Thames River Group knows that communicating both technical and business ideas between a firm and its’ potential investors can be tricky. Therefore, we provide this Glossary of Investment Terms to help our clients understand what investors are saying.
Entity – the actual registered corporate business structure that is the chassis for your business. Examples include C-corp, S-corp, LLC, partnership, and sole proprietorship. The different types have an impact on important details such as allowing for different tax treatment of income, how ownership interest can be transferred to other parties, and how liability is assigned to partners.
Business formation – generating a business entity typically requires a state registration for the business details, creating an FEIN (federal employer identification number, which acts like a social security number for the business), and home state tax registration. For some states the entire process can be done online, but consult a professional well versed in the process to ensure you don’t miss anything.
Registered agent – the person of record who lives in the state the business is formed in that is authorized to receive mail on behalf of the company. They are most often one of the partners, but if the business is registered in a state other than where the principals live, certain types of institutions (like a CPA firm) can act as agent by proxy.
Analytics – tools that evaluate performance, typically related to the advertising reach of content. Metrics include email read throughs, retweets (Twitter), likes (Facebook or Insta), click throughs (from emails to land on a web page), conversions (purchases from a website), post shares (FB or Insta), comments (all), subscriptions (Youtube, FB, Insta), or views (all).
ROI – return on investment. Normally this phrase is applied to a traditional passive investment vehicle, but in business it can also be in reference to money (and/or time) spent on advertising and its relationship to client acquisition, determined through analytics.
SEO – search engine optimization – the discipline of ensuring your site gets maximum exposure through it’s placement in the search results of major sites like Google, Bing, Yahoo etc
Social media – online platforms that you can generate profiles in to establish your brand identity. Examples include Facebook, Instagram, Twitter, Medium, Youtube. They create your online first impression more than your website itself will, since they already have established traffic. When well executed, they are portals to funnel traffic to your website
Credentials – recognized merits that give your business substance in the market. These can take the form of degrees, certifications, other institutional recognition, track record, trade association (such as chambers of commerce) positions, group leadership roles (on boards of directors etc). For service based businesses especially, credentials can allow you to charge more for your product through their perceived value.
White paper – also ‘wire framing’, an exercise of visually representing your whole business model through drawing it out, with various aspects depicted out as branches and connected through an organized flow chart. The drafting of this business overview often can stimulate creative thinking.
NDA – non disclosure agreement – designed to protect the commercial privacy of your ideas and restrict their exposure to parties other than those that you intend to include in the conversation. When discussing your business,, this document should be signed off and in your possession before you engage anyone with your ideas.
Trademark – A trademark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of others. A service mark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of a service rather than goods. Some examples include: brand names, slogans, and logos. The term “trademark” is often used in a general sense to refer to both trademarks and service marks. (www.USPTO.gov). Trademarks recognize the unique aspect of these and legally protects the creator from having others use their unique marketing.
Copyright – Another form of intellectual property protection that protects original works of authorship. The protection does not extend to ideas, operations or practices, but can protect the way the ideas are expressed. The more clearly and thoroughly things are written out, the better the protection afforded, as specifics become more personalized to you and what you have created. In the marketing world, the way you position a product or service can be as valuable as the product or service itself; this area is where copyrights can be useful, in the expression.
IP – intellectual property – private knowledge that translates into commercially valuable content. Ideas for products/services, how to market them, and any other value brought through thinking. Whoever creates it should protect its exposure in the market through legal documents such as NDAs, non-compete clauses, trademarks, copyrights or patents.
Buy/Sell agreement – agreement between the partners to allow, in the event of a partner’s death, for the remaining partners to retain residual control of the company through the buyout of the deceased partner’s equity interest. The buyout can be funded through company assets, life insurance, debt notes, or other means of transferring value over time. Used to prevent a partnership from taking on unintended partners like spouses or other family members of the deceased partner, and also designed to prevent the dilution of decision making among the remaining founders.
Operating agreement – the written testament between partners that clearly defines the roles and responsibilities of each party. This delineation is designed to justify the why each partner has earned their ownership portion of the company, as well as protect everyone’s position and ensure efficiency. In the settling of a disagreement between partners, it is far better to have a document to point to, rather than point at each other.
Fee Agreement – compensation document that outlines the terms that need to be met to trigger payment. Often used with some form of contractor that is loosely attached to the company and not paid as an employee. Often a commission based incentive, or triggered by the delivery of revenue to the company.
Contractor Agreement – document that outlines the duties of a company affiliate doing contract work. Typically, the individual is hired under a per diem status rather than an employment capacity, with defined parameters including duration of work, specific duties, restrictions, pay structure etc.
Joint Venture Agreement – document defining the relationship between two or more entities, often individual businesses that elect to come together under certain provisions to create a new hybrid service or package for clients. The document is designed to protect the individual interests of the parties as well as define the contributions necessary to make the partnership functional and productive. It also spells out the dispute resolution process in the event of failures or defaults by any involved entities.
W-2 – Employee tax document that denotes their income for the tax year, issued by the employer after the year is over. W-2 employee income has the federal and state taxes built in, that is, net pay every period already has a portion set aside for the taxes based on the employee’s withholding elections. An employee is eligible for available workplace benefits provided they meet standards such as a vesting period of active work and full – time status.
10-99 MISC – contractor tax document issued by the hiring company at the end of a tax year. As a non employed position, no taxes are taken out, and the contractor has the obligation to pay ordinary income tax on everything received. This position is also not eligible for any employee benefits, but does have access to tax deductions that employees do not.
Debt vs equity fundraising – raising capital typically falls under debt or equity in exchange. A debt note means principal will be returned, typically as a balloon payment at the end or in installments annually, plus interest often paid on a quarterly or semiannual basis. There is typically no tax consequence to the company for money taken in as debt, since it is not classified as income. Equity purchases entail the investor having ownership stake in the company, which can be temporary (where the equity is agreed to be bought back through future purchase options) or permanent. A percentage of the company is purchased, and typically part of the cash is treated as income to the company. Equity purchases may include voting rights, where the investor has a say in company policy and decisions, or not depending upon what is agreed to.
Overhead – all the demands on a business’ cash flow that it has to meet regularly in order to operate. Including payroll, commercial leases, inventory, utilities, CAM fees, equipment, insurance, debt service, contractors, etc.
Financial projections – Data driven assumptions about growth of your business into the future. Typically mapped out in one year increments and looking forward to five years. Often used in business plans to map growth and give investors a sense of earnings potential.
EBITDA – Earnings before interest, taxes, depreciation and amoritization. An important metric that allows for the simplified comparison of a company’s financial health to other companies by focusing on net earnings generated through the sales of products or services, and removing the impact of other financial considerations.
Lines of credit – issued through a bank, these can be attached to your business or the owner partners. Available for business use, and the interest is often tax deductible. It is wise to pursue lines of credit when the business bank account is already well funded (for example when you first receive investment funds and have not yet spent them), as you may get access to higher limits under more favorable terms.
Business credit card – it is possible to have separate credit established for your business than your personal credit, as the business FEIN functions somewhat like an individual’s social security number, and can build its own credit profile. Can help with creating additional reserve funds when unforseen expenses arise.
Working capital – an important metric to determine current financial health, this is the net result of a business subtracting all liabilities from its assets. It allows the partners to assess stability and the ability of a business to take on additional cash flow risk. A ratio of dividing assets into liabilities with a result over 1 indicates the business is in a net positive state.
Balance sheet – A display of the business’s value through an accounting of all its assets, liabilities and cash flow.
Assets – those parts of a business that generate income, such as accounts receivable, service contracts, purchase orders etc.
Liabilities – those facets of a business that are a draw down on cash flow – such as accounts payable, employee payroll, contractor payments, inventory replenishment, taxes, equipment maintenance, etc.
Pro forma – high level, investment grade business plan that includes a tremendous amount of diligence written to help an investor evaluate the merits of risking their capital with your company. Should include areas such as: 1) Full background of how the product/service came to be 2) What problems does your business solve in the marketplace? 3) What distinguishes your brand from others? 4) What are the competitor businesses in your ecosystem and what do their revenue models look like? 5) What are the demographics of your physical business location if you have one – surrounding area population age, median income, and spending habits? 6) What are the line item breakdowns for all uses of seed funds? 7) What are the years 1-5 financial projections? 8) What are the profiles and CVs of the company partners? 9) What operating agreements are in place to demonstrate efficiency?
CPA – Certified Public Accountant – important for the proper handling of taxes, both for paying (and proper budget planning) and also for the proper deployment of tax deductions which can help business cash flow and efficiency.
Financial planner – important to lend perspective on how the business operates as a whole, taking a bird’s eye view and ensuring that the various components work efficiently together. Also helps to integrate longer term personal portfolio planning for the owners, adding asset classes that work in tandem with the business as it creates cash flow. Planners must consider the tax implications and asset protection necessary in the overall picture of the business owner’s ecosystem.
GC – General contractor – a key figure in organizing all the people and elements needed to build out and occupy a commercial space. They coordinate all the building aspects through their relationships across all the construction disciplines, and act as project manager to get your space ready to be inhabited.
CO – certificate of occupancy – a decree document issued by the township granting the open use of your commercial premesis which allows customers to enter. It testifies that the building is up to all acceptable municipal code standards for safety. A temporary version, or CTO, is used while the building is being worked on but does not allow general public access.
Non-compete agreements – these can appear as individual agreements or clauses found within employment contracts. They are designed to restrict a party who works with a company and through that work develops an understanding of that company’s unique marketing strategies (or other trade secrets) from using those strategies in a competing business model in the future. As in many types of contracts, the extent to which something is protected is the depth to which it is delineated in writing. Even so, non-compete agreements have limitations in how they protect a company from its intellectual property being utilized.
Supply chain – the systems of distribution required to source products from their manufacture through to their final destination in the hands of the end user/consumer. The proper management of this system requires the coordination of shipping, payment processing, materials sourcing, etc and is used to ensure cost/time efficiency.
Influencers – social media personalities who have built a strong online presence and reputation. The interaction with influencers can create unique channels of broadcasting your business online in a cost effective way to reach an audience through them.
Triple net leases – a commercial real estate lease where the tenant agrees to pay the three net expenses on top of their rent for the space, which are property taxes, maintenance, and property insurance premiums. In single net leases, only the property taxes are included in the tenant obligation, and in double net scenarios it includes the property/casualty insurance. Landlords will shift the risk of the additional expenses upon the tenant whenever they are able.
Insurance agent – there are multiple types of business insurance available that may be needed to transfer the risk of certain types of loss away from the company. Agents can help identify where needs are and unassumed risk might need to be addressed. Some are required by law and others are moreso to guarantee efficiency in a company in the event of unforseen difficulties, others still to protect against certain types of liability falling on the company’s balance sheet. Examples include general commercial liability, property/casualty coverage, key person insurance, business overhead coverage, buy/sell agreements, work disability policies and life insurance. Many events in business can occur without being planned for and coverages to minimize risk are sometimes overlooked to the peril of the company.
Demographics – diligence done to ascertain the clientele that live in an area and gather data about their lifestyle, income, household makeup, spending habits, age ranges, etc. There is also demographic data that can indicate the composition of businesses in an area which can give a sense of competition, market saturation for your type of business, and other valuable indicators that can help narrow down a search for placing your location in an optimal area for your target market.
CAM fees – common area maintenance fees associated with a commercial property, which are often an additional expense negotiated in the lease agreement (for example triple net leases include these expenses on behalf of the tenant). Include premesis maintenance such as lawncare and snow removal, trash removal, landscaping, lighting, parking lot and sidewalk upkeep etc.
Employee benefits – when hiring W2 employees, your employer benefits package may make for a competitive advantage to attract the best talent. Includes elements such as health insurance, 401(k), disability coverage, maternity leave, life insurance, and paid sick days.
401(k) – IRS sponsored program that is a defined contribution plan, that is, the employee sets their contributions and the amounts are auto-deposited into the investment account on a regular basis (often every pay period). This type of plan is called a qualified plan, meaning the dollars go in on a pre-tax basis and only the remainder that gets paid out to the employee is taxed at the time. As a result, this account grows tax deferred, and income taxes on both the principal and interest are not realized until distributions are taken down the road. As an employer, you may elect to do a % match for the employee contributions as additional incentive.