The premium above par value that an issuer is willing to pay as part of the redemption of a bond issue prior to maturity.
Call price
The price an issuer agrees to pay to bondholders to redeem all or part of a bond issuance.
Call protection
A provision in the terms of a bond specifying the period of time during which the bond cannot be called by the issuer.
Capital Asset Pricing Model (CAPM)
A method of estimating the cost of equity capital of a company. The cost of equity capital is equal to the return of a risk-free investment plus a premium that reflects the risk of the company’s equity.
Capital call
When a private equity fund manager (usually a “general partner” in a partnership) requests that an investor in the fund (a “limited partner”) provide additional capital. Usually a limited partner will agree to a maximum investment amount and the general partner will make a series of capital calls over time to the limited partner as opportunities arise to finance startups and buyouts.
Capital gains
A tax classification of investment earnings resulting from the purchase and sale of assets. Typically, an investor prefers that investment earnings be classified as long term capital gains (held for a year or longer), which are taxed at a lower rate than ordinary income.
Capital gap
The difficulty faced by some entrepreneurs in trying to raise between $2 million and $5 million. Friends, family and angel investors are typically good sources for financing rounds of less than $2 million, while many venture capital funds have become so large that they are only interested in investing amounts greater than $5 million.
Capitalization rate (“cap rate”)
A ratio of a real estate property's net operating income to its current market value. Capitalization rates can vary from year to year as the level of income generated by the property fluctuates.
Capitalization table
A table showing the owners of a company’s shares and their ownership percentages as well as the debt holders. It also lists the forms of ownership, such as common stock, preferred stock, warrants, options, senior debt, and subordinated debt.
Capital stock
A description of stock that applies when there is only one class of shares. This class is known as Common stock.
Capped participating preferred stock
Preferred stock whose participating feature is limited so that an investor cannot receive more than a specified amount. See Participating preferred stock.
Carried interest
The share in the capital gains of a venture capital fund which is allocated to the general partner. Typically, a fund must return the capital given to it by limited partners plus any preferential rate of return before the general partner can share in the profits of the fund. The general partner will typically receive a 20% carried interest, although some successful firms receive 25% to 30%. Also known as “carry” or Promote.
Catch-up
A clause in the agreement between the general partner and the limited partners of a private equity fund. Once the limited partners have received a certain portion of their expected return, the general partner can then receive a majority of profits until the previously agreed upon profit split is reached.
C corporation
An ownership structure that allows any number of individuals or companies to own shares. A C corporation is a stand-alone legal entity so it offers some protection to its owners, managers and investors from liability resulting from its actions.
Change of control bonus
A bonus of cash or stock given by private equity investors to members of a management group if they successfully negotiate a sale of the company for a price greater than a specified amount.
Clawback
A clause in the agreement between the general partner and the limited partners of a private equity fund. The clawback gives limited partners the right to reclaim a portion of disbursements to a general partner for profitable investments based on significant losses from later investments in a portfolio.
Closing
The conclusion of a financing round whereby all necessary legal documents are signed and capital has been transferred.
Club deal
The act of investing by two or more entities in the same target company, usually involving a leveraged buyout transaction.
Co-investment
The direct investment by a limited partner alongside a general partner in a portfolio company.
Collateral
Hard assets of the borrower, such as real estate or equipment, for which a lender has a legal interest until a loan obligation is fully paid off.
Commitment
An obligation, typically the maximum amount that a limited partner agrees to invest in a fund. See Capital call.
Common stock
A type of security representing ownership rights in a company. Usually, company founders, management and employees own common stock while investors own preferred stock. In the event of a liquidation of the company, the claims of secured and unsecured creditors, bondholders and preferred stockholders take precedence over common stockholders. See Preferred stock.
Comparable
A private or publicly traded company with similar characteristics to a private or public company that is being valued. For example, a telecommunications equipment manufacturer whose market value is 2 times revenues, or who was sold for 2 times revenue, can be used to estimate the value of a similar and relatively new company with a new product in the same industry. See Liquidity discount.
Completion accounts
Accounting statements of the target in a transaction, prepared on an agreed basis (which may deviate from GAAP) on the date of completion of the transaction.
Consolidaton
See Rollup.
Control
The authority of an individual or entity that owns more than 50% of equity in a company or owns the largest block of shares compared to other shareholders.
Conversion
The right of an investor or lender to force a company to replace the investor’s preferred shares or the lender’s debt with common shares at a preset conversion ratio. A conversion feature was first used in railroad bonds in the 1800’s.
Convertible debt
A loan which allows the lender to exchange the debt for common shares in a company at a preset conversion ratio. Also known as a “convertible note.”
Convertible preferred stock
A type of stock that gives an owner the right to convert to common shares of stock. Usually, preferred stock has certain rights that common stock doesn’t have, such as decision-making management control, a promised return on investment (dividend), or senior priority in receiving proceeds from a sale or liquidation of the company. Typically, convertible preferred stock automatically converts to common stock if the company makes an initial public offering (IPO). Convertible preferred is the most common tool for private equity funds to invest in companies.
Convertible security
A security that gives its owner the right to exchange the security for common shares in a company at a preset conversion ratio. The security is typically preferred stock, warrants or debt.
Co-sale right
A contractual right of an investor to sell some of the investor’s stock along with the founder’s or majority shareholder’s stock if either the founder or majority shareholder elects to sell stock to a third-party. Also known as Tag-along right.
Cost of capital
See Weighted average cost of capital.
Cost of revenue
The expenses generated by the core operations of a company.
Covenant
A legal promise to do or not do a certain thing. For example, in a financing arrangement, company management may agree to a negative covenant, whereby it promises not to incur additional debt. The penalties for violation of a covenant may vary from repairing the mistake to losing control of the company.
Coverage ratio
Describes a company’s ability to pay debt from cash flow or profits. Typical measures are EBITDA/Interest, (EBITDA minus Capital Expenditures)/Interest, and EBIT/Interest. This is also referred to as an interest coverage ratio.
Cram down round
A financing round whereby previous investors, the founders and management suffer significant dilution. Usually as a result of a washout round, the new investor gains majority ownership and control of the company. Also known as a Washout round.
Cross guarantee
A commitment given by one or more companies in a group in support of another group company, often to assist another company in the same group to raise financing.
Cumulative dividends
The owner of preferred stock with cumulative dividends has the right to receive accrued (previously unpaid) dividends in full before dividends are paid to any other classes of stock.
Current ratio
The ratio of current assets to current liabilities.