Resources

Private Equity and Entrepreneurship Glossary

Data room

A specific location where potential buyers / investors can review confidential information about a target company. This information may include detailed financial statements, client contracts, intellectual property, property leases, and compensation agreements.

DCF

See Discounted Cash Flow.

Deal flow

A measure of the number of potential investments that a fund reviews in any given period.

Debt service ratio

The ratio of a required loan payment amount (“debt service”) to available cash flow earned during a specific period. Typically lenders insist that a company maintain a certain debt service ratio or else risk penalties such as having to pay off the loan immediately.

Default

A company’s failure to comply with the terms and conditions of a financing arrangement or sale transaction agreement. See Breach of covenant.

Defined benefit plan

A company retirement plan in which the benefits are typically based on an employee’s salary and number of years worked. Fixed benefits are paid after the employee retires. The employer bears the investment risk and is committed to providing the benefits to the employee. Defined benefit plan managers can invest in private equity funds.

Defined contribution plan

A company retirement plan in which the employee elects to contribute some portion of his or her salary into a retirement plan, such as a 401(k) or 403(b). The employer may also contribute to the employee’s plan. With this type of plan, the employee bears the investment risk. The benefits depend solely on the amount of money made from investing the employee’s contributions.

Demand rights

A type of registration right. Demand rights give an investor the right to force a startup to register its shares with the SEC and prepare for a public sale of stock (IPO).

Denominator effect

An imbalance in asset allocation targets from one year to the next due to a significant change in the overall value of a portfolio. For example, if 10% of a portfolio is invested in private equity as planned but the total portfolio value (the denominator) drops significantly due to stock market volatility, the portfolio manager may have to stop investing or sell stakes in private equity funds in order to rebalance the private equity allocation to the 10% goal.

Dilution

The reduction in the ownership percentage of current investors, founders and employees caused by the issuance of new shares to new investors.

Dilution protection

See Anti-dilution and Ratchet.

Direct costs

See Cost of revenue.

Disbursement

An investment by a fund in a company.

Discounted cash flow (DCF)

A valuation methodology whereby the present value of all future cash flows expected from a company is calculated.

Discount rate

The interest rate used to determine the present value of a series of future cash flows.

Distressed debt

The bonds of a company that is either in or approaching bankruptcy. Some private equity funds specialize in purchasing such debt at deep discounts with the expectation of exerting influence in the restructuring of the company and then selling the debt once the company has meaningfully recovered.

Distribution

The transfer of cash or securities to a limited partner resulting from the sale, liquidation or IPO of one or more portfolio companies in which a general partner chose to invest.

Dividends

Payments made by a company to the owners of certain securities. Typically, dividends are paid quarterly, by approval of the board of directors, to owners of preferred stock.

Down round

A round of financing whereby the valuation of the company is lower than the value determined by investors in an earlier round.

Drag-along rights

The contractual right of an investor in a company to force all other investors to agree to a specific action, such as the sale of the company.

Drawdown schedule

An estimate of the gradual transfer of committed investment funds from the limited partners of a private equity fund to the general partners.

Drive-by VC

A venture capitalist that only appears during board meetings of a portfolio company and rarely offers advice to management.

Due diligence

The investigatory process performed or commissioned by investors to assess the viability of a potential investment and the accuracy of the information provided by the target company. In the case of an auction process, the vendor may commission an independent due diligence report which can be shared with multiple bidders, with the option of 'top-up' due diligence later in the process.

Dutch auction

A method of conducting an IPO whereby newly issued shares of stock are committed to the highest bidder, then, if any shares remain, to the next highest bidder, and so on until all the shares are committed. Note that the price per share paid by all buyers is the price commitment of the buyer of the last share.