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| Small Business Terms Glossary Search for Terms S S corporation n: a form of legal organization for a business, commonly used only by small and/or closely-held companies (the "S" refers to Subchapter S of the U.S. Internal Revenue Code). S corporations are "pass-through" entities for tax purposes; that is, they pay no corporate tax, and all financial profits or losses "pass through" or "flow through" proportionately to the shareholders on a pro rata basis. This form of organization can be advantageous for shareholders, because: a) it avoids double taxation; and b) individual shareholders can receive the tax benefits of a business's losses. However, anS corporation can have no more than 75 shareholders and is subject to limitations as to whom or what type of entity can own the business. (Note: See also LLCor limited liability corporation, another form of business legal organization that shares the "pass-through" feature of the S corporation.) SBC (Small Business Centers) - n: These 12 GSA centers located throughout the United States can help you tap the multi-billion-dollar GSA "market" for goods and services. Contact a center nearest you. SBDC- n: Small Business Development Centers are are located throughout the United States and are administered by the SBA. They provide management assistance to entrepreneurs and new business owners. SBIC (Small Business Investment Corporation) - n: SBICs are licensed by the SBA as federally funded private venture capital firms. Money is available to small businesses under a variety of agreements. SCORE- n: The Service Corps of Retired Executives is a volunteer management assistance program of the SBA. SCORE volunteers provide one-on-one counseling and workshops and seminars for small businesses. There are hundreds of SCORE offices throughout the United States. Sale-Leaseback. A transaction where the owner of a property sells it to another party but retains occupancy by immediately leasing it back from the buyer. Frequently a way of raising cash or getting rid of an unwanted property. Sandwich Lease. Where a tenant subleases part or all of his space to other tenants. Sarbanes-Oxley Act n: a business reform act signed to law on July 30, 2002. The Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the "Public Company Accounting Oversight Board," also known as the PCAOB, to oversee the activities of the auditing profession. The full text of the Act is available at: http://www.law.uc.edu/CCL/SOact/soact.pdf. The Act has many implications for private businesses. You should consult your attorney about how the Act will effect your business. SBA n: the U.S. Small Business Administration, the federal government agency responsible for assisting small and young companies and entrepreneurs (see www.sba.gov). SBIR nor adj: Small Business Innovation Research, the name of a U.S. federal government grant program administered by the Small Business Administration (SBA) that provides funding solely to small, for-profit businesses to develop and commercialize certain technologies. (For more information, see www.sba.gov/sbir). scale v: to grow a business, often rapidly, once its products have been commercially released and customer sales have commenced. Generally speaking, companies scale successfully by developing a well-thought-out and highly repeatable formula for production, distribution/sales, operations and customer service. Scale stage n: the third stage of the Venture Value Chain. In the Scale stage, the company typically raises institutional financing (equity or debt) to enable rapid scaling of the enterprise. Key tasks of theScale stage include: recruiting and orienting management and staff; building infrastructure (systems, processes and procedures) necessary to grow the business; developing and refining the product line; developing/strengthening the brand and building brand recognition; and expanding sales. The Scale stage is the make-or-break stage for many startup companies. It is during this stage that a company's products or services must Cross the Chasm from selling to early adoptercustomers to selling to the far more numerous, but difficult-to-please, early majority customers. SEC n: (see Securities and Exchange Commission) secretary n: (see secretary of the corporation) secretary of the corporation n: the legally-designated corporate officer responsible for keepingminutesof board meetings, drafting board resolutions,and maintaining the company's minute book security n: a financial instrument, such as a stock or bond, used by legal entities such as companies or government agencies to raise money from individual or institutional investors. Securities and Exchange Commission (SEC) n: the U.S. federal government agency with primary responsibility for overseeing and regulating the securities industry i.e., the formation, underwriting, selling, buying, trading and optioning of stocks and bonds by corporations, investment banks, brokerages, and commercial banks. The primary mission of the SEC is to protect investors and maintain the integrity of the securities markets (both private and public). The SEC also oversees other key participants in the securities world, including stock exchanges, broker-dealers, investment advisors, mutual funds, investment banks, and public utility holding companies. Through its EDGAR online system, the SEC provides free public access to all filings companies make with the SEC (for example, filings required prior to public offerings, as well as 10K annual reports and 10Q quarterly reports); such filings are very useful data sources when conducting comparable companies analysis or valuation analysis. (For more information, visit www.sec.gov.) seed financing n: financing to fund an early-stage company, generally provided by either angel investorsand/or a venture capital firm, to fund the early stages of a company's business plan. Seed financingtypically occurs before a company has commercially released its product or service, and therefore before the business is generating revenue. seed round n: (see seed financing) segment nandv: (see market segmentand market segmentation) segmentation n: (see market segmentand market segmentation) self-referencing adj: describing a market or set of customers in which the customers interact intensively with one another and rely on each other (reference each other) for information about a type of product or service. Self-referencingcustomer groups tend to read the same periodicals, belong to the same clubs or professional associations, attend the same conferences, conventions and trade shows, or communicate with one another through word-of-mouth, Internet chat rooms or web logs ("blogs"), or at actual events such as industry conferences, conventions, concerts or other gatherings. Businesses valueself-referencing customer groups because they tend to be relatively inexpensive and efficient to reach, communicate with and market to.Examples:DentaSpecial Inc. has developed an innovative new device for use by dentists. Because dentists are a tightly self-referencing group, DentaSpecial can reach their prospective customers relatively efficiently inexpensively; rather than advertising on television or in popular magazines at great expense, the firm can promote its products by advertising in the professional periodicals and at the annual and regional conventions of dentists' professional association, the American Dental Association (ADA). Because dentists tend not to compete with each other beyond local boundaries, they are very comfortable "comparing notes" with their professional colleagues and sharing best practices with one another. Self-Charged Interest. The portion of interest charged on a lending transaction between a flow-through entity (S corporation or partnership) and its partners or shareholders which represents a payment a person makes to himself or herself. Stated differently, it is the amount the lender/borrower reports as interest income/expense which is equal to the lender's/borrower's distributive share of the flow through entity's interest deduction. The interest payments received are generally treated as portfolio income. Self-Rented Property. Personal or real property a taxpayer rents to an entity in which the taxpayer materially participates. For example, you rent real property you own personally to an S corporation in which you materially participate. Seller Carry-Back. Also known as seller financing, it's where the seller provides some or all of the financing in connection with the sale of real estate or a business. Semivariable Costs. Expenses that have both a fixed and variable component. Sensitivity Analysis. An approach to taking into account risk by calculating the changes in potential returns if the original assumptions change. For example, by using your best estimates for costs and revenue you compute that a new machine will provide you with 18% return. If revenues are 10% lower, the return will be 14%. series n: In the case of preferred stock, each financing round is called a series (see financing round).Example:ABC Ventures invested in both the Series A round and Series B round of the young company's funding. Settlement Options. Different ways of taking the proceeds from a life insurance policy. For example, rather than receiving the proceeds in a lump sum, the beneficiary can request the insurer to pay the amount out over several years. Interest is added to the principal to reflect the delayed payout. Shape stage n: The first stage of the Venture Value Chain. In the Shape stage, an individual or small group of individuals develops, and progressively shapes the original business concept. This stage in the Venture Value Chain involves idea generation, initial business model exploration, a reality check of the validity of the business idea, business planning, and business plan validation. Entrepreneurs should fully work through the Shape stage prior to the Launch of a new business. shareholders' equity n: accounting/finance term; the residual ownership in an organization after deducting liabilities. Short. An investor is said to be short if he has sold stock that he does not own, that is, he has sold stock he borrowed from his broker. In the case of an option, the seller or writer has a short position if he has sold the option short. shrink-wrap license n: a license and/or copyright agreement on product or software packaging which describes a company's copyright to the product in the package. The agreement generally states that the end user agrees to the copyright agreement upon opening the package. SIC (Standard Industrial Classification Code) - n: A four-digit number assigned to identify a business based on the type of business or trade involved. The first two digits correspond to major groups such as construction and manufacturing, while the last two digits correspond to subgroups such as constructing homes versus constructing highways. A business can determine its SIC number by looking it up in a directory published by the Department of Commerce, or by checking in the SIC book in the reference section of a local library. SBA size standards are based on SIC codes. Significant Participation Activity. A business in which you participate more than 100 hours without materially participating. If the total hours of participation in your significant participation activities (SPA) exceed 500, the total net income from SPAs is treated as nonpassive. simple interest- n: Interest paid only on the principal of a loan. SOHO n and adj: acronym referring to small office/home office, a characterization for the millions of Americans who work from home, whether they're running their own small business or "telecommuting" from home on behalf of an employer sole proprietorship n: a type of business legal organization with a single owner. The simpliest (and most popular) form of business organization. The individual is personally liable for all debts of the business to the full extent of his or her property. On the other hand, the owner has complete control of the business. Sole proprietorships are pass-through entities. Specific Coverage. An insurance policy or endorsement where coverage is limited to the property specified in the contract. Specified Perils Contract. An insurance policy on real or personal property where only coverage is limited to the enumerated perils. For example, flood insurance covers only floods, no other peril. Spendthrift Clause. A clause in a trust, insurance policy, etc. that guards the assets against unwise use by the beneficiary. In some cases the assets cannot be attached by creditors. Often used by parents to provide for children who might otherwise waste the assets or pledge them. spin-off n: a company or stand-alone, separate business unit that is created by being separated from an established business or institution. Typically, the spin-off offers a discrete set of products and/or services.adj: describing a business that has been or is being spun out from an established business or institution. spin off v: to create a spin-off business (see spin-off). spin-out n: (see spin-off) stakeholder n: owner of an organization. The term is also used generally to describe people who have an interest of any kind in a business, transaction or deal. Example: When a startup raises money, there are several interested parties who are not owners of the company, but are stakeholders in the transaction. The investors, and managers have an interest in the success of the transaction, and thus are stakeholders. Further, advisors, consultants, lawyers, accountants and other professionals are stakeholders, because they are interested in the success of the transaction. All employees of the company, whether stockholding or not, are stakeholders as the success of a fundraising transaction allows the jobs to exist. Standby Loan. A commitment by a lender to make a loan on specified terms. Generally, neither the potential borrower nor lender anticipate the loan will be taken down. Instead, it's anticipated it will be replaced by a permanent loan. startup n: also start-up; a new or early-stage company. stock n: equity ownership in a corporation. stock option n: the right to purchase a company's stock in the future; an option is a legal offer or contract, typically granted by a company to an employee, director, or advisor, under which the grantee (holder of the option) has the ability to purchase a certain number of shares of the company's stock for a stipulated price (the strike price). Most options are subject to a vesting period or vesting schedule, under which the grantee's rights to purchase the stock in question vests over a period of time (continued tenure with the company); some vesting schedules, particularly those for corporate officers' options, are based on accomplishment of specific milestonesinstead of, or in combination with, tenure. The purpose of a stock option is to provide a financial incentive (other than cash salary and/or bonus) to an individual whose contribution is considered important to the company's ongoing success. This incentive works in two ways: a) the vesting schedule (typically between three and five years) encourages the option recipient to stay with the company until his/her option fully vests (thereby giving him/her the right to exercise the option, or purchase the stock, at the given strike price; and, b) the option recipient has extra incentive to help make the company succeed, and to see that success reflect in an increased stock price, since the individual's strike price "locks in" his/her right to purchase stock at a (hopefully much lower) price set at the time the stock option was granted. Example: ABC Corp. grants "Employee Smith" a stock option on January 1, 2008 for 36,000 shares of stock, at a strike price of $1.00/share, with a vesting scheduleof 3 years vesting monthly in a straight-line fashion. Therefore, starting February 1, 2008 and each month thereafter for 36 months, Employee Smith vests on (earns the right to exercise) an additional 1/36th of her total options, of an additional 1,000 shares per month. At the end of the 3-yearvesting schedule, her full 36,000-share option is fully vested (i.e., she has the right to purchase all 36,000 shares at $1.00 per share. stock option agreement n: legal contract between a company granting a stock option and the individual receiving the stock option; an option agreement is usually very brief often simply a letter agreement that refers to (and typically incorporates by attachment) the company's governing stock option plan, and stipulates the date of the grant, the number of shares of stock in the grant, the vesting schedule, and the strike price. stock option plan n: an executive and employee compensation mechanism whereby executives and other key employees are granted stock options. Stock option plans allow companies to align the interests of executives and shareholders by rewarding both for increases in valuation (stock price). Companies are legally required to file or register their stock option plans with the state in which they are incorporated or organized, and that plan governs all incentive stock options(ISOs) and non-qualified stock options (NSOs) issued by the company; the plantypically stipulates the rules and parameters (e.g., vesting schedules) governing options granted under the plan. stockholders' equity n: (see shareholders' equity) Straddle. Any of a number of possible investment positions where the investor owns both a put and a call or protection from a drop in the market and a rise in the market. The put and call would have both the same exercise price and the same expiration date. An investor is long in a straddle if he buys a put and a call; he is short a straddle if he writes a put and a call. Straight Deductible. In an insurance contract, a constant amount or percentage of value which the insured bears on every loss. Straight-Line Depreciation. Depreciation (also applies to amortization) where the amount for each period is equal. For example, annual depreciation on a $12,000 asset with a 10-year life would be $1,200 per year. strategic investment n: (see strategic investor) strategic investor n: an investor (typically a company) that invests primarily for strategic rather than financial (return) purposes for example, in order to gain future access to a key new technology or product. (By contrast, financial investors make investment decisions primarily based on the prospect of a strong financial return.)Example:Corporation Z, a large record company, made a strategic investment in a minority equity stake in the startup digital music distributor; they did so in the hopes of learning more about online media marketing, with the possibly of eventually acquiring the startup. strategic business unit n: (see business unit) strike price n: finance/accounting term; the price per share specified in an individual's stock option at which the grantee (holder of the option) has the right to purchase stock from the company once that option vests.. The strike price for options is set by the company's board of directors, and is adjusted from time to time for new options granted by the company. The strike price "locks in" an individual's future purchase price for a given number of shares at the time that option in granted. Therefore, if the company succeeds and its success is reflected by a rise in its stock price, an individual option holder, once his/her grant vests, has the opportunity to purchase shares at a discount to the company's then-current share price. On the other hand, if the company's stock price drops over the vesting period, the option's strike price will reflect a premium over the post-vesting stock price a phenomenon known as the option beingunder water. Subordination Clause. In real estate lending, a clause in a mortgage that allows it to become junior to subsequent liens. Subrogation. The right of an insurer to substitute itself for the victim in recovering the amount of the loss from the party responsible for the loss. For example, you rent space in a warehouse. A worker accidentally sets fire to the building. The landlord collects from his insurance company but the insurer files a claim against your business. Substantial Part of an Activity. An identifiable piece or unit of a larger activity, such as a separate division or branch, or a separate product line of a business with several lines or divisions. Generally used in connection with the passive activity loss rules. Subvented Lease. A special lease provided by vehicle or equipment manufacturers that make it more attractive than a lease offered through regular sources. In essence, the lease is subsidized by the manufacturer. subscription agreement n: legal/finance term; the legal agreement between a company and an investor governing the purchase and sale of stock. For a given financing round or preferred stock series, the subscription agreement will typically be identical for all investors in that round (with the exception of specific investors' names, signature dates and the number of shares purchased). supplier financing n: arrangements with a business's suppliers to provide funding either through extended or generous credit terms, or through partnered product development; one way for small or early-stage companies to reduce the need for outside financing surety bond- n: Surety bonds provide reimbursement to an individual, company or the government if a firm fails to complete a contract. SBA guarantees surety bonds in a program much like SBA's guaranteed loan program. Suspended Losses. Passive losses which are carried forward indefinitely until the taxpayer has passive income or there is an entire disposition of the activity. Also called carryover or carryforward losses. sweat equity- n: A common form of "investment." This refers to the investment in time owners make, with no salary, to a new business. sweep account- n: A brokerage or bank account whose cash balance is automatically transferred into an interest-bearing investment, such as a money market fund. Use sweep accounts to earn interest on surplus cash. At the end of each business day, a sweep account would transfer excess funds into an interest-bearing account, earn overnight interest, and make the funds available the next day. T Take-Out. Also know as a permanent loan commitment, it's a promise by a lender to replace a construction loan with a permanent one. Tangible Asset. A physical asset such as equipment, buildings, etc. rather than an intangible asset. target market n: a market, or market segment, specifically targeted by a company or the product managers of a specific product. Your target market represents the group of customers that you want to buy your product or service. tax ID n: informal term for Employer Identification Number(see Employer Identification Number) Tax Deferred. A term that indicates no tax is currently due on the transaction or income received. Instead, tax is due at a later date when the transaction is closed. Earnings in an IRA account are tax deferred until you retire and the income is distributed to you. A tradein is a tax deferred transaction. You report no gain until you sell the property received in the tradein. tax exempt number- n: A number assigned to a business that enables the business to buy wholesale without paying sales tax on goods and products. Contact your local court house for additional information. triple net- n: Rental type in which the tenant pays rent to the landlord and additionally assumes all costs regarding the operation, taxes and maintenance of the premises and building. tech transfer n: (see technology transfer) Technical Advice Memorandum. This is written advice issued by the IRS national office at the request of an IRS district office or Appeals Office on a technical or procedural question, usually arising during the audit of a taxpayer's return or a claim for refund. Like Private Letter Rulings these are reported to the public, but are not official IRS pronouncements. Thus, they cannot be cited as precedent. technology adoption curve n: (see technology adoption lifecycle) technology adoption lifecycle n: a.k.a. technology adoption curve; the staged pattern by which virtually all new technologies or technology-related products are adopted by the market. Geoffrey A. Moore, in his seminal work on marketing for technology startups, Crossing the Chasm, defined the sequence of customer types to adopt (or buy) a given product as innovators, early adopters, early majority, late majority, and laggards. Bear in mind that the technology adoption lifecycle follows the life of a technology, rather than a specific product or a company. technology risk n: (see product risk) technology transfer n: commonly referred to as tech transfer; the process of arranging for the commercialization of technology-based inventions or innovations originating in research universities, government or non-profit laboratories or large corporations. Technology transferinvolves the organization responsible for originating the technology negotiating the transfer of the commercialization rights to that technology to a commercial entity (typically a for-profit company) via a licensing agreement. The business arrangements associated with tech transfer agreements can vary widely, but typically involve the company receiving the commercialization rights paying the owner of the intellectual property orIP (the inventing organization) some combination of up-front license fees, royalties (variable payments calculated as a percentage of future sales), and/or partial equity ownership (stock) in the commercializing company. (Stock ownership is only common in tech transfer deals in cases in which the commercializing entity is a startup company for whom the intellectual property being transferred is a strategic part of their product portfolio. Large, publicly-traded companies will typically acquire tech transfer intellectual property using some combination of the cash payment mechanisms described above as opposed to stock). Tenancy at Will. The occupancy of property at the will of the owner. The agreement may be written or oral, but the tenant may leave at any time without liability and the owner can evict the tenant at any time. Term. The life of a contract, agreement, loan, etc. Term Contracting. A technique in which a source of supply is established for a specified period of time. The contract often has an estimated or minimum quantity. Term Insurance. A type of life insurance issued for one or more years specified in the contract. As opposed to whole life, the policy does not build any cash value. term sheet n : legal/venture capital term; a legal document, sent from a venture capital firm to a company in which they are interested in investing, that summarizes the terms of VC's investment offer number of shares they are interested in purchasing, price per share they are willing to pay, terms describing the security (preferences, etc.), and other terms and conditions (whether they want representation on the board of directors, for example). The term sheet serves as the basis for the financing negotiation between the VC and the company; once all terms are agreed upon, the term sheet serves as the basis for lawyers to draft the formal investment agreement between the two parties. Tiered Entities. Partnerships or trusts or S corporations invested in other partnerships or trusts or S corporations. trademark n: legal/marketing term; an identifying name or graphical mark that is uniquely identified with a specific product, service or company. Trademarkscan be names, logos, slogans or symbols, and serve as important elements in branding and building brand equity. Trademarks can be legally claimed or reserved by a company by simply labeling the mark or name with the trademark symbol TM. A more rigorous (and legally defensible) way to protect a company's exclusive rights to a mark or name is to formally register it (a registered trademark, indicated by the symbol ®) with the U.S. Patent and Trademark Office (PTO). v: the act of legally claiming exclusive use rights to a unique mark, name or slogan/tagline. tranche n: a general term for a round of financing (see financing roundorseries). Treasury Inflation Protection Securities (TIPS) These are treasury bonds where the principal is indexed to the CPI. The total yield is made up of current interest payments and semi-annual CPI adjustments to principal. While only the interest is paid, both portions are taxable. Because of the CPI adjustment, the interest rate is relatively low. Trial Balance. A list of all the ledger accounts with their balances at any point in time. |
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