Major Investors Right
Major investor rights define the threshold required to be considered a “major investor” and the associated rights that an investor receives for being considered as such. E.g. information rights, pro rata rights, co-sale rights, the right of first refusal…etc. Setting major investor rights is beneficial, because it can reduce the number of investors you have to coordinate or negotiate with during specific events—such as the sale of stock, or a liquidation event.
Management Rights Letter
A management rights letter is an agreement between a company and an investor that provides the investor with certain “management rights”—allowing it to substantially participate in, or substantially influence the conduct of, the management of the portfolio company.
Mandatory conversions occur when a key event takes place, such as an IPO, acquisition or merger. They result in the preferred shares of a company being converted into common shares. Mandatory conversions are outlined in the provisions of a term sheet.
The margin of a company is calculated by subtracting the expenses from its revenues. The higher the margin, the more likely the company is to generate a profit. Software companies typically have higher margins versus companies that sell physical products.
Company’s mark down the price of products that are not selling well to liquidate their inventory—sometimes to the point of losing money for every item sold. In price wars, companies race to the bottom by marking down their price.
The mark up on a product or service is the dollar amount that is added to its cost, forming its selling price. It is calculated by subtracting the cost of the product or service from its selling price. The markup for software is often high, while the markup for physical products is typically low.
The term ‘market penetration’ refers to the adoption of a company’s product or service relative to the total estimated market for that product or service. Most companies never reach 100% penetration, due to saturation, competition and other factors in the market.
The maturity date of a loan or other debt product, refers to a specific point in time when the final payment is due. The maturity date of a loan is outlined in the repayment terms.
Merchant Cash Advance
The term ‘merchant cash advance’ refers to the purchase of a company’s receivables—the company receives a lump sum payment in exchange for making fixed monthly payments in the future.
Merchant cash advances are a form of receivables financing, and revenue based financing. They are the most founder-friendly way for startups to fuel their growth, as there is no debt or dilution. With merchant cash advances, startups can convert their future revenues into upfront capital so they can scale faster, on their terms and without restriction.
The term ‘mezzanine financing’ refers to a hybrid form of debt and equity financing, similar to a SAFE or convertible note, except that it gives the lender the right to convert its debt position into an equity interest in the company in the event of default. Startups leverage mezzanine financing to fund growth projects and to help with acquisitions. Mezzanine financing is subordinate to senior debt, and superior to both preferred and common stock.
Micro Venture Capital
Micro venture capital, also known as Micro VC is a form of investing in seed-and-early-stage startups. Typically micro VC funds have less than $50MM in capital under management, have an average check size between $25-$500k and they invest on behalf of their limited partners (as do other VC funds). Startups typically use the funds from a micro VC investment to bring their product to market.
A microloan is a type of loan typically used to finance entrepreneurial projects in impoverished or developing regions. Microloans are also offered to small businesses by the SBA, and can range from a few thousand dollars up to $50,000.
Most Favored Nation (MFN) Clause
The Most Favored Nation Clause gives early investors the same rights and benefits received by later investors, if those rights and benefits are more favorable than those originally agreed to. MFN clauses are typically included in SAFEs and Convertible notes. MFN clauses give investors peace of mind—they are assured that they will not be disadvantaged compared to other investors in subsequent rounds, thus maximizing their potential returns.