Glossary

A - D

Antidilution
A provision that gives a shareholder the right to receive a number of shares at par value if a subsequent round of investment is at a lower price per share than the shareholder paid (a "down round"), so that the overall average price paid for his shares is the price of the down round.

Assignment
An agreement whereby you assign your right to your technology (product or service) to another party, normally in exchange for a one off payment. Once a technology is assigned you will not normally have any further involvement in it unless specified in the assignment agreement.

Bimbo
A term to describe a deal involving both existing and outside managers: a buy-in/management buy-out or bimbo.

Bought deal
Term used when a deal maker provides all of the finance needed for a buy-out deal and then sells on or syndicates part of the funding to other investors at a later stage. Bought deals are often used by the larger providers of finance when speed or confidentiality are particularly important.

Business plan
The document put together by managers to justify their application to financiers for backing. Should contain summaries of past and projected profit and loss accounts, balance sheets and cash flows. Also details of products and services, markets, future strategy and, profiles of the managers.

Caps, collars and cylinders
Clauses in buy-out deals which limit the extent to which the interest rate charged on borrowed funds can rise or fall. Agreements usually have a limited life of one or two years. The longer the period of cover the more expensive this form of interest rate insurance is.

Carried interest
A stake taken in the investee company by the venture capital or buy-out fund managers. Carried interest can be in the form of options.

Chargeable interest
Interest payable on a loan either in cash now or rolled up for payment at a later date.

Commercialisation strategy
The means of obtaining value for the Intellectual Property, normally via a licence or spin out company.

Competitive advantage
A cost or service or other advantage over competitors, which normally erodes over time.

Convertible loan
A loan which converts into equity at a later date, at specific rates or in response to particular events.

Copyright
Copyright protects literary, dramatic and musical works, amongst others, from being copied without the permission of the owner. Copyright automatically subsists in a work as soon as it has been expressed in a tangible format. For a more detailed explanation of Copyright please see the Barker Brettell Guide to Intellectual Property Rights.

Deal flow
The rate at which investment propositions come to the deal maker or financier.

Design right
Design rights apply to aspects of, or features applied to, an article, not the article itself, for example a decorative pattern. Design Rights operate in the same way as Copyright, in that it subsists automatically and there is no registration requirement. For a more detailed explanation of Design Rights please see the Barker Brettell Guide to Intellectual Property Rights.

Development capital
Later stage finance for more established companies which are profitable or nearly profitable. Generally less risky than early stage finance.

Due diligence
Detailed analysis and appraisal of the business and the entrepreneur/management.

E - H

Early stage or seed fund
A fund to develop a business at, or near, the start of its operations.

Earn out
Describes either a formula for relating the final purchase price of a company to actual future earnings or a means of encouraging management to perform by payment on the basis of their future performance (see also Ratchet).

Employee buy-out
A deal involving not just the top management but also all or a large number of the more junior employees of the organisation. There is generally a difficulty with regard to confidentiality where large numbers of employees are involved. This can be alleviated by staging a purely management buy-out initially then involving other staff at a later stage.

Employee Share Ownership Plan
A trust which is established to acquire shares in a (ESOP) company for subsequent allocation to employees over a number of years.

Equity kicker
An option to acquire equity often granted to the provider of mezzanine finance (qv) or loan notes to compensate for the higher risk involved in this type of funding.

Exit
The point at which the financier sells his holding in the buy-out company, either through a trade sale to a larger company, by the management buying out the other investors to assume complete control, or by a stock market flotation.

Filing date
The date that your patent application is filed at the UK Patent Office. For further information about the relevance of the filing date, please see the Barker Brettell Guide to Intellectual Property Rights.

Fund manager
A professional fund manager that is regulated by the Financial Services Authority (FSA).

The Gatsby Charitable Foundation
The Gatsby Charitable Foundation is a Sainsburys Family Charitable Trust, established to bestow grants within identified fields of interest, including Technical Education, Plant Science, Cognitive Neuroscience amongst others. For more information about the Foundation please visit their website (www.gatsby.org.uk).

Gearing (or leverage)
This is the ratio of debt to equity in a company's capital structure. Intermediate forms of finance such as redeemable preference shares and convertible loans can complicate the calculations and mean a variety of different ratios may be applied to the same company.

Hands off / hands on
The degree to which an investor in a buy-out becomes involved in its management. A hands on investor would normally nominate a non-executive director to the board and might commit some of its other executives to help out if the company ran into difficulties. Hands off investors would have very little or no active involvement in the company.

I - L

Infringement
Infringement of IPR occurs where a party uses another party's Intellectual Property without the permission of the owner. For example, in order to work your invention you may have to use technology established by someone other than yourself, and that technology may be protected by a patent or other IPR. Similarly, if your IPR has been generated under a research funded project, the party that funded the research may have some proprietary rights over the invention - this will be established and clarified during the due diligence procedure.

Intellectual Property Rights
Intellectual Property is a generic term for the legal protection available for the expression of ideas. There are five main types of IPR's: Patents, Trade Marks, Copyright, Design Right and Registered Designs. For further information about the different types of IPR's please see the Barker Brettell Guide to Intellectual Property Rights.

Internal Rate of Return (IRR)
Different investors work this out in different ways but the term generally refers to the annual compound rate of return on an investment over a given period. Returns normally include dividend distributions and profits from either disposals or a fair valuation of the buy-out company.

Joint venture
A separate company or business jointly owned by two or more organisations.

Junior debt
Loans which rank after secured or senior debt for repayment in the event of a default.

Junk bonds
High yielding, unsecured debt used in US buy-outs. Since the debt is in the form of a bond certificate, it can be bought and sold more easily than the mezzanine loans (qv) used to finance UK buy-outs.

Lead investor
Venture capitalist or other deal maker with the largest share in a syndicated investment. The lead investor usually initiates the deal and takes a hands on role on behalf of the other partners.

Lemons and plums
Bad deals and good. Bad investments usually go wrong before the good ones produce a profit. Hence: the lemons ripen before the plums.

Leveraged buy-out
Similar to a management buy-out, though usually applied to US deals where the transaction will have been initiated by a financial group rather than by the management. The name refers to the high level of borrowing or leverage which the company takes on, using the assets being purchased as security.

Licence deal
An agreement whereby you licence part or all of your right to your technology (product or service) to one or more parties, normally in exchange for an up-front payment followed by royalty payments thereafter. Licence deals offer a lot of flexibility as you choose between exclusive or non-exclusive licence, the whole technology or part or it, world-wide rights or territory specific rights, amongst many others.

Living dead
Companies which are just about trading profitably but which are unlikely to do really well. A slightly dated term used about investments the deal makers prefer to forget.

Lock-out agreement
An agreement to give the buy-out team time to negotiate the purchase of their company free from pressure from other bidders.

M - P

Management buy-in
An offshoot of the management buy-out industry. The purchase of a business by one or more outside managers with the help of a group of financial backers. Buy-ins are seen as being considerably riskier than buy-outs because they involve an outside management team which does not know the company well. Many deals are neither pure buy-ins nor buy-outs but Bimbos (qv).

Management buy-out
The purchase of a business by its existing management with the help of a group of financial backers. The managers put up a relatively small amount of the total finance but usually gain a disproportionately large share of the equity. Buy-outs are funded largely by loans secured in the assets of the company itself.

Merlin
The Merlin mentoring project is co-financed by the South East England Development Agency (SEEDA) and the European Social Fund (ESF).

Mezzanine finance
Loans, usually unsecured, which rank after secured or senior debt but before equity in the event of a company failing. To compensate for the greater risk, they typically carry interest one to three percentage points above secured loans and often carry an equity kicker (qv) to give the lender a stake in the equity.

NewCo
The buy-out is usually carried out through a newly created company referred to as NewCo.

Non-disclosure agreement or confidentiality agreement
An NDA is a legal contract under which two or more parties disclose confidential information to the other party(s). The terms of each NDA can vary, but each NDA will require the receiving party to keep confidential any information disclosed to them under the agreement for a set term (i.e. 5 years) up to the point where the information is put into the public domain (in other words, it is no longer confidential).

Office of Science and Technology
The Office of Science and Technology leads for Government in supporting excellent science, engineering and technology and their uses to benefit society and the economy. For more information about the OST please visit their website at www.ost.gov.uk.

Patent
A patent grants the owner a legal monopoly to work their invention, to the exclusion of others, for a period up to 20 years. For a more detailed explanation of patents please see the Barker Brettell Guide to Intellectual Property Rights.

Patent application
If you wish to seek legal protection for a new invention you must first file a patent application with the UK Patent Office. The application will describe the technology and should enable a person who is 'skilled in the art' to work that invention - so it must be a comprehensive description of the technology. Filing a patent application is the first step in obtaining a patent. For a further explanation of patent applications, please see the Barker Brettell Guide to Intellectual Property Rights.

Pre-emption rights
A right of first refusal for an existing shareholder to purchase a proportion of any shares to be issued or transferred, the proportion invariably being the percentage that their existing shareholding is to the entire issued capital.

Preferred ordinary shares
Ordinary shares taken up by outside investors in a buy-out. They rank ahead of, or are "preferred to", the plain ordinary shares owned by the management in terms of dividends and the pay-out in the event of a winding-up.

Premium protection
A provision which gives an investor the right to the repayment of the premium he paid for his shares in preference to other shareholders on the return of capital on liquidation or in the event of a sale.

Prior art
Prior art is defined as any literature that is in the public domain prior to the filing date of a patent application that discloses or anticipates the technology you are applying to protect. The Patent Office will undertake a prior art search in the process of granting a patent, however it is necessary that you also undertake a prior art search as it has many added benefits other than establishing that your technology is novel, for example it will show you who else is researching in fields similar to your technology - these may be your competitors.

Q - T

Ratchet
An incentive arrangement whereby managers get a bigger share of the equity if the company performs well. Sometimes managers forfeit shares if they do particularly badly.

Registered designs
A registered design is a monopoly right, similar to patents, which can last for up to 25 years and must be applied for at the UK Patent Office, and applies specifically to aesthetic articles, for example the shape of a new kettle which is designed specifically to appeal to and be judged by the eye. For a more detailed explanation of Registered Designs please see the Barker Brettell Guide to Intellectual Property Rights.

Royalty share
A royalty is a payment you receive in return for your technology being used commercially. You can structure the royalty terms in many different ways, for example a percentage of turnover (you benefit from the overall success of the company) or of product sales (you benefit from more products being sold). Payments can be on a sliding scale or with ceiling payments.

Second round financing
Is now increasingly needed to help buy-outs which have run short of funds. It can also be applied to businesses which have done well and which are able to raise new money for investment on more favourable terms than in the first round.

Senior debt
Secured debt which ranks first in terms of repayments in the event of a default (see also junior debt).

Slippage
This is what happens when the buy-out company starts to eat up more cash than expected.

Spin out company
A company that has formed to exploit technology developed under funded research at a University.

Syndicated investment
An investment which is too large or too risky to be handled by one investor and which therefore needs to be shared among several partners.

Technology Transfer Office
A unit of the University staffed with specialists in business planning, intellectual property and other commercial skills.

Term sheet
The terms (cost, conditions etc) by which investment funds are made available.

Trade Marks
You may apply to the UK Trade Mark Office (housed in the UK Patent Office) for protection of a mark or sign that distinguishes your goods or services from the goods and services of another undertaking. For a more detailed guide to Trade Marks, please see the Barker Brettell Guide to Intellectual Property Rights.

U - Z

Unique selling point (USP)
An aspect of your product/service that distinguishes your product/service from your competitors.

University Challenge Scheme
An initiative of the OST with funding from the Gatsby Charitable Foundation and the Wellcome Trust.

Vendor finance
Finance provided by the vendor in the form of either a deferred payment or alternatively a retained minority stake in the bought-out company, usually in the form of loan notes. It allows the vendor to share in the profits of the company it has sold if it does very well. The vendor's management can then demonstrate to shareholders they did not sell too cheaply. It also allows the vendor to boost the sale price, also thereby impressing its own shareholders.

Venture capital
A company which provides equity finance and advice to entrepreneurs starting a business from scratch or staging a buy-out.

The Wellcome Trust
The Wellcome Trust is an independent research-funding charity, established under the will of Sir Henry Wellcome in 1936. It is funded from a private endowment, which is managed with long-term stability and growth in mind. For more information on The Wellcome Trust please visit their website at www.wellcome.ac.uk.