Resources

Private Equity and Entrepreneurship Glossary

Sale and purchase agreement (SPA)

A legal document that records the sale of a business and the legal terms of the transaction. An SPA can cover the transfer of a company's shares (stock) or its assets and trade.

SBA

See Small Business Administration

SBIC

See Small Business Investment Company.

Scalability

A characteristic of a new business concept that entails the growth of sales and revenues with a much slower growth of organizational complexity and expenses. Venture capitalists look for scalability in the startups they select to finance.

Scale-down

A schedule for phased decreases in management fees for general partners in a limited partnership as the fund reduces its investment activities toward the end of its term.

Scale-up

The process of a company growing quickly while maintaining operational and financial controls in place. Also, a schedule for phased increases in management fees for general partners in a limited partnership as the fund increases its investment activities over time.

S corporation

An ownership structure that limits its number of owners to 100. An S corporation does not pay taxes, rather its owners pay taxes on their proportion of the corporation’s profits at their individual tax rates.

Search fund

An investment fund whereby one or two individuals raise sufficient capital to pay for their salary and expenses for a one to two year period in searching for a target company to acquire. Once the target is identified and a purchase agreement is signed, the individuals seek another round of funding from current and additional investors in order to purchase the target (usually using leverage).

SEC

See Securities and Exchange Commission.

Secondary market

A market for the sale of limited partnership interests in private equity funds. Sometimes limited partners chose to sell their interest in a partnership, typically to raise cash or because they cannot meet their obligation to invest more capital according to the takedown schedule. Certain investment companies specialize in buying these partnership interests at a discount.

Secondary shares

Shares sold by a shareholder (not by the corporation).

Second lien

A senior debt instrument with a secondary ranking over the assets of the borrower. Such loans are primarily used where the senior funding requirement of a transaction is in excess of the lender's maximum senior limit. Higher fees and interest rates than standard senior debt are typical, to reflect the additional risk involved, and these loans often carry Negative pledges.

SEC’s Kickstarter rule: Everyone’s a venture capitalist!

See Securities and Exchange Commission.

Secured debt

Debt that has seniority in case the borrowing company defaults or is dissolved and its assets sold to pay creditors.

Securities and Exchange Commission (SEC)

The regulatory body that enforces federal securities laws such as the Securities Act of 1933 and the Securities Exchange Act of 1934.

Security

A document that represents an interest in a company. Shares of stock, notes and bonds are examples of securities.

Seed capital

Investment provided by angels, friends and family to the founders of a startup in seed stage.

Seed stage

The state of a company when it has just been incorporated and its founders are developing their product or service.

Senior debt

A loan that has a higher priority in case of a liquidation of the asset or company.

Seniority

Higher priority.

Series A preferred stock

Preferred stock issued by a fast growth company in exchange for capital from investors in the “A” round of financing. This preferred stock is usually convertible to common shares upon the IPO or sale of the company.

Shareholders’ agreement

A contract between a company's shareholders that sets out, for example, the basis on which the cimpany will be operated and the shareholders' rights and obligations. It provides protection to minority shareholders.

Sharpe Ratio

A method of calculating the risk-adjusted return of an investment. The Sharpe Ratio is calculated by subtracting the risk-free rate from the return on a specific investment for a time period (usually one year) and then dividing the resulting figure by the standard deviation of the historical (annual) returns for that investment. The higher the Sharpe Ratio, the better.

Small Business Administration (SBA)

A US government agency that assists small businesses applying for loans and acts as guarantor on some small business loans.

Small Business Investment Company (SBIC)

A company licensed by the Small Business Administration to receive government capital in the form of debt or equity in order to use in private equity investing.

SPA

See Sale and purchase agreement.

Spin out

A division of an established company that becomes an independent entity. Also known as a spin-off.

Stock

A share of ownership in a corporation.

Stock option

A right to purchase or sell a share of stock at a specific price within a specific period of time. Stock purchase options are commonly used as long term incentive compensation for employees and management of fast growth companies.

Strategic investor

A relatively large corporation that agrees to invest in a young company in order to have access to a proprietary technology, product or service. By having this access, the corporation can potentially achieve its strategic goals.

Sub-investment grade debt

See High yield debt.

Subordinated debt

A loan that has a lower priority than a senior loan in case of a liquidation of the asset or company. Also known as Junior debt.

Sweat equity

Ownership of shares in a company resulting from work rather than investment of capital.

Syndicate

A group of investors that agree to participate in a round of funding for a company. Alternatively, a syndicate can refer to a group of investment banks that agree to participate in the sale of stock to the public as part of an IPO.

Syndication

The process of arranging a syndicate.