Target Rate of Return
Target rate of return refers to a dollar figure (profit) that an investor wants to see based on their investment in a company, adjusted for the time value of money (TVM). Investors work backward from their ideal return on investment to determine their target price for the investment.
Tender Offer
A tender offer is similar to a takeover bid, in that an individual or organization offers to purchase some or all of the outstanding shares of a company’s stock. The offer outlines a specific price (typically at a premium compared to the current strike price) and a specific time period—it is usually contingent on a minimum or a maximum number of shares being sold.
Term Loan
A term loan is a form of debt that is repaid in regular payments over a set period of time. Term loans are typically the simplest form of loans available and are accompanied by either a variable interest rate or a fixed interest rate. There are three primary forms of term loans, short-term, intermediate-term and long-term loans—the longer the term, the higher the interest rate charged.
If you’re considering a term loan, revenue based financing may also be a good alternative.
Term Sheet
A term sheet is a nonbinding (sometimes binding) agreement that outlines the financial terms and conditions of an investment, acquisition or business agreement. It opens up future negotiations between two parties, lays out the financial terms of the investment, it plainly states how much the startup is “worth”, and outlines the various provisions or requirements that accompany the investment.
Before signing a term sheet, discuss it with your legal council so that you understand the outlined provisions and their potential implications. Some of the particular provisions to pay attention to include: pay-out provisions, liquidation preferences, option pools and board seat requirements.
Terminal Value
Terminal value refers to the value of an asset, business, or product beyond the forecasted period. It is useful when creating financial models, more specifically discounted cash flow valuations. The two most common forms of forecasting used to determine a businesses terminal value include: the perpetual growth model and the exit multiple model. It is possible to achieve negative terminal value if the cost of future capital exceeds the assumed growth rate, but is not sustainable.
Here’s a helpful tool that visualizes the impact of your burn and growth rate on your terminal value, profitability, and break even point.
The 409a Valuation
A 409A valuation is an appraisal of the fair market value (FMV) of the common stock of a private company by an independent third party. Startups typically get their initial 409A valuation before they issue their first common stock options, and after raising a round of equity financing. They typically also request a 409A valuation upon receipt of an acquisition offer. Startups use the findings from a 409A valuation to inform the price at which employees can purchase shares of the company’s common stock. A few of the more frequently used independent third parties for conducting a 409A valuation include: Kruz Consulting, Carta, and Shareworks.
The 504 Loans
504 loans are a form of fixed rate financing that is offered by the Small Business Association (SBA). The maximum amount offered is $5 million, and is typically used for business growth and job creation. It cannot be used for working capital or to consolidate or refinance current debts. To qualify for a 504 loan, the organization must operate as a for-profit company in the USA, have a tangible net worth of less than $15 million and have an average net income of less than $5 million.
For more information on 504 loans, visit the SBA website.
The 7(a) Loans
7(a) Loans are offered by the Small Business Association (SBA), and are the most commonly offered loans by the SBA. The maximum amount offered is $5 million, and it is typically used for short-and long-term working capital, to refinance current debt, and to purchase assets/supplies. To qualify for a 7(a) loan, the business must be considered a small business, must operate in the USA, prove they actually need the loan and operate as a for-profit business.
For more information on 7(a) loans, visit the SBA website.
The 83(b) Election
Simply put, an 83(b) election is a document that you send to the IRS that informs them of your intention to be taxed on the date your equity was granted rather than on the date the equity vests. Typically 83(b) elections are made by early employees or startup founders who have the ability to early exercise their options.
Top-Down Forecasting
Top-down forecasting, in contrast to “bottoms-up forecasting”, refers to the method of estimating future performance by starting with high-level market data, such as the TAM of a business, and working down to your estimated market share to determine projected revenues for the coming year.
Early stage startups typically use top-down forecasting when they don’t have any hard metrics (e.g. revenue, customer lifetime value, churn). As they mature, they transition from the top-down model to the bottoms-up model mentioned above.
Total Addressable Market (TAM)
The total addressable market (TAM) refers to the overall revenue opportunity for a company if 100% of the target audience purchased their product or service. It is useful for early-stage startups when forecasting future revenues using the top-down method and for prioritizing specific products, customer segments, and business opportunities. It becomes less useful as an organization matures and gathers hard data around its true market opportunity.
Trajectory Growth Funding
Trajectory growth funding, like traditional growth funding, is provided to startups who have demonstrated significant growth over the trailing 3-6months. It is typically equity capital, but can also be non-dilutive debt capital. Funding amounts usually range from $100,000 – $5 million, but can be significantly more. In recent years, startups seeking trajectory growth capital have sought out providers of revenue based financing to fuel their growth.