Venture Capital Chapter 2

Front 1

Capital Calls

Back 1

Periodic capital provisions or contributions to a VC fund; also known as drawdowns or takedowns

Front 2

Committed Capital

Back 2

The total amount of capital promised by the LPs over the lifetime of the fund

Front 3

Investment/Commitment Period

Back 3

The years where the committed capital is drawn down

Front 4

Follow-On Investments

Back 4

After the investment period is over, these are made into the portfolio investments by the VC; investments made in round "Y" by a VC investor in round "X" where Y>X.

Front 5

Multistage Fund

Back 5

A VC fund that invests across all stages

Front 6

Generalist

Back 6

A fund that invests without regard for industry focus

Front 7

Vintage Year

Back 7

Typically defined as the calendar year that a VC fund began investing; often used to compare fund performance

Front 8

Fund-of-Funds

Back 8

A fund that makes investments in other funds rather than making investments directly in portfolio companies; typically organized as a limited partnership with many of the same rules as other PE funds

Front 9

Management Fees

Back 9

Regular payments made by the limited partners to general partners intended to cover the fixed costs of operating the fund

Front 10

Lifetime Fees

Back 10

The total amount of management fees that will be paid by limited partners over the lifetime of a fund

Front 11

Investment Capital

Back 11

The difference between committed capital and lifetime fees

Front 12

Reasons why Mgmt Fees are Based on CC rather than MV

Back 12

(1) The fees would be low in the first few years and may not be able to cover expenses
(2) Mgmt fees based on portfolio value would create an incentive for VCs to invest quickly, thus decreasing investment quality
(3) Market Values are hard to calculate for non-traded companies, and the fee level would thus be arbitrary

Front 13

Realized Investments

Back 13

Those investments that have been exited or those in companies that have been shut down

Front 14

Unrealized Investments

Back 14

Those investments that have not yet been exited in companies that still exist

Front 15

Cost Basis

Back 15

The dollar amount of the original investment

Front 16

Invested Capital

Back 16

The cost basis for the investment capital of the fund that has already been deployed

Front 17

Net Invested Capital

Back 17

Invested capital less the cost basis of realized and written-off investments

Front 18

Carried Interest or Carry

Back 18

The fund profits paid to the general partner

Front 19

Carried Interest Basis

Back 19

The threshold that must be exceeded before the GPs can claim a profit

Front 20

Contributed Capital

Back 20

The portion of committed capital that has already been transferred from the LPs to the GPs; the invested capital plus any management fees paid to date

Front 21

Net Contributed Capital

Back 21

Contributed capital less the cost basis of any realized and written-off investments

Front 22

Preferred/Hurdle Returns

Back 22

A preset level of returns that the fund must pay to investors before the GPs can begin to take any carried interest

Front 23

Catch-up Provision

Back 23

When LPs receive a hurdle return, the GP may have this that allows them to receive a share greater that carried interest for some range of profits after the hurdle return is achieved

Front 24

Write Downs

Back 24

Partial losses

Front 25

Clawback

Back 25

If carried interest is received before the entire carried interest basis and hurdle returns have been paid and if later proceeds are insufficient to reach these thresholds, then GPs may be subject to this provision, where some of the earlier carried interest must be transferred to the LPs

Front 26

Restrictive Covenants

Back 26

Contractual terms in LP agreements that restrict the activities of the GP

Front 27

Categories of Restrictive Covenants

Back 27

(1) Restrictions on the management of the fund
(2) Restrictions on the activities of the GPs
(3) Restrictions on the types of investments