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Small Business Terms Glossary Search for Terms I Immediate Notice. In insurance parlance, a clause requiring the insured to provide notice to the insurer (or a representative) as soon as reasonably possible following a loss. Implied Warranty. A warranty that is assumed or assumed to be part of a contract despite the fact that it is not expressly stated. Imprest Funds. Funds set aside as a cash reserve for expenditures expressly designated. Also, a petty cash fund. In-the-money. For options, if exercising the option will result in a gain, the option is in-the-money. For a call option, it is in-the-money if the market price of the stock is greater than the exercise price. A put option is in-the-money if the market price of the stock is less than the exercise price. incentive stock option n: often referred to by its abbreviation, ISO(pronounced ICE-oh); tax-deferred employee stock option which provides tax advantages for the employer versus non-qualified stock option (NSO) plans. income n: finance/accounting term; revenues minus expenses. income statement n: finance/accounting term; the profit-and-loss statement of a company. incorporate v: to create a new corporation by making a legal filing with the Secretary of State of a given state (Delaware, California, Michigan, etc.). incorporation n: the act of incorporating, or creating a new corporation by making a legal filing with the Secretary of State of a given state (Delaware, California, Michigan, etc.); for an LLC, this act is calledformation. indemnity- n: Obligation of one party to reimburse another party for losses which have occurred or which may occur. Indirect Costs. Costs that can't be directly related to the cost objective or a product. Industrial Property Form. An all-risk or specific peril type of insurance for manufacturers or businesses engaged in processing. industry map n: a visual and/or written representation of all players in an industry e.g., suppliers, manufacturers, distributors, consultants, influencers, dealers and customers and how money, services and products change hands within the industry. It's very useful for an entrepreneurial team to develop anindustry map for their particular industry or market space, first of all to define their company's position in their industry, and secondly in order to communicate to others as part of a business plan, executive summary and/or investor presentation. industry marketing n: in a business-to-businesscompany, the sub-set of the marketing discipline that entails tailoring, positioning and promoting a company's products and/or services to a specific industry.Example:An enterprise software vendor may have distinct individuals or teams assigned to financial industry marketing vs. manufacturing industry marketingvs. retail industry marketing. inflation n: general decline of purchasing power per unit of currency (e.g., for one dollar). For example, because of inflation, you can only buy 2 candy bars for a dollar now, whereas you could have purchased four candy bars for a dollar 20 years ago. Inflation Endorsement. A clause in a homeowners policy where the coverage is automatically increased periodically to account for changes in a price index. influencer n: marketing term; an organization, individual or institution that influences the buying behavior of customers. Examples include industry consultants, the trade press, business or popular media, trade shows, and professional societies and conferences. Example: Although dermatologists do not prescribe ABC Pharmaceutical Co.'s over-the-counter skin ointment, ABC focuses considerable marketing effort on dermatologists and their professional society, the American College of Dermatology, since ABC considers skin doctors to be powerful influencers of their patients' decisions about whether to use skin ointments, and, through their recommendations, specifically which brands to purchase. initial public offering n: the event of first listing the stock of a formerly private company on a public stock exchange (e.g., NASDAQ, the New York Stock Exchange, etc.) so that the company's shares can be freely traded bought and sold by the investing public; commonly referred to by its abbreviation (IPO); going through the process of an IPO is often referred to as going public. innovators n: a term coined by Geoffrey A. Moore in his seminal work on marketing for technology startups, "Crossing the Chasm";the first customers of a newly commercialized technology in thetechnology adoption life cycle. Innovators proactively seek out and purchase new technology products. They tend to be technologists themselves who are fascinated with new innovations and the functions or properties of new devices, regardless of the new product's unproven benefits and lack of track record. insolvency n: legal term; financial condition in which a person or company is unable to meet its near- term financial obligations. If a company can not recover from insolvencyquickly, they may be forced to file for bankruptcy protection. Insured Bonds. Generally, municipal bonds that are covered by insurance against default (loss of interest or principal). The insurance premium is paid by the issuer. Insured bonds generally have a lower yield because of this protection. institutional financing (or funding) n: typically refers to funding that a startup company receives from venture capitalists; usually takes the form of equity investment capital (i.e., the startup company issues additional shares of stock, which it sells to the VC in exchange for cash at a negotiated price per share). institutional investor n: term used for organizations possessing extremely large amounts of money, that make multiple financial investments and oversee their investment portfolio. Examples of institutional investorsinclude pension funds, mutual funds, university endowments, foundations, insurance companies, corporate treasuries and money management firms. Example: Most limited partner investors in large venture capital funds are institutional investors (as opposed to high-net -worth individuals). intangible assets n: assets of a firm that are not physical in nature and therefore tend to be more difficult than physical assets to value. Example: A company's intellectual property, such as patents, trade secrets or software source code, are considered intangible assets. Intangible Costs. Expenditures incurred to create an intangible asset. For example, legal fees to negotiate a lease, the cost to acquire a license, etc. Integrated Operations. Two or more business operations which are conducted as though they were one single economic unit. intellectual property n: often referred to by its abbreviation (IP); an intangible asset of a company that consists of human ideas. Legally, patents, copyrightsand trade secretsare all forms of intellectual property. In the startup world, a company's IPis a key part of its "secret sauce" its key differentiation that sets it apart from its present and future competition. interest rate n: finance/accounting term; the percentage applied to the principal amount of a loan or bond used to calculate the dollar amount of interest charged. Interest ratex principal amount= interest. Interest-Only Loan. A loan where the borrower pays only interest and not principal during the course of the loan. Some loans have an interest-only period, then require payment of interest and principal. The total amount borrowed is payable as a balloon payment at maturity. Sometimes referred to as a bullet loan. Interim Financing. Short-term financing that's conditional upon securing intermediate or long-term financing. Also known as a bridge loan. Interim Statement. A financial report that covers only a part of the company's year. Often used to refer to a quarterly financial statement. inventory n: goods held by a company to sell to customers. invested equity n: (see cash equity) investment round n: financing round from the perspective of the investor (see financing round). investment banking n: the process of linking organizations to investors through securities offerings. Investment banksunderwrite securities offerings, such as bonds, preferred stock, or common stock offerings, and sell the securities to other financial institutions, such as mutual funds or brokerage houses that make a market in the securities. Investment banks also offer advisory services, such as ergers and acquisitions (M&A) advisory services, or other corporate finance advisory services. (See alsounderwriter.) investor pitch n: (see investor presentation) investor presentation n: a 10- to 25-slide presentation that tells the story of your company simply and compellingly to potential investors. A strong investor presentation should address the following topics (similar to the topical coverage for your executive summary): a) the business your company is in (e.g., "... a web-based enterprise software for independent retailers...", or "...a biotech company focused on drug discovery for treating esophageal cancer..."); b) the stage of company development (e.g., "...incorporated in Delaware in [date], targeting having demonstrable product prototype by [date]..."); c) the target market/customers; d) the customers' unmet need, and how they are addressing that need today; e) your company's proposed solution to that unmet need (product and/or service); f) competition and your competitive differentiation (how your solution is demonstrably better, faster, cheaper, cooler, or otherwise more desirable to your target customers); g) established strategic alliances; h) management team; i) financial summary (results to-date and forecast out at least 3 years); j) capitalization (invested capital to-date) and amount of capital the company is current hoping to raise. IP n: (see intellectual property) IPO n: (see initial public offering) ISO n: (see incentive stock option) J & K job sharing- v: Arrangement in which the responsibilities and hours of one job position are carried out by two people. Joint-and-Last Survivor Annuity. A type of annuity where income is payable during the lifetimes of two or more annuitants and continues until the death of the last survivor. Joint-and-Last-Survivorship Option. When paying out the proceeds of an insurance policy, payments continue until the death of the last survivor of two persons. Junior Mortgage. A lien that is below that of another mortgage. The holder of a junior mortgage can usually be satisfied only after a more senior lender is paid off. Thus, the interest rate on a junior mortgage is usually higher. K-1. The information form from a partnership, S corporation, trust or estate, which provides the flow-through income and losses to be reported on an investor's individual return. Kicker. An additional benefit a lender or investor receives as an inducement to make the loan or investment. For example, a lender may receive an Equity Kicker allowing him to receive a share of the income from the property if it exceeds a specified amount or giving the lender warrants to purchase shares of stock in the investment at a price below market value. KISS philosophy n: acronym for Keep It Simple, Stupid. A guiding philosophy widely used in organizations that aims to focus management attention on the core attributes of a product, service or task. Burdening products, services or tasks with unnecessary add-ons leads to unnecessary development delays and management challenges. (So, when you think of how cool your product might be with just one more bell or whistle, just KISS that idea goodbye. ) Kiting. Generally, it's the action of drawing checks on one account while depositing checks in another account and depending on the float to avoid overdrafts. A common form of embezzlement. L laggard n: a term coined by Geoffrey A. Moore in his seminal work on marketing for technology startups, "Crossing the Chasm" 1991, HarperCollins; the last group of potential customers to adopt a new technology or innovation in the technology adoption life cycle (if they adopt it at all). Example: Elderly people, particularly elderly women, will probably prove to be the laggards in the markets for PDAs (personal digital assistants) and MP3 digital music players. late majority n: a term coined by Geoffrey A. Moore in his seminal work on marketing for technology startups, "Crossing the Chasm" 1991, HarperCollins;the late majority, like the early majority, is comprised of pragmatists who are primarily concerned with the racticality of a technology in making their purchasing decisions. However, the late majority is driven more by necessity than desire. They tend not to be comfortable with technology, and purchase new technology only once it has become an established standard i.e., once it's no longer new. The late majority can be thought of as the sector of the market that watches, and then follows, the mainstream. Latent Defect. A defect which could not be discovered by ordinary and reasonable inspection. Launch stage n: The second stage of the Venture Value Chain. In the Launch stage, the company is legally formed and initially funded. The key tasks in the Launch stage are legal formation, seed funding, and establishing proof-of-concept and proof-of-market. LBO n: (see leveraged buyout) lead the round v: venture capital term, a.k.a. price the round; Leasehold Interest. The right to the use of real property created by a lease. If the rent payable on the lease is below the current market, the lease has a number of years to run and is for a very desirable property, etc. the lease can be a valuable asset, particularly if the space can be subleased. Lessee. A party who rents property from another under a lease. Lessor. A party who owns property and leases it to a tenant. Level Premium Plan. Premiums due on an insurance policy that remain level throughout the term, regardless of any dividends that may be paid. Leverage. 1. Financial leverage is the act of increasing the return on an investment by borrowing some of the funds at an interest rate less than your return on the project. 2. Operating leverage has the same objective, but you increase your return by increasing cheaper fixed costs. Leverage can be positive or negative. If the return on an investment is greater than the cost of borrowing, leverage is positive. If the return is less, leverage is negative. lien - n: Legal right to hold property of another party or to have it sold or applied in payment of a claim. lender n: a person or entity that lends money to another; typically a bank, but sometimes an individual investor or institutional investor (see also creditor). letter of intent n: legal term; often referred to by its acronym, LOI; a brief, temporary, pre-contract document between two or more entities that outlines the parties' intention regarding a future contractual or business arrangement. The purpose of a letter of intent is for the parties to establish and document a common understanding of the form in which they see their legal or business relationship evolving; LOIs tend to have a temporary, limited term and serve the purpose of a "place-holder" while the parties continue detailed due diligence and/or negotiation. (see also: memorandum of understanding or MOU) leveraged buyout n: abbreviated LBO,a transaction in which a leveraged buy-out firm (LBO firm or LBO shop) acquires a business, using debt to fund at least 50% of the purchase price. This type ofliquidity event is most often seen in traditional bricks-and-mortar businesses with the consistent cash flow necessary to support the buyer's debt service. leveraged recapitalization n: similar to an LBO, a transaction where a management team, sometimes partnering with an investor or investment firm, purchases a company, using debt to fund at least 50% of the purchase price. This type of liquidity event is typically seen in traditional bricks-and-mortar businesses with consistent cash flow to support debt service. Leveraged recapitalizationsare also known as management buyouts (MBOs). leverage v: to borrow money (use debt capital rather than equity capital) to fund a business or project, with the goal of increasing return on equity. n: the use of debt in a business; the beneficial effects of the use of debt (i.e., additional capital to fund the business without taking on more equity investment and the associated dilution). liability n: a) finance/accounting term; an economic obligation of an organization to another organization or individual, or claims against the assets of an organization by outsiders. b) legal term; the quality of being liable (i.e., obligated, or legally and financially responsible) under the law. Life Income Period-Certain Annuity. The annuitant is guaranteed payments for the rest of his life, but should he die before a certain time, there is a payout based on a minimum number of payments. Like-Kind Exchange. A tax device for deferring gain on the transfer of a property by exchanging it for similar property. For example, you exchange investment property in New Hampshire for investment property in Colorado. If you receive no cash or unlike property, there is no tax on any gain. limited liability n: legal term; a feature of the corporate (or corporation) form of organization under which corporate creditorscan make claims only against corporate assets rather than the assets of the corporation's owners, officers or directors. This feature is also shared with the LLC form of organization. Example: All startup companies would be wise to legally form their business (incorporate or form an LLC) so that the founders and owners can benefit from the limited liability provisions, shielding their personal assets from future potential business creditors or legal actions. limited liability company n: abbreviated LLC, a legal form of company that has many of the tax advantages of partnerships, notably the characteristic of being a pass-through entity for tax purposes. For companies with only one or two owners and no plans to raise money from venture investors, this form of organization has the advantage (over the corporation legal form) of enabling owners to personally receive tax advantages of early-stage losses, as well as to distribute profits without being subjected to both corporate and personal taxation. However, unlike traditional partnerships, the LLC structure protects owners from personal liability in the event of a legal judgment against the company. (Note: See also "S" corporation, another form of business legal organization that shares the "pass-through" feature of theLLC. ) limited partner n: an investor in a venture capital fund, which typically takes the legal form of a limited partnershipor LLC and is managed by a venture capital firmthat serves the legal role of general partner of the fund. limited partnership n: a type of legal entity that is typically used by venture capital firmsfor each of their venture capital funds. Many venture capital firms and funds are electing the LLC structure, however, because owners (limited and general partners) are protected from personal liability. line of credit n: finance term; frequently referred to by its acronym, LOC; a mechanism by which a company arranges ongoing short-term borrowing from a bank. A line of credit functions very much as if it were a company's credit card: the bank sets an interest rate for borrowing against the line of credit, an upper credit limit, and rules governing the schedule of repayment. Limited-Pay Life. Premiums on a life insurance policy that are payable for a stated period or until the insured reaches a certain age. Liquidated Damages. A specific sum of money, set as part of a contract, to be paid by one party to the other if the first should default on the contract. Liquidity Premium. The part of an interest rate or other return that is intended to cover the fact that the investment is illiquid. Liquidity Risk. The risk that a party will not be able to have enough cash to meet its obligations as they come due. liquidation n: the process of turning assets into cash in order to pay creditors. Companies in dire financial trouble contemplate liquidation as a way to potentially return more value to shareholders than in a bankruptcy scenario. liquidation preference n: term included in many venture capital financing agreements. States that the investors in a given round will receive a set multiple of their investment before investors in earlier rounds see any return. For example, investors in a B round deal with a 2x liquidation preference would receive 2x their investment before investors in the A rounds and earlier received a return. Liquidity stage n: the fifth and final stage of the Venture Value Chain. In the Liquidity stage, the company achieves liquidity for its shareholders outside investors, founders, and option-holding employees through a liquidity event. In a nutshell, the company returns money to investors at theLiquidity stagethrough some sort of sale event, whether that is an IPO, an M&A transaction or arecapitalization. liquidity n: the ability for shareholders to sell or trade their stock holdings i.e., to convert their stock shares to liquid cash. liquidity event n: an event that enables shareholders of a privately-held company to convert theirilliquidownership shares into cash. Most typically, startups achieve liquidity for their shareholders through one of three types of liquidity events: an initial public offering (IPO); a sale of the company or its assets in an M&A transaction; or a leveraged buyout or management buyout. (see also: exit andshareholder exit) LLC n: (see Limited Liability Company) LOC n: (see line of credit) LOI n: (see letter of intent) LP n: (see limited partner) loan n: money borrowed by a company; a form of debt. A company can borrow money from any individual, company or institution, though loans are generally provided by financial institutions such as commercial and investment banks. Loan Commitment. A agreement by a lender to make a loan in the future if all the conditions in the agreement are satisfied. Loan-to-Value Ratio. The percentage a lending institution will loan to the appraised value of a property. For example, if the property is appraised for $100,000 and a bank will loan only $70,000, the loan-to-value ratio is 70%. logo n: the visual representation of your brand; a unique graphical mark or symbol. Some logos incorporate the actual company or product name (e.g., IBM's logo) and/or a tag line, while othersare simply easily identifiable symbols, such as McDonald's golden arches. Long Position. In stocks, bonds, etc. it means you own the stock, bond, option, etc. Often just referred to as simply long. Long Bond. A bond that matures in more than 10 years. Lost Instrument Bond. A bond that guarantees that the owner of a lost stock, bond, etc. certificate or other financial instrument will hold the firm harmless against loss if it will issue a replacement certificate. lower of cost or market adj: financial term, abbreviated LCM or LOCOM; valuation convention for portfolio companies used by some venture capital fundsand other investors where investments are listed on the books at the lower of either the cost of the original investment or the market value of the investment. Some VCs prefer other valuation methods, since LCM understates fund performance during the life of a fund Lowest Responsible Bidder. The bidder who is awarded a contract because his bid is lower than any of the other bidders whose reputation, past performance, and business and financial capabilities are acceptable. Lump Sum. A price for a group of goods or services where there is no breakdown of price for the various items. |
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