A lead investor is the primary investor of a funding round. They are responsible for setting the key terms in the capital raise and oftentimes (but not always) is the largest investor. Lead investors play an important role since they act as a facilitator during the capital raise process as the terms secured in the initial term sheet will apply to all subsequent investors in the round.
Legal fees are often assessed when negotiating term sheets, the related provisions or other transactions that require council. It is imperative that you understand the rights that your potential investors expect—do not agree to terms that you do not understand or have not discussed with your council. Lawyers are expensive, but they protect your best interests and your bottom line—as the saying goes: you get what you pay for, so don’t always go the cheaper route.
Leverage is a business and finance strategy where companies leverage debt to build financial assets. Businesses create debt by borrowing capital from lenders with the promise that they will pay off this debt with added interest. A business is labeled as highly-leveraged when their total debt outweighs total equity.
To calculate financial leverage take total company debt and divide by total shareholder’s equity:
- Leverage = total company debt/shareholder’s equity
Liabilities are the legal debts a business owes to third-party creditors and can include accounts payables, notes payables, and bank debt. Long term liabilities are obligations that are due after more than one year. Mismanagement of liabilities can result in negative consequences such as declining financial performance or bankruptcy.
Line of Credit
A line of credit is a credit facility that a financial institution extends to a government, business, or customer which enables the borrower to draw on the facility as needed and repay either immediately or over time.
A Liquidation multiplier is a term that allows investors to receive a multiple of their liquidation preference in the event of a liquidity event.
An investor with one million shares of Series B preferred stock with an original issue price (OIP) of $1.00 would have a liquidation preference of $1 million. However if the same investor had shares with a liquidation multiplier of 2x, their liquidation preference would be $2 million.
Liquidation preferences are the set of key term in any investment or lending agreement that give investors and creditors the right to be repaid in the event of a company’s bankruptcy or liquidation. This protection can be vital for investors and creditors, as it ensures that they will not lose out if the company goes under.
Liquidation waterfall defines the payout order in the event of corporate liquidation. Typically, the companys’ preferred stockholders get their money back first, ahead of other kinds of stockholders (common shareholders) or debt-holders. These liquidation preferences can include a mix of standard and non-standard terms that further affect the payout order.
A liquidation or liquidity event is the acquisition, merger, initial public offering (IPO), or other action that allows founders and early investors in a company to liquidate some or all of their ownership shares.
Favorable liquidation events:
- Sales of a company for cash
- Sale of a company for shares
Unfavorable liquidation event:
- Company bankruptcy
Loan in Default
A loan is considered “in default” when it cannot reasonably be expected to be paid back, or when only the interest can be paid back (i.e. interest-only payments).
Loan Processing Fee
Fees paid to a lender to process a loan. These fees are paid only after the loan is accepted.
Loan-to-Value Ratio (LVR)
The term ‘loan to value ratio’ refers to the assessment of lending risk that is calculated by dividing the loan amount by the lender-assessed value of the business. Generally speaking, most lenders consider a LVR of 80% or more as being risky.
Lock Up Period
The term ‘lock up period’ refers to the period of time following an IPO of a company when investors or other shareholders are not allowed to redeem or sell shares. The typical lock up period is 180 days, but it can last for over a year. Lock-up periods are not required by the Securities and Exchange Commission (SEC) or any other regulatory body, but are established to prevent large investors from flooding the market with their shares.
Loss of Control
Loss of control occurs when a founder is removed from the leadership team of a company, via a board vote or a hostile takeover. A few founders that suffered a “loss of control” include: Steve Jobs (Apple), Jack Dorsey (Twitter), Andrew Mason (Groupon), and Jerry Yang (Yahoo).