Glossary of loan & investor terms

Archangel — A respected leader in the private investor community, often an ultra-high-net-worth individual who can influence other angel investors to make an investment.

Capacity — Ability to repay a loan. Capacity compares a company's cash flow to the monthly minimum loan payment due.

Convertible debt — A loan that can be converted to stock, either by election or automatically upon reaching certain business milestones.

Convertible stock — Stock that can be converted to debt, usually at the sole discretion of the investor.

Dilution — The loss of ownership (as a percentage), which naturally results from selling company stock to new investors.

Down round — An equity investment (stock purchase) at a price lower than previous investors paid. Down rounds can cause extreme dilution to prior shareholders.

Mezzanine financing — A finance package made up of an unsecured loan combined with a grant of warrants. A mixture of debt and equity.

Participating preferred — A class of investor stock that, in case of any sale or liquidation, requires the company to pay back the initial investment before any other distributions, and also entitles the holder to participate in capital gains along with common shareholders.

Private equity group — Any organized fund or institutional investor that specializes in purchasing, and sometimes managing, private companies.

Stockbrokerage margin account — Investment account which allows you to purchase securities with funds borrowed from a broker at a specified interest rate.

Term sheet — A simple, plain-English memo which outlines the parameters of an investment or loan prior to the formal contract. Term sheets are the basis for negotiation between investor and business owner.

Valuation — The dollar value of 100% of the company stock. If an investor buys 25% of the stock for $10,000, then the valuation of the business is $40,000.

Warrants — The right to purchase stock in the future at a predetermined price (called the strike price). Similar to options of a public company, warrants are commonly used to reward early investors, consultants or lenders.