company (typically 2 to 4 years).
Growth of a business through the acquisition of generally smaller businesses, in complementary segments or geographies. LBO companies do a lot of “Build Up” in order to quickly increase the value of their holdings. But funded start-ups are also doing more and more.
Individuals investing their personal money and providing their opinions, advice and networks. There are many associations of business angels, which often invest in several on the same deal (Paris Business Angels, HEC Business Angels, XMP…).
The “ business model ” is a synthetic representation of the main aspects of an organization’s value creation, both in terms of its purposes (objectives, offers, strategies) and the resources and means deployed. In the creation of a business or activity, the writing of the business model (not to be confused with the business plan), constitutes a major exercise, because it gives a complete overview of the capacity of the project to create more or more value. less quickly.
CAC or Customer Acquisition Cost
A very important measure of start-up activity is the total average cost required to acquire a new customer. The value created by the start-up is the difference between the CAC and the “Life Time Value” (LTV), the average total net income of the client before he “churns”, that is to say he ceases to be a customer.
Capital increase (” AK “)
Issue of new shares which are bought by existing or new subscribers in order to bring cash to the start-up. This capital increase dilutes the existing shareholders. These shares are generally purchased with an “issue premium ” compared to the shares issued when the company was created, issue premium negotiated upon entry.
Table summarizing the holdings of shares, present and future, including the effect of exercising convertible securities (share warrants, warrants for founders of companies, Convertible Bonds).
Incentive for private equity operators based on the performance of the investments made. This incentive paid to managers of private equity funds generally represents 20% of capital gains recorded, and is generally only payable after financial investors have reached a minimum internal rate of return (hurdle rate). It is an instrument allowing to align the interests of investors in the funds (“ Limited Partners ”) and of the fund teams (“ General Partner ”).
Refers to the resale of shares in cash (partial or total) before a total liquidity operation of the securities (resale or IPO), which is generally done at a negotiated value lower than the last price of the share during an increase of capital (known as the “ Cash In ” operation).
Comparables (comparables method)
Company valuation method based on the valuation of other companies in the sector, then by performing an equalization on turnover or profits.
Last step of an investment (or a disinvestment), at the end of which all the legal documents are signed, the funds are paid by the financial investors and the transaction is carried out. Three types of contract documents are generally signed : Shareholder agreement, Investment protocol and Subscription forms . In addition, you can sign an Asset and Liability Guarantee and ” Side Letters “.
Crowdfunding (or crowdfunding )
Tools and methods of financial transactions that call on a large number of people to finance a project, either in capital or in advance of the project.
This mode of financing is done without the help of traditional financing players, via crowdfunding platforms on the internet.
In France, capital crowdfunding requires specific approval from the Autorité des Marchés Financiers (AMF) and is limited to € 1 million.
Business flows, including all the investment proposals made by personal relationships, specialized intermediaries, affiliate networks, or directly by the entrepreneurs themselves.
Discounted Cash Flow (or DCF, Net Present Value or NPV in French)
This designates in particular a method of valuing companies. The value of the business is determined by discounting future cash flows. The discount rate chosen for cash flow, which can exceed 20% on risky segments, has a major impact on the estimated value of the company.
Financing round at an action price lower than the previous one
Drag along (or DAR : drag along right)
Forced exit clause for minority shareholders in the event of a buyback offer for the majority of the shares. It is a right which ensures that the majority shareholders are not blocked in the liquidity of their shares by the minority shareholders. This duty, generally required of minority shareholders, comes in front of a right : the Tag Along.
All of the information research and control measures enabling the capital investor to base his judgment on the activity, financial situation, results, development prospects and organization of the company. Due diligence includes financial, legal (analysis of existing contracts), technical, and business parts.
The Earn-out clause allows part of the price paid by the buyer to be indexed to the company’s future results. This indexation can be based on EBITDA, EBIT or current income. This clause can force the founders of a company to stay in the company for a few years in order to be paid the full price of the sale, after having ” made their earn out period “.
Actions, in English. “ Equity- paid ” : paid in shares, rather than cash.
Evergreen or Ever Green
Refers to an investment structure that has recurring cash inflows and therefore does not need to raise money regularly. It generally does not need to return money to its investors in a strictly limited time frame.
Executive summary or Execsum
Summary of the business plan in a few pages which should allow the capital investor to get a precise idea of the project and make him want to go further through the study of the business plan which will be communicated to him subsequently.
Resale of the shares of a company, either in the event of acquisition by another company, or by IPO, or by repurchase by managers.
FCPR (Risky Mutual Fund )
Belonging to the UCITS family, the FCPR is a French regulated instrument for the co-ownership of transferable securities and has no legal personality. It is managed by a management company approved by the Autorité des marchés financiers (AMF) which acts in the name and on behalf of the FCPR, represents it and commits it. An FCPR must invest in shareholdings in the capital of companies, respecting certain quotas depending on the type of investment. The FCPR is the most common form of investment fund in France for professional investors, whose liability is limited in relation to the holding of securities. They are “ Limited Partner ” of the FCPR, in association with the “ General Partner ” which is the management company.
FCPI (Mutual Fund for Investments in Innovation)
Created by the 1997 finance law, FCPIs are French mutual funds whose assets must be at least 60% of the securities of unlisted companies having their registered office or a permanent establishment in the Union. European, employing less than 2000 people and presenting an innovative character. FCPIs are subscribed by individuals with a tax advantage upon subscription. FCPIs tend to invest quickly in companies whose risk profile is visible and often devote less monitoring time to them than FCPRs.
Incentive mechanism for managers and employees consisting in allocating them free shares of the company, under the benefit of a favorable tax regime but with conditions of presence and retention.
Guarantee of Assets and Liabilities
Guarantee potentially given by the manager to the financial investor on the consistency of the assets and liabilities in relation to the documents which served as the basis for the transaction. The commitment given by the sellers under the guarantee of liabilities is generally guaranteed by a deduction from the sale price or by a bank guarantee.
A process of rapidly experimenting with growth marketing levers, both conventional and unconventional, through multiple channels to identify the most effective. The ” Growth hackers ” often use inexpensive techniques such as addressing prospects via social media or viral marketing professionals. Accelerators surround themselves with these skills to help start-ups and intrapreneurs
Support structure for start-ups, including in particular a dedicated workspace, premises that are adapted to their activity (open spaces, meeting spaces, etc.), and value-added services (legal, accounting, training, lifting of funds…) which vary from one space to another. An incubator can be public or private, specialized or generalist. Unlike an accelerator, the length of stay is not strictly limited, the rent is generally paid and the incubator does not take a share in the capital.
Protocol signed during the investment to determine the terms and conditions of the Investment subscribed by the investors with the other shareholders of the company. It details in particular the subscription price, the new capitalization table, the rights of the shares acquired, etc.
IPO (Initial Public Offering )
Financial transaction conducted by a company and its various advisers (investment bankers, auditors, business lawyer, etc.) which allows the listing of equity securities [shares] of this company on a stock market (Nasdaq, EuroNext …)
IRR (Internal Rate of Return) – ROI in English
Rate measuring the average annualized profitability of an investment made up of negative flows (disbursements) and positive flows (receipts). It is used to measure and follow the evolution of the performance of Private Equity operations.
Key Man Insurance
Insurance taken out by the company on the heads of managers for the benefit of lenders and / or investment funds, or for the benefit of the company. This insurance is generally requested by investors when they enter the capital of the company, so as to be able to secure their investment in the event of failure of the team on which they have bet.
KPI (Key Performance Indicators)
Start-ups generally choose a small number and follow them regularly. It can be the number of users, conversion rate, turnover per user, acquisition cost, etc.
LBO (Leverage Buy Out)
Acquisition of a company by capital investors, generally associated with the managers of the company purchased, as part of a financial arrangement comprising a more or less significant proportion of loans, the repayment of which is provided for by the future profits of the company. society.
Lean Start Up
The term ” Lean Startup ” (English lean ” lean “) refers to a specific approach to quick start and with a minimal investment of an economic activity (or extension of a product launch). It is based on verifying the validity of concepts, scientific experimentation and iterative design. It tends to shorten product release cycles, regularly measure progress, and get user feedback. The concept was formalized in 2011 by Eric Ries on high-tech companies in Silicon Valley . Since then, he has had great success around the world, notably thanks to his book, “The Lean Startup”, which is a reference work for the launch of start-ups.
Letter of Intent (Letter of Intent)
Document formalizing the investment proposal addressed by the capital investor to the company in which he intends to invest, or to the advisory bank mandated by it. This may or may not be binding. It generally specifies the main terms of the future shareholders’ agreement. The termsheet must be countersigned by the start-up in order to signify acceptance of its conditions. After that begins the so-called ” due diligence ” period (see above).
Life Time Value (LTV)
Total average net income of the client during his life as a client, that is to say until the moment when he ceases to be a client and does not “churn”. The LTV may include a discount factor for future income.
M&A (Merging & Acquisition)
Merger Acquisition, and by extension the department in charge of this activity (of a large group or a law firm), generally separate from the Venture department.
Minimum Viable Product (MVP) : minimum viable product
The minimum viable product is a product development strategy, used for rapid, quantitative testing of a product or feature to market. This strategy was popularized by Eric Ries, author of the book “Lean Start Up”. It is used today for the development of new business models and new products. Leaving the MVP is an important phase in the development of a young start-up.
MRR, Monthly Recurring Revenue
Recurring income from customers, excluding one-off income (known as “one shot”). It is a very important indicator of the “traction” of a start-up, and of its market value.
NDA (non-disclosure agreement) or confidentiality agreement
In the context of fundraising, it is an agreement often signed at the start of negotiations between a start-up and the potential investor. It must define the information contractually considered confidential and the obligations of the parties in relation to this information in a given space of time and geography.
Share price when the company was created. If a company is created with 1000 shares and a share capital of 1000 euros, the nominal price of the share is 1 euro.
OC or OCA (Obligation convertible en action – convertible bonds in English)
The Convertible Bond is a transferable security giving access to capital, issued by the company and subscribed by an investor, consisting of a debt instrument (bond) and the ability to convert this debt into company shares. The convertible bond is similar to a traditional bond with a call option on new shares of the issuer. It is a product of great flexibility of use since the interest rate can be fixed, variable, indexed, floating, revisable, any amortization and conversion condition being possible moreover.
OKR (Objectives and Key Results)
Methodology used to define and monitor (“tracker”) the progress of the main measurable indicators of a start-up’s success. OKRs are widely shared in the organization that practices them, and very widespread, including in large companies in Silicon Valley (Google, Twitter, etc.)
Share conferring traditional rights, typically those of the founders of the company (voting rights, preferential subscription rights, right to dividends, etc.). The rights of the holders are proportional to the proportion of the capital they hold. The name “Ordinary Share” is understood to mean by difference to “ Preference Shares ” (see above).
Post-Money Valuation (postmoney value)
Valuation of a company after the entry into the capital of the investor (s).
Valuation of a company before the entry of investors into the capital.
Preferential Liquidation (” Liquid pref “)
Clauses sometimes granted to certain classes of shares (called “ preferred shares ”, purchased by investors) allowing, during the sale, to be paid before the founders who hold “ ordinary shares ”. In certain cases, the repayment rate of the shares during the Preferential Liquidation can be at a rate lower or higher than 1, which can then induce a significant distortion on the distribution of the capital among the shareholders.
Category of shares with preferential rights (enhanced information rights, right to a representative in management bodies, right to priority recovery of amounts invested in the event of liquidation or sale of the company, etc.). There are negative preference shares, which deprive the holders of certain nominal rights (voting rights, dividend rights, etc.) at a more attractive acquisition cost.
When a company raises money by increasing its capital, it will sell shares that it will create for the occasion. These shares are at the nominal price, increased by an “issue premium ” depending on what has been negotiated between the founders and the investors. By way of example, a company which issued at its creation 1000 shares of 1 euro and which raises 250,000 euros for 20% of its capital will issue 250 new shares at 1 euro. But the 250 shares worth 250,000 euros will be worth 1,000 euros each, including 1 euro of nominal and 999 euros of “share premium ”.
Any equity investment in unlisted companies. Its segments :
– venture capital to finance the start-up of new businesses
– development capital (“ CapDev ”) to finance the development of the company.
– transmission capital or LBO intended to support the transmission or sale of the company.
The origin of the term Private Equity comes from the fact that it designates capital investment transactions other than those in “ publicly listed ” companies in stock markets.
This clause is sometimes negotiated by investors allowing them an increase, totally or partially, in the event of a new financing round concluded at a price lower than the subscription price, valid for a limited period.
Right of pre-emption
Contractual clause which allows shareholders to buy back as a priority the shares of other shareholders who want to sell.
Refers to the ability of a product to “scale up”, that is to say to adapt to a strong order of magnitude change in demand, while controlling the increase in associated costs. The question of its scalability is one of the first that we ask a start-up since it is at the heart of the attractiveness of its value creation.
Share Holder Agreement (SHA)
See Shareholders’ agreement
Shareholder agreement ( SHA)
Agreement concluded between the shareholders of the company (founders and capital investors) to organize their relations as shareholders. The shareholders’ agreement details all aspects of corporate governance by a “ strategic committee ”, as well as the rights of shareholders (right of information, right of first refusal, drag along, tag along, right of approval , confidentiality…).
Letter of commitment specific to a company, typically signed by the founders at the time of a financing round, either to make commitments on the governance of the company (typically to remedy any discrepancies noted in due diligence), or potentially to confer certain advantages on one or more investors.
Newly created company. In the commonly adopted sense, it is an innovative company aiming for rapid growth through “scalability” levers. Start-up is invariable in French, but takes an s in the plural in English. Service companies generally do not qualify as start-ups.
Start-up support structure, which strongly selects the start-ups that it accepts upon entry, and will help them to develop for short periods, generally from 3 to 6 months. Private and independent accelerators will be remunerated in capital by taking a few points of the capital, which will be valued when the start-ups are resold. Accelerators, unlike incubators, do not necessarily have premises to offer companies. They provide advice, coaching, methodology, and potentially technical resources (CTO, UX, etc.). Accelerators can also invest cash in the start-ups they have selected, either directly or via an adjoining fund.
See BSPCE and BSA.
Tag Along or Tag-along right (TAR)
Reciprocal Drag Along Right. It ensures that minority shareholders are able to sell their shares in the event of an offer to buy from majority shareholders, on a pro rata basis.
Historical result of an investment portfolio, team or investor.
The traction of a start-up refers to the interest in its product on the part of its customers, whether they pay or not.
Start-up which exceeds the billion dollar valuation, and which therefore concentrates most of the profitability of investors. This represents 0.2% of start-ups in the US. In France : Blabla Car, Talend, Criteo…
Financing round at an action price higher than the previous one.
User Experience (or UX Design, User Experience)
UX is the result and the feeling of the user experience during the occasional or recurring use of a product or an interface. The work on the user experience, often carried out by a designer, aims to optimize the satisfaction during the use of functions and the way of making them evolve as much on the form, on the substance, as on the way to access them. . The speed of access to the most used functions is one of the objectives of UX Design. It is a key success factor for start-ups, and digital companies in general. Accelerators often offer UX Design skills to the start-ups they support.
Capital investment class in own funds (or quasi-equity) in start-ups. Depending on the maturity of the project to be financed, Venture Capital is subdivided as follows :
- The Seed (or Seed) finances the very beginning of its activity, when it does not yet make significant income. A seed round starts at a few tens of thousands of euros, typically up to € 1 million.
- Then come the first round (Round A) , then second round (Round B), third round (round C)… The sizes of the rounds are very unequal between countries and sectors but are generally increasing. The first rounds start at a few million euros and can sometimes exceed 10M €.
- A so-called “Early Stage” fund will focus on the seed phases, the first, or even the second round, but will be limited by the (small) size of its fund.
- A “Late Stage” fund will start its intervention from the second round and can then accompany larger fundraising.
Financing in the form of debt to a company that is still heavily dependent on venture capital investments to finance its activities. A venture loan investment is a loan with a guaranteed interest rate repaid monthly or quarterly, usually high, with a guarantee given on the securities of the company. It is an investment which is generally in relay before other capital investments.
Vesting (period of)
Necessary duration of presence in a company sometimes required as part of full payment of the sale price, or to obtain full ownership stock options.