START-UP LEXICON


Here you will find the most important terms in the start-up world, which every founder should know.
 
 

A

Accelerator

Accelerators pursue similar goals as incubators but have a different approach. Generally speaking, accelerators have a fixed frame and start date. Several pre-selected start-ups will start at this date. During the initial phase of a few months, the start-ups are under intensively supervision with the aim of creating a first marketable product at the end of the program. In the end, a so-called Demo Day will be held where start-ups pitch their ideas to investors.

Articles of associations

Only the bare necessities are regulated in articles of associations which are in connection with the participation of an investor. The company agreement is deposited in the trade register and overt. Further details are ruled in a separate contract of participation, which is non-accessible for the general public.

Anti Dilution Protection

New capital usually comes through a capital increase into the start-up. Previous investors may insist on an anti-dilution protection. That means that they are able to hold the same percentage of shares in the start-up after following financing rounds, as the subscription rights of the old shareholders are often excluded in favor of the new investors. With the anti-dilution protection, former investors secure the right to buy additional shares from the founders to increase their share capital even in a capital increase under exclusion of subscription rights. See also subscription rights.

B

Bootstrapping

The term boostrapping describes the financing of a start-up, in which founders get along without external financing. By minimizing all costs, the founder’s goal is to achieve early turnovers and a positive cash flow. If external money is needed for scaling, these start-ups are welcomed by investors.

Business Angel

Business angels support start-ups at an early stage, often with the founding of the business. In doing so, they support the start-up with capital and above all with know-how and contacts, which are an important component for the success of a start-up. Typically, business angels invest much earlier than venture capital companies. Corporate business angels, like inQventures, are incubators of companies who provide private equity and smart capital. Business angels are often organized in clubs and relatively easy to find.

C

Contract of participation

You’ll find any details about a participation of an investor associated with a start-up program in the contract of participation. In comparison to the partnership agreement (charter) it doesn’t need to be recorded in the trade register. Thus it’s non-accessible for the general public. A clause of secrecy is obligatory.

Crowdinvesting, Crowdlending

This is a form of financing in which a large number of investors with small sums of money finance a young company or a project. With crowdfunding investors provide the money in the form of a subordinated loan without collateral. As a rule, higher interest rates are paid here than with crowd lending. In crowd lending, for example, the loan is secured by guarantees or otherwise. There are various Internet platforms that allow crowdfunding.

Capital increase

The financing of a start-up program of an investor’s investment is based on an established business and its capital increase i.e. getting it by new holdings of the company and not by transfers or sales of existing holdings. Purpose of financing is for example a scaling of the business but not the disbursal of early shareholders. For that to happen the share capital of the company needs to be increased. The investor inherits the shares. Agreed upon investment is provided for capital reserve or for a secondarily loan. See also dilution protection.

D

Down Round Protection

In case of a lower valuation of the start-up in a later financing round, an anti-dilution protection will be established. This means that the investment of the previous investor will be adopted to the lower valuation, as if he made his investment based on the current valuation. This is usually limited to one period or the next financing round. See also "Step Up".

Drag-along right

The drag-along right enables the majority shareholder to force the minority shareholder to join the sell of the company. The dragging shareholder must offer the same terms and conditions to the minority shareholder. The Drag Along Right plays an important role during an exit if shares will be sold to another shareholder.

Due Diligence

The purchaser of a participation in a company accomplishes various risk checks of a start-up program to analyze its strengths and weaknesses. That’s an important fact for the valuation of an investment – it shows if the investor truly intends a contribution. See also guaranties.

F

Family Office

Wealthy entrepreneurs and their dependents often have their money managed by so-called family offices. These family offices only accept assets in excess of millions of euros. Due to their proximity to entrepreneurship, current figures show that up to 50% of the assets are invested in participations (shares and private equity). That means that beside venture capital companies, family offices can also be a good way to finance a start-up. Generally, family offices are not that prominent and difficult to find and get in touch with.

G

Guarantees of the founders

Investors protect themselves with regard to legal, economic, technical and fiscal circumstances of the start-up and define legal consequences as well as damages, if founders have given untrue information. For minor violations a damage allowance will be agreed on. At the same time, a maximum limit is agreed that is set, for example, on the amount of the investment.

I

Incubator

An inQventures is an institution and collaborative program designed to help start-ups to grow. There are many incubators from university for instance, who support start-ups with coaching and infrastructure (office space). Start-ups that are supported by incubators have a significantly higher chance of surviving on the market.

In addition to public facilities, corporate incubators have focused on helping start-ups in their early stages. inQventures assists in completing the founding team, provides infrastructure such as office space and helps not only strategically with the structure of the IT structure but also with the professional implementation with experienced architects and developers.

L

Letter-of-Intent (LOI), Term-Sheet, Heads of Agreement

A Letter-of-Intent is a written declaration of intent, in which two parties express their fundamental interest in concluding a contract. A LOI includes roughly the main points of the main contract – for example the economic ideas. As a rule, the LOI is non-binding, however, in participation negotiations, exclusivity and the confidentiality of the exchanged information are often legally binding for a certain period of time.

Liquidation preferences

Investors can secure the default risk and additional return with the help of liquidation preference. Liquidation preference is frequently used in participation agreements to specify which investors get paid first and how much they get paid in the event of a liquidation event, such as the sale of the company. It protects the investor from losing money by making sure they get their initial investment back before other shareholders when a company is liquidated, sold or gets insolvent.

In case the selling price is below the investment of the liquidation preference of the investor, all the other shareholders will not get anything.

Liquidation preferences can differ a lot and can get really complex in more and more funding rounds with clauses like “Last in first out”.
It is important, that liquidation preference should not be to complex, which could demotivate the founders.

M

Managing employment contract

Usually every company agreement has its solid lifetime so that the investor is able to keep a commitment with the founder and its start-up for a certain period of time.  Recorded are the agent’s authority, subject to approval businesses, non-compete agreement and general requirements and regulations; like for example salary (and bonus), additional services and sick pay or paid holiday.

Milestones

The payout of equity capital is often staggered in installments and tied to milestones that the start-up needs to achieve. Milestones should always be linked to objectively identifiable KPIs, such as revenue generated in a given time period, the absolute number of members in a community, or the number of new signups in a given time period.

Mitverkaufsrechte und Mitverkaufspflichten

Siehe Drag Along Recht und Tag Along Recht

N

Nachrangiges Darlehen

Ein nachrangiges Darlehen wird in der Start-up Finanzierung oft mit einer Eigenkapitalbeteiligung kombiniert. Nachrangige Darlehen gehören zum sogenannten Mezzanine-Kapital, die im Falle einer Liquidation oder Insolvenz im Rang hinter anderen Forderungen stehen. Diese Darlehen werden verzinst und mit einem Fälligkeitsdatum ausgestattet. Gegenüber der Eigenkapitalbeteiligung hat das nachrangige Darlehen den Vorteil, dass es immer noch vor dem Rang des Eigenkapitals steht. Eigenkapital Investoren erhalten insbesondere bei einer Liquidation oder Insolvenz immer als letztes Geld, wenn noch welches vorhanden ist. Der Nachteil ist, dass sich aus dem nachrangigen Darlehen kein Mitspracherecht ergibt. Deswegen werden beide Finanzierungsformen kombiniert.

Non Disclosure Agreement (NDA)

A non-disclosure agreement (NDA) is a contract and protects sensitive and confidential information by outlining in detail which information can be shared or released to the public and which must remain private. For ventures capitalists a NDA is a no-go because investors are meant to be partners who will not “steel” any ideas. The primarily invest in the teams and not the idea.

In addition, a NDA would make it harder for the investor to communicate to its network to for example find co-investors. Investors do see a lot of ideas and founders with similar ideas in the same segment. A NDA would mean, that they can’t evaluate any new ideas because of legal risk. In general, founders asking for NDAs are inexperienced.

non-compete agreement

For an investor, a non-compete agreement for the managers (founders) is mandatory. The non-compete agreement applies to the time of the management and after the manager has left the start-up. The retired manager will receive a compensation up to two years

P

Participation

An investor’s participation is registered and regulated in the articles of associations and in the contract of participation. Other important contracts - in relation to a participation - are the rules of regulation and their contracts.

R

Rules of Regulation

The relation between business executives and between manager and general assembly are regulated in the rules of regulation. Also very important is the catalogue of subject to approval arrangements and its right of information. The point is to represent the company by the manager without any limitations by law. In other words contracts are valid even though shareholders are disagreeing.

S

Smart Capital

Apart from venture capital, smart capital is an investments into a start-up with long term and strategic management support, which means that the company will profit from the experience and network of the investor. At inQventures, smart capital also means operational IT support from years of experience in different branches. In addition, the success of a start-up. In addition, market access (networks) are fundamental for the success of a start-up. That’s why more and more founders are looking for smart capital since experience and the right network is the key advantage to succeed in the marketplace.

Step-up rule

It is normal that founders value their company higher than investors and vice versa. However, in order to agree on a participation, founders and investors may come to the following solution:
If certain milestones are reached or if the valuations of the company exceeds a particular value in the next financing round, investors have to give away a certain amount of shares at nominal value. The step up rule secures both the investor and the founders.  This rule is usually limited to one period or the next financing. See also "Down Round Protection".

T

Tag-along right

The tag-along right ensures an investor or (minority) shareholder to sell his shares to the same price, to which another, often the majority shareholder sells his stakes. The tag-along right protects minority shareholders gives them the ability to participate in a deal.

V

Vesting

The know-how of a start-up in the early stage especially focuses on the founders. In order to prevent the operational know-how leaving the company, investors insist on a vesting clause in the participation agreement. Depending on the time and the reason, the founder must leave shares at nominal value or with a lower valuation when leaving the company. It is also crucial whether the founder leaves the company through no fault of his own (so-called good leaver) or for an important reason (so-called bad leaver).

In this context, a specific time is defined for which a vesting rule applies and can be subdivided into periods that individually determine the consequences. The vesting rule is also important for an exit. The know-how of the founders has to be handed over to new know-how carriers and founders often have to commit to remaining in the company for a certain period of time.

Venture Capital

Venture capital refers to investments in start-ups in which shares of a start-up are acquired. The investor participates in the success of the company and at the same time has a say in the shareholders' meeting. Venture capital can from private individuals, family offices, investment companies and companies. Another term for Venture capital is private equity, because these holdings are outside a regulated market.

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