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The distribution waterfall is a methodology for splitting distributions between the GP entity and Limited Partners. Typically, the GP takes 20% carried interest on profits. The distribution waterfall outlines how and when this carried in...

The distribution waterfall is a methodology for splitting distributions between the GP entity and Limited Partners. Typically, the GP takes 20% carried interest on profits. The distribution waterfall outlines how and when this carried interest is allocated. An American waterfall refers to a deal-by-deal method of allocating carried interest. This means that the GP entity receives carry on a deal-by-deal basis before investors are made whole overall. This allows the GP to receive carried interest sooner. The American waterfall is juxtaposed with the European waterfall with is a method by which all Limited Partners’ capital contributions (including unrealized investments) have been repaid before the GP entity receives its carried interest. While the American waterfall allows you to take carry earlier usually, in practice, you should not take the entirety of your share of carried interest until Limited Partners are made whole to avoid having to clawback the GP carried interest.

Part of 1065 filing. Partner specific form which details distributive share of all income and expense items incurred by the partnership.

Part of 1065 filing. Partner specific form which details distributive share of all income and expense items incurred by the partnership.

A specific US federal tax exemption that allows investors in Qualified Small Business (defined as under $50M capitalization) for some capital gains tax exemption (up to 100%) based on how long the stock is held (minimum 5 years) up to $1...

A specific US federal tax exemption that allows investors in Qualified Small Business (defined as under $50M capitalization) for some capital gains tax exemption (up to 100%) based on how long the stock is held (minimum 5 years) up to $10mm. This provision is a frequent target of proposed tax law changes, though (as of January 2023) it is still in place.

Under U.S. securities laws, the sale of securities, including fund interests, require either registration with the S.E.C. which is expensive and time consuming, or such sale must be exempt from registration under the rules.  Regulation D...

Under U.S. securities laws, the sale of securities, including fund interests, require either registration with the S.E.C. which is expensive and time consuming, or such sale must be exempt from registration under the rules.  Regulation D is the primary regulation relied on by funds and companies to be exempt from registration.  Rules 506(b) and 506(c) of Regulation D are the primary rules that funds  raise capital with an exemption from registration.  The  distinction between the two rules is that under 506(c), the issuer is permitted to advertise the offering, also know as general solicitation, however the issuer must take reasonable steps to verify that the purchasers are "accredited investors" under the rules.  It is common for issuers to hire a third party service provider to perform the verification.  Under a 506(b) offering, each investor is permitted to self-certify they are an accredited investor.

A preferred stock that may be converted into common stock or another class of preferred stock, either voluntarily or mandatory at an agreed conversion ratio.  Other provisions may include dividends, liquidation preferences, voting or man...

A preferred stock that may be converted into common stock or another class of preferred stock, either voluntarily or mandatory at an agreed conversion ratio.  Other provisions may include dividends, liquidation preferences, voting or management rights, and anti-dilution. Recommended general references are "Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist" and "The Business of Venture Capital: The Art of Raising a Fund, Structuring Investments, Portfolio Management, and Exits"

An investment vehicle - a loan (at some nominal interest rate, but required) that converts into stock in the company when the company does the next Priced Round. This is done to: 1) avoid the legal overhead of a Priced Round and 2) avoid...

An investment vehicle - a loan (at some nominal interest rate, but required) that converts into stock in the company when the company does the next Priced Round. This is done to: 1) avoid the legal overhead of a Priced Round and 2) avoid the possibly challenging negotiation over the actual valuation of the company - kicking the valuation can down the road. There may a valuation cap or discount to compensate and incentivize these earlier investors for the additional risk.

The SAFE Note is a  Simple Agreement for Future Equity - a legal document template facilitating streamlined investments in early-stage companies, reducing the need for legal process and expense. Current templates are maintained by YCombi...

The SAFE Note is a  Simple Agreement for Future Equity - a legal document template facilitating streamlined investments in early-stage companies, reducing the need for legal process and expense. Current templates are maintained by YCombinator and available at https://www.ycombinator.com/documents The SAFE was originally created by Adeo Ressi to streamline early-stage investing with a standardized document, replacing bespoke convertible notes or priced rounds. It was popularized by YCombinator.

In startup investing, an SPV is a legal entity (usually an LLC) used to roll up smaller investments from multiple investors into a single investment, to provide access to a deal with a larger minimum investment. The person or entity mana...

In startup investing, an SPV is a legal entity (usually an LLC) used to roll up smaller investments from multiple investors into a single investment, to provide access to a deal with a larger minimum investment. The person or entity managing the SPV may charge fees or carry.

A company or investment fund that acquires and consolidates multiple smaller companies in a particular industry or sector. The goal of a roll-up vehicle is to create a larger and more diversified company with economies of scale, which ca...

A company or investment fund that acquires and consolidates multiple smaller companies in a particular industry or sector. The goal of a roll-up vehicle is to create a larger and more diversified company with economies of scale, which can then be sold or taken public.

"Pari passu" translates to "equal footing" or "on an equal basis."  In the investment context, it refers to situations where all investors have equal rights and privileges with respect to the assets and earnings of the company.

"Pari passu" translates to "equal footing" or "on an equal basis."  In the investment context, it refers to situations where all investors have equal rights and privileges with respect to the assets and earnings of the company.

Pro-rata rights give an investor in a company the right to participate in a subsequent round of funding to maintain their level of percentage ownership in the company.

Pro-rata rights give an investor in a company the right to participate in a subsequent round of funding to maintain their level of percentage ownership in the company.

Financial projections of a company's future performance. These projections are typically used to model different scenarios and assumptions, to estimate the future revenue, expenses, and profitability of a company and evaluate the potenti...

Financial projections of a company's future performance. These projections are typically used to model different scenarios and assumptions, to estimate the future revenue, expenses, and profitability of a company and evaluate the potential investment opportunity.

A priced round refers to a type of funding round where a startup company raises capital from external investors by selling ownership stakes (equity) in the company at a predetermined valuation. A priced round is commonly used in later st...

A priced round refers to a type of funding round where a startup company raises capital from external investors by selling ownership stakes (equity) in the company at a predetermined valuation. A priced round is commonly used in later stages of a company's growth when there is more data and information available to assess its value.

A type of loan offered by banks and nonbank lenders that is designed specifically for early-stage companies with venture capital backing.

A type of loan offered by banks and nonbank lenders that is designed specifically for early-stage companies with venture capital backing.

The investor who sets deal terms (which may include legal aspects) performs due diligence, organizes other investors. Best practice is for a lead to create a deal memo summarizing the key investment aspects of the opportunity. The lead u...

The investor who sets deal terms (which may include legal aspects) performs due diligence, organizes other investors. Best practice is for a lead to create a deal memo summarizing the key investment aspects of the opportunity. The lead usually, though not always is a significant (or largest) investor in the round, though minor investors also may take lead roles.

A valuation cap is the price ceiling at which a SAFE or convertible note will convert into equity (usually preferred stock) at a future financing round. Valuation caps are commonly used to bridge the gap between an early-stage investment...

A valuation cap is the price ceiling at which a SAFE or convertible note will convert into equity (usually preferred stock) at a future financing round. Valuation caps are commonly used to bridge the gap between an early-stage investment and a future priced round, providing a way for startups to raise capital while deferring the determination of an exact valuation until more information is available.

An outline document defining the terms of a following legal agreement.

An outline document defining the terms of a following legal agreement.

Refers to the maturity or development of a company. For example, a company in its early stages, such as a startup, may be considered a "seed stage" company, while a company that has grown and is approaching an initial public offering may...

Refers to the maturity or development of a company. For example, a company in its early stages, such as a startup, may be considered a "seed stage" company, while a company that has grown and is approaching an initial public offering may be considered a "later stage" company.

Bringing together multiple investors for a collective investment. The investors may invest individually or part of an organized syndicate investment vehicle (an SPV or Single Purpose Vehicle) where the organizer or facilitator collects f...

Bringing together multiple investors for a collective investment. The investors may invest individually or part of an organized syndicate investment vehicle (an SPV or Single Purpose Vehicle) where the organizer or facilitator collects fees or carry.

A "round" refers to a specific instance of funding that a startup company raises from external investors. For example, a company may raise money in a "seed round," a "series A round," and so on. These rounds of funding represent distinct...

A "round" refers to a specific instance of funding that a startup company raises from external investors. For example, a company may raise money in a "seed round," a "series A round," and so on. These rounds of funding represent distinct stages in a startup's growth and development, with each round aimed at securing capital to fuel various aspects of the business, such as product development, marketing, scaling operations, and more.