Glossary - Sydecar

#

3(c)(1) Fund

3(c)(1) Funds (which make up the majority of venture capital funds) are privately traded funds that are exempt from certain registration and reporting requirements with the SEC (under the Investment Company Act of 1940). 3C1 Funds can only accept 100 or 250 investors depending on the amount raised, and must invest primarily in private companies.

3(c)(1) Fund

3(c)(7) Fund

The 3(c)(7) exemption allows certain qualifying private funds to avoid certain SEC regulations, including registration and regular disclosure.3(c)(7) funds can only accept Qualified Purchasers as investors, and must demonstrate that they do not plan to IPO.

3(c)(7) Fund

409A Valuation

409A valuation is a method of valuing a private company based on its securities, generally including common stock, preferred stock, and convertible securities. 409A valuations typically occur when a private company is planning to go public or get acquired, although valuation reporting comes into play at other points in a startup’s lifetime as well.The process for performing a 409A Valuation generally involves the following steps:(i) Determine the type of security being valued;(ii) Gather financial and other relevant information;(iii) Identify comparable companies and transactions;(iv) Estimate the discount or premium to apply to comparable company/transaction data;(v) Develop an implied common share value per unit at the valuation date; and(vi) Calculate the value of the preferred shares in question.

409A Valuation

506(b) Fund

Regulation D Rule 506(b) is a provision under the U.S. Securities and Exchange Commission (SEC) that allows companies to raise an unlimited amount of capital without registering the securities offering with the SEC. This exemption is widely used by private companies and investment funds to raise capital through private placements. Here are the key features and requirements of Rule 506(b):Unlimited Capital Raising: Issuers can raise an unlimited amount of capital under Rule 506(b).Accredited Investors: Managers or deal sponsors can sell securities to 99 or 250 accredited investors (individuals or entities that meet specific income or net worth criteria) and up to 35 non-accredited investors who meet certain sophistication standards.Companies can sell securities to an unlimited number of accredited investors and up to 35 non-accredited investors.  Purchasers can self-verify their accreditation status; GPs aren’t responsible for verifying accreditation.Information Requirements: Companies must provide non-accredited investors with disclosure documents that generally contain the same type of information as provided in registered offerings. The company does not have to provide specific information to accredited investors, but if it does provide information, it must not violate anti-fraud provisions of securities laws.No General Solicitation or Advertising: Issuers are not allowed to use general solicitation or advertising to market the securities. This means that the company must have a pre-existing relationship with the investors.Restricted Securities: Securities sold under Rule 506(b) are considered restricted, meaning they cannot be freely traded in the secondary market after the offering.Filing Requirements: Companies must file a Form D with the SEC within 15 days after the first sale of securities in the offering.State Securities Laws: While Rule 506(b) offerings are exempt from federal registration, they are still subject to state securities laws, which vary from state to state.It's important for companies to ensure that they meet all the requirements of Rule 506(b) to qualify for the exemption from SEC registration. Failure to do so could result in legal and regulatory consequences.

506(b) Fund

506(c) Fund

Rule 506(c) permits issuers to broadly solicit and generally advertise an offering, provided that: - all purchasers in the offering are accredited investors- the issuer takes reasonable steps to verify purchasers’ accredited investor status and - certain other conditions in Regulation D are satisfied

506(c) Fund

A

Accredited Investor

As defined by the SEC, an accredited investor is an individual who meets one of the following requirements:Individuals with annual income over $200K (individually) or $300K (with spouse or spousal equivalent) in each of the last 2 years and an expectation of the same this yearIndividuals with net assets over $1 million, excluding the primary residence (unless more is owed on the mortgage than the residence is worth)An institution with over $5 million in assets, such as a venture fund or a trustAn entity made up entirely of accredited investorsSEC- and state-registered investment advisersExempt reporting advisers filing with the SECIndividuals with certain professional certifications (Series 7, Series 65, and Series 82 license)"Family Offices” with over $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers ActAny entity with over $5 million in investments and that was not formed for the specific purpose of investing in the securities offered.

Accredited Investor

Allocation

Allocation refers to the amount a person or fund is able to invest in a given company.e.g., A company may be raising $500k, and have offered a specific investor the right to invest $50K.

Allocation

Allocation refers to the amount a person or fund is able to invest in a given company.e.g., A company may be raising $500k, and have offered a specific investor the right to invest $50K.

Allocation

Allocation refers to the amount a person or fund is able to invest in a given company.e.g., A company may be raising $500k, and have offered a specific investor the right to invest $50K.

American Waterfall

An American waterfall is a structure under which a fund manager receives carried interest on a deal-by-deal basis, prior to fund investors receiving their initial money back. This is sometimes referred to as a deal-by-deal waterfall and is more favorable for the fund manager.This is the opposite of the European waterfall structure, which is the more common structure in VC.

American Waterfall

AML

Anti-Money Laundering (”AML”) is the execution of transactions to eventually convert illegally obtained money into legal money. Although you as a company stick to the rules, this does not mean that your partners and business associates adhere to the same AML compliance laws as you.AML activities aim to fight money laundering by establishing processes, policies, and enforcement of regulations and laws that require businesses to actively monitor the entities with whom they do business. They target such practices as market manipulation, illegal goods trading, tax evasion, bribery, and other forms of financial corruption under the secrecy act.

AML

AUM

Assets under management (AUM) is the total market value of the investments that a person or entity handles on behalf of investors: AUM fluctuates daily, reflecting the flow of money in and out of a particular fund and the price performance of the assets. Funds with larger AUM tend to be more easily traded. A fund's management fees and expenses are often calculated as a percentage of AUM.

AUM

B

Beneficial Owner

A ultimate beneficial owner (UBO) is a person the primary beneficiary when an institution initiates a transaction. Beneficial ownership is distinguished from legal ownership, though in most cases, the legal and beneficial owners are one and the same.The threshold for beneficial ownership may vary between jurisdictions, but typically falls in the range of 10-25%. For SPVs formed in the state of Delaware (as those on Sydecar are), a ultimate beneficial owner is anyone who owns over 25% of the SPV. In adherence with our banking partner’s requirements, we must perform a KYC check on any ultimate beneficial owners of an SPV. This is a seamless process performed through our platform where we collect a copy of the investor’s passport or ID.

Beneficial Owner

Benefit Plan Investor

Benefit Plan Investors are typically entities that manage money from a retirement plan or employee benefit package.A “Benefit Plan Investor” is defined as:(i) an entity that is deemed to be a “benefit plan investor” under the U.S. Department of Labor final plan assets regulation, 29 C.F.R. §2510.3-101, as amended (the “Regulation”) and as modified by Section 3(42) of ERISA.“Benefit Plan Investors” manage:(i) an “employee benefit plan” (as defined in Section 3(3) of ERISA), that is subject to part 4 of Title I of ERISA, OR(ii) a “plan” (as defined in Section 4975(e)(1) of the Code), that is subject to Section 4975 of the Code.

Benefit Plan Investor

Blocker Structures

Blocker structures are corporations that effectively “block” taxable income at the corporate level for U.S. federal, state and local income tax purposes.Most commonly they are U.S. corporations that absorb tax. Taxable income passed through on a Schedule K-1 by a portfolio company generally falls into the category of income “effectively connected with a U.S. trade or business” (ECI) for foreign investors and unrelated business taxable income (UBTI) for U.S. tax-exempt investors.Foreign investors want to avoid being allocated effectively connected income because exposure to an allocation of that income subjects them to a U.S. income tax filing requirement and potentially to U.S. federal income and withholding taxes.Tax-exempt investors want to avoid being allocated income that is UBTI because that income will subject the otherwise tax-exempt investor to U.S. excise taxes.Neither foreign or tax-exempt investors want to hold directly an equity interest in a U.S. business taxed as a partnership. Hence, the use of a U.S C corporation as a “blocker corporation” to block the flow-through of income on a Schedule K-1 at the corporate level.Must be held through entities taxed as corporations, which will “block” receipt of ECI by the investor. In addition, the terms of many investment fund agreements relieve the fund of its obligation to avoid investments resulting in ECI if non-U.S. investors are offered the opportunity to invest through a “blocker.” This blocker typically will be a U.S. corporation (or other U.S. entity that elects to be treated as a corporation), although a non-U.S. corporation (or a non-U.S. partnership that elects to be treated as a corporation) may be preferable where the potential ECI is attributable solely to an investment in a USRPHC. A blocker structure prevents the flow-through of ECI to the investor. However, the blocker corporation will be fully subject to U.S. taxation, and any dividends may be subject to U.S. withholding taxes. Thus, while the blocker avoids the requirement for the investor to file U.S. income tax returns, the U.S. taxation faced by the blocker may be substantially the same as, or greater than, the taxation that would be faced by the investor if no blocker were used.

Blocker Structures

Blue Sky Fees

Blue Sky laws are US state-level regulations established as safeguards for investors against securities fraud. Issuers of securities must register in each state where they wish to do business. Blue Sky filing fees vary by state.

Blue Sky Fees

Bridge Round

An interim financing round intended to keep the company afloat until the next, larger financing round.

Bridge Round

An interim financing round intended to keep the company afloat until the next, larger financing round.

Bridge Round

An interim financing round intended to keep the company afloat until the next, larger financing round.

Broker-Dealer

A broker-dealer is a firm or individual responsible for purchasing securities for its customers as well on its own behalf. In the context of venture capital, broker-dealers may help companies fundraise from investors and take a transaction fee for doing so.Broker-dealers are compensated through transaction fees (known as “brokerage fees”). In order to legally take brokerage fees, broker-dealers are required to register with both the SEC and FINRA and pass a certification exam.

Broker-Dealer

C

Cap Table

A capitalization table (or "cap table") is a simple spreadsheet that lists all the owners of your company, their percentage ownership in the company, and their equity. It can be used to determine how much ownership each shareholder has and what it would be worth if the business is sold. It also helps you calculate different scenarios for raising new funding rounds or acquisitions.The cap table is one of the most valuable tools for venture-backed companies because it enables them to keep track of investor dilution over time by showing how much ownership each shareholder has in relation to others at any given time.

Cap Table

Cap/Uncapped

A “cap” refers to the valuation cap. When entrepreneurs and investors agree to a capped round, this means that they place a ceiling on the valuation at which investors’ notes convert to equity. An “uncapped” round means that the investors get no guarantee of how much equity their money purchases.

Cap/Uncapped

Capital Call/Drawdown

A capital call is the process a GP, deal lead, or fund administrator uses to request funds from investors or LPs. Capital calls typically occur when a fund or SPV is going to make an investment or pay certain expenses. In most cases, LPs will fund a portion of their overall commitment when they sign their investment docs, known as the “initial drawdown.” A fund’s capital schedule (or the cadence at which they request additional capital from LPs) is typically set by the Limited Partner Agreement (LPA) that all LPs sign when they initially commit to the fund.

Capital Call/Drawdown

Carried Interest/Carry

Carried interest is a share of any profits that the fund lead receives as compensation regardless of whether they contribute any initial funds. Carried interest acts as a type of performance fee, and motivates the fund's overall performance. However, carried interest is often only paid if the fund’s returns meet a certain threshold.

Carried Interest/Carry

Carry Share

A carry share is the process by which a deal lead shares a portion of their carried interest with another individual who has contributed to managing the deal. This is done by executing a carry share agreement, which is supported by Sydecar’s team.The individual receiving the carry share must have contributed to the management of the deal, including deal sourcing, due diligence, administrative or portfolio support. An individual may not receive carry solely for driving capital to a deal unless they are a registered broker-dealer.

Carry Share

Clawback

A clawback is the refund or repayment of money that has already been contributed. In venture capital, a clawback obligation is when an adviser has to return a carried interest amount that exceeds the carried interest percentage provided in a fund agreement.Excess carried interest occurs when 1) a fund is using an American waterfall where distribution happens on a deal-by-deal basis and 2) some deals overperformed while other deals in the fund underperformed. The carried interest the GP receives from those overperformed deals would sum up to a total carried interest amount that, when you account for the later underperformed returns, may result in a much higher carried interest rate for the GP.For example: a $1M fund has 2 deals at $500k each in investment. The 1st deal has a 4x return, which nets $2M in return. In an American waterfall, the GP gets $300k in carry interest at a 20% rate. Assume the 2nd deal was a complete loss. So at the end of the fund's life, the fund overall got $2M in distributions $1M is returned back to the LPs, leaving $1M left as profit for the fund. Since the GP already received its carried interest distribution from the first deal, the GP's net carried interest is now 30% ($300k/$1M, which is far in excess of the stated 20% interest.

Clawback

Co-Investors

Co-investors are the other investors participating in the round. This includes venture capital firms or well-known angel investors.

Co-Investors

Co-investors are the other investors participating in the round. This includes venture capital firms or well-known angel investors.

Co-Investors

Co-investors are the other investors participating in the round. This includes venture capital firms or well-known angel investors.

Common/Preferred Stock

Common stock is a security that represents ownership in a corporation. Holders of common stock elect the board of directors and vote on corporate policies. Venture capital firms are issued preferred stock, rather than common stock in a company. Preferred stock comes with certain rights attached. The upside: generally has dividends payed out to its owners before common stock and has priority in a liquidation event. The downside: usually does not have voting rights.

Common/Preferred Stock

Control Person

A Control Person refers to a director or executive officer of a licensee or a person who has the authority to participate in the direction, directly or indirectly through 1 or more other persons, of the management or policies of a licensee.Control persons include senior managers, members of the board of directors, and officers such as the CEO and CFO. Control persons are able to use their authority and influence to make decisions on the corporation’s activities.

Control Person

Convertible Debt/Note

Convertible debt (aka convertible notes) is a type of bond that the holder can convert into a specified number of shares of common stock in the issuing company or cash of equal value. Convertible debt allows startups to raise money while delaying valuation until the company is more mature.As its name suggests, convertible debt is a loan and may accrue interest. Accrued interest can be calculated in different ways, depending on the language in the purchase agreement. The accrual details on a convertible promissory note specify the methodology for calculating the number of days between two dates. We support the three most common methods for calculating interest:Per annum - calculates the daily interest using the actual number of days in the year and then multiplies that by the actual number of days elapsed in each time period.Actual/360 - calculates the daily interest using a 360-day year and then multiplies that by the actual number of days elapsed in each time period.Actual/365 - calculates the daily interest using a 365-day year and then multiplies that by the actual number of days elapsed in each time period.

Convertible Debt/Note

D

Deal Memo

An investment deal memo is a document that summarizes the startup and the opportunity behind it in a concise, single-page format.It's typically used by investors, startup scouts, and even startup entrepreneurs themselves during the fundraising process.When bringing a deal, a deal memo can provide context for you and the investors when looking at opportunities. Specifically, it provides context for the major assumptions behind your model for success, what is driving those assumptions, and how you will know if they are correct or not.

Deal Memo

Discount

When convertible notes or SAFEs convert into equity, they do so at a certain price per share. To incentivize and reward early investors, convertible notes or SAFEs often come with a discount, meaning they convert into shares at a price per share that is lower than the price per share paid by new investors (who do not have a discount).The Discount Price is the price per share of the Standard Preferred Stock sold in the Equity Financing multiplied by the Discount Rate.The Discount Rate is defined at the top of the SAFE, and usually something like 80%.

Discount

Distributions to Paid-In Capital (DPI)

Distributions to Paid-In Capital (DPI) is a key fund performance metric that shows how much money a fund has returned to investors compared to how much they’ve contributed. A DPI of 1.0x means investors have received back exactly what they put in; anything above that indicates profit. Unlike metrics based on unrealized value, DPI reflects actual cash returns and is a strong signal of realized performance.Formula:DPI = Total Distributions ÷ Paid-In Capital

Distributions to Paid-In Capital (DPI)

Down Round

A down round refers to the scenario where a startup raises a subsequent round of funding at a lower valuation than a previous round.

Down Round

A down round refers to the scenario where a startup raises a subsequent round of funding at a lower valuation than a previous round.

Down Round

A down round refers to the scenario where a startup raises a subsequent round of funding at a lower valuation than a previous round.

E

Effectively Connected Income

Non-U.S. investors that are engaged in a trade or business in the United States are taxed on their income that is “effectively connected” with that business, often referred to as “effectively connected income” or ECI.Non-U.S. investors that are engaged in a U.S. trade or business are required to file U.S. tax returns.Many non-U.S. investors seek to avoid ECI so that they are not required to file U.S. federal income tax returns.If a fund is not engaged in a U.S. trade or business, a non-U.S. investor generally will not be subject to U.S. income tax on capital gains upon the sale of portfolio investments by the fund.To avoid ECI, the fund cannot invest in flow-through operating entities, except through blocker structure.

Effectively Connected Income

European Waterfall

In a European waterfall, the fund manager only receives their portion of carried interest after the fund investors have received both their initial capital back, as well as their preferred return. This is the most common waterfall structure in VC, as opposed to the American waterfall.

European Waterfall

Exempt Reporting Adviser

An exempt reporting adviser (ERA) is an adviser to “qualifying VC” funds that registers with FINRA and the SEC using the short-form Form ADV.

Exempt Reporting Adviser

An exempt reporting adviser (ERA) is an adviser to “qualifying VC” funds that registers with FINRA and the SEC using the short-form Form ADV.

Exempt Reporting Adviser

An exempt reporting adviser (ERA) is an adviser to “qualifying VC” funds that registers with FINRA and the SEC using the short-form Form ADV.

Exit

An exit is when a company either goes public (via IPO) or gets acquired by another company. Exits are notable for venture investors because they are typically accompanied by a liquidity event (distribution of cash or stock to investors).

Exit

F

Family Company

“Family company” means a company that is owned, directly or indirectly, only by or for 2 or more natural persons who are related as siblings or spouses (including former spouses), or direct lineal descendants by birth or adoption, spouses of such persons, the estates of such persons, or foundations, charitable organizations, or trusts established by or for the benefit of such persons.

Family Company

Family Office

A family office is an investment management company that serves one high-net-worth family. Family offices frequently invest in real estate, public markets, & private equities. According to Financial Times, family office participation in venture investing is quickly increasing.

Family Office

Form ADV

Form ADV is the uniform form used by investment advisers to register with both the SEC and state securities authorities. The form consists of two parts, both of which are available to the public on the SEC’s Investment Adviser Public Disclosure (IAPD) website.

Form ADV

Fund of Funds

A fund-of-funds is a pool of capital that is aggregated to invest into many other venture funds. A fund-of-funds allows LPs to gain greater exposure to venture capital investments without having to individually meet the minimum commitment for every fund they want to participate in.While fund-of-funds have increased in popularity, they are still avoided by some LPs because they incur an additional layer of fees (carried interest and management fees) that could be avoided if you were to invest into a typical venture fund.

Fund of Funds

G

General Partner/Deal Lead

A general partner (known as a "GP") or deal lead is a manager of a venture fund. GPs analyze potential deals and make the final decision on how a fund's capital will be allocated. General partners get paid through management fees, carried interest, and distributions from the fund.

General Partner/Deal Lead

General Solicitation

General Solicitation is the process of offering securities to the public. Practically speaking, general solicitation allows VCs to raise money for an investment vehicle (SPV or fund) from individuals that they don’t have a pre-existing relationship with. This includes marketing the investment opportunity on social media, websites, television, radio, or any other public channel.General solicitation is only allowed for funds that operate under Rule 506(c).

General Solicitation

GP's Lead Commitment

This refers to how much money the GP themselves is investing into the deal. This is also referred to as "skin in the game."

GP's Lead Commitment

This refers to how much money the GP themselves is investing into the deal. This is also referred to as "skin in the game."

GP's Lead Commitment

This refers to how much money the GP themselves is investing into the deal. This is also referred to as "skin in the game."

I

Individual Income

For purposes of investor accreditation and qualification, “individual income” means adjusted gross income as reported for U.S. federal income tax purposes, less any income attributable to a spouse or spousal equivalent or to property owned by a spouse or spousal equivalent, increased by the following amounts (but not including any amounts attributable to a spouse or spousal equivalent or to property owned by a spouse or spousal equivalent): (i) the amount of any interest income received which is tax-exempt under §103 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), (ii) the amount of losses claimed as a limited partner in a limited partnership (as reported on Schedule E of Form 1040), (iii) any deduction claimed for depletion under Code §611 et seq., and (iv) any amount by which income from long-term capital gains has been reduced in arriving at adjusted gross income pursuant to the provisions of Code §1202 prior to its repeal by the Tax Reform Act of 1986.

Individual Income

Information Rights

Information rights dictate what company data (such as financial details) an investor has the rights to access or request.This type of advanced right is typically only granted to larger investors (dictated by an ownership percentage). If these rights are granted, they will be granted to the SPV rather than the individual investors who own a stake in the SPV.

Information Rights

Internal Rate of Return

Internal Rate of Return (IRR) is a percentage metric that shows the annualized return that a fund has earned from its portfolio companies. Gross IRR ignores fees paid to the manager (carry & management fee), while Net IRR calculates the return to LPs once carry and management fees have been factored in. Typically, a higher IRR indicates a better performing portfolio, although there are a number of factors that can be used to manipulate a fund’s IRR. IRR is a helpful tool to analyze funds across different vintages, since it takes into account the amount of time it took for a fund to earn returns for its LPs.

Internal Rate of Return

Investment Advisers Act of 1940

The Investment Advisers Act of 1940 is a U.S. federal law designed to regulate and supervise the activities of investment advisers. It mandates the registration of investment advisers with the Securities and Exchange Commission (SEC), and emphasizes transparency and ethical practices. The Act mandates investment advisers to act in their clients' best interests, uphold fiduciary duties, and ensure full and fair disclosure of material facts.

Investment Advisers Act of 1940

Investment Instrument

An investment instrument is any type of financial arrangement that provides the holder or recipient with the promise of earning some sort of return from that investment.

Investment Instrument

An investment instrument is any type of financial arrangement that provides the holder or recipient with the promise of earning some sort of return from that investment.

Investment Instrument

An investment instrument is any type of financial arrangement that provides the holder or recipient with the promise of earning some sort of return from that investment.

J

Joint Income

For purposes of investor accreditation and qualification, “joint income” means adjusted gross income as reported for U.S. federal income tax purposes, including any income attributable to a spouse or spousal equivalent or to property owned by a spouse or spousal equivalent, increased by the following amounts (including any amounts attributable to a spouse or spousal equivalent or to property owned by a spouse or spousal equivalent): (i) the amount of any interest income received which is tax-exempt under Code §103, (ii) the amount of losses claimed as a limited partner in a limited partnership (as reported on Schedule E of Form 1040), (iii) any deduction claimed for depletion under Code §611 et seq., and (iv) any amount by which income from long-term capital gains has been reduced in arriving at adjusted gross income pursuant to the provisions of Code §1202 prior to its repeal by the Tax Reform Act of 1986.

Joint Income

K

Knowledgeable Employee

“Knowledgeable employee” means(i) an executive officer, director, trustee, general partner, advisory board member, or person serving in a similar capacity, of (i) a private fund, or (ii) a general partner, management company or similar entity that manages the investment activities of such private fund (the “private fund manager”);(ii) an employee of a private fund, or of a private fund manager (other than an employee performing solely clerical, secretarial or administrative functions with regard to such private fund or its investments) who, in connection with his or her regular functions or duties, participates in the investment activities of such private fund or another company that would be an investment company but for the exclusion provided by Section 3(c)(1) or 3(c)(7) of the Investment Company Act, the investment activities of which are managed by a private fund manager, provided that such employee has been performing such functions and duties for or on behalf of such private fund or private fund manager, or substantially similar functions or duties for or on behalf of another company, for at least 12 months.

Knowledgeable Employee

KYC

Know Your Customer (”KYC”) is a standard due diligence process used by financial institutions and other financial services companies to assess and monitor customer risk and verify a customer's identity. KYC ensures that a customer is who they say they are.

KYC

L

Liquidation Preference

Liquidation happens when a business goes bankrupt. It’s assets are sold and the money is distributed to the credit holders and then to the shareholders. Liquidation preferences determine who gets paid what and when during these events.

Liquidation Preference

Liquidity

Liquidity refers to how easily and quickly one can exchange/sell an asset for cash. Venture capital is an illiquid asset, as it cannot easily or quickly be exchanged for cash.

Liquidity

Liquidity refers to how easily and quickly one can exchange/sell an asset for cash. Venture capital is an illiquid asset, as it cannot easily or quickly be exchanged for cash.

Liquidity

Liquidity refers to how easily and quickly one can exchange/sell an asset for cash. Venture capital is an illiquid asset, as it cannot easily or quickly be exchanged for cash.

Look-Through Rules

Look-through rules, as established by Section 3(c)(1) of The Private Investment Company Exclusion, pertain to the limit on the number of investors that a venture fund can accept. The rules dictate that any company that invests in a venture fund can be counted as a single investor, unless the company owns more than 10% of the fund, in which case the fund must “look through” count all shareholders in the company towards their investor limits.

Look-Through Rules

LP/Investor

A limited partner is a part-owner of a company whose liability for the firm's debts cannot exceed the amount that an individual invested in the company. Limited partners are often called silent partners.

LP/Investor

M

Management Company

A management company is an entity (typically an LLC) that is created for the purposed of managing the operations of a venture capital fund. This includes collecting management fees, paying out and accounting for operational expenses (i.e. marketing or business travel), organizing employment or other business agreements, and handling regulatory filings. Facilitating these activities through a management company protects fund managers from complete liability when it comes to the fund’s activities.The management company is typically created and owned by one or multiple fund partners. The latter is known as a multi-member management company.How do you create a management company?Setting up a management company is a fairly straight forward online process. Sydecar customers typically use the Delaware Registered Agent website to create their management companies as an LLC registered in Delaware.You should also plan to set up a distinct bank account for your management company that is used to collect management fees and pay out partner and contractor compensation, operating expenses, etc.We recommend consulting with a legal, tax, and/or accounting professional to understand all of the nuances of running a management company.

Management Company

Management Fee

Management fees are the cost of having an investment fund professionally managed by an investment manager. The management fees cover not only the cost of paying the managers but also the costs of investor relations and any administrative costs.Fee structures are usually based on a percentage of assets under management (AUM); they tend to range from 0.10% to more than 2% of AUM.

Management Fee

Most Favored Nation (MFN)

The most favored nations clause (MFN) protects early investors by giving them access to the same rights benefits received by later investors, if those rights and benefits are more favorable. MFN rights are typically relevant when an investors uses a SAFE or convertible note and wants to protect their access to a favorable valuation cap, discount, or interest rate given to future investors. This type of advanced right is typically only granted to larger investors (dictated by an ownership percentage). If these rights are granted, they will be granted to the SPV rather than the individual investors who own a stake in the SPV.

Most Favored Nation (MFN)

N

Net Worth

For purposes of investor accreditation and qualification, “net worth” means the excess of total assets at fair market value (excluding the value of the primary residence of such natural person) over total liabilities (excluding the amount of indebtedness secured by the primary residence of such natural person up to such primary residence’s estimated fair market value, except that if the amount of such indebtedness outstanding at the time of investment exceeds the amount outstanding 60 days before such time (the “additional indebtedness”), other than as a result of the acquisition of the primary residence, the amount of such additional indebtedness shall be included as a liability).

Net Worth

P

Pass Through Entity

A pass-through entity refers to a type of business structure that allows the income and losses of the entity to pass through to its owners (investors) for tax purposes. This means that the entity itself does not pay income taxes; instead, the owners report their share of the entity's income or losses on their individual tax returns and pay taxes at their individual tax rates. Pass-through entities are common in venture capital and private equity investments because they provide certain tax advantages and flexibility to investors.The most common types of pass-through entities used in venture capital include:Limited Liability Company (LLC): An LLC is a flexible business structure that offers limited liability protection to its members (owners). The income and losses of an LLC "pass through" to its members' personal tax returns, where they are taxed at the individual tax rates of the members.Limited Partnership (LP): In a limited partnership, there are two types of partners: general partners and limited partners. General partners manage the business and are personally liable for its debts, while limited partners have limited liability and are typically passive investors. Income and losses flow through to the partners' personal tax returns.S Corporation: An S Corporation is a specific type of corporation that elects to pass through its income and losses to its shareholders. Shareholders report their share of the S Corporation's income on their individual tax returns.Pass-through entities are often preferred by venture capital firms and investors because they allow for more tax flexibility and potentially lower tax rates compared to traditional C Corporations. Additionally, pass-through entities offer limited liability protection to their owners, which can be important for investors looking to minimize personal risk.

Pass Through Entity

Passive Foreign Investment Companies

PFIC (Passive Foreign Investment Companies) are non-U.S. based companies that either (i) generate 75% of gross income from “passive income” sources or (ii) use 50% of the company’s assets to generate “passive income.”Generally, passive income is income generated from sources that are not related to the company’s regular business operations.Principal forms of passive income as they relate to PFICs include interest, rents, royalties, capital gains, currency gains, and dividends. In general, most investors want to avoid PFICs because the IRS taxes gains from these investments at the ordinary income tax rate, as opposed to the lower capital gains tax rate.

Passive Foreign Investment Companies

Pay-to-Play

Pay-to-play is a provision included in some financing agreements that requires existing investors to participate in a subsequent funding round to avoid the loss of certain rights, including anti-dilution protection, liquidation preferences, or conversion of preferred stock into common stock.Under a pay-to-play provision, existing investors are required to invest a pro-rata share in a new financing round to maintain their existing rights. The intention is to protect the company by ensuring ongoing financial support from its existing investors, especially during down rounds. For investors, participating in subsequent rounds under a pay-to-play clause means maintaining their current rights and influence in the company.Overall, pay-to-play is a mechanism to align the interests of the company and its existing investors, ensuring that all parties remain actively invested in the company’s growth and success.

Pay-to-Play

Pre-Money/Post-Money Valuation

The valuation represents how much a company is worth, and can be expressed as either Pre-Money or Post-Money Valuation. Pre-Money valuation refers to the value of the company excluding funding. It represents how much a startup is worth before receiving investments. Post-Money valuation refers to how much the company is worth after receiving investments. For instance, a company receiving a $1M investment at a $5M valuation is worth $5M pre-money or $6M post-money.

Pre-Money/Post-Money Valuation

Pro-Rata

A pro-rata right is a right that is given to an investor that allows them to maintain their initial level of ownership percentage during later financing rounds. This type of advanced right is typically only granted to larger investors (dictated by an ownership percentage). If these rights are granted, they will be granted to the SPV rather than the individual investors who own a stake in the SPV.

Pro-Rata

Q

Qualified Client

A Qualified Client is defined as:has $2.2 Million investable assets (increased from $2 Million in 2016) ORhas $1.1 Million invested with that advisor ORis a “qualified purchaser” ORis an officer or director of the fund manager or an employee who participates in the investment activities of the investment advisor.

Qualified Client

Qualified Purchaser

A Qualified Purchaser is defined as:an individual (or family-owned business not formed just to buy into a fund) that owns $5,000,000 or more in investments ORa trust not formed for the specific purpose of acquiring the interest in the fund which is sponsored by and managed by qualified purchasers ORan individual (or any entity not formed just to buy into a fund) which owns and invests at least $25,000,000 in investments (or someone who is acting on account of such a person) ORan entity, of which each beneficial owner is a qualified purchaser.

Qualified Purchaser

Qualified Small Business Stock

A Qualified Small Business (QSB) is any active domestic C corporation whose assets don't go over $50 million on or after the issuance of stock.Only certain types of companies fall under the category of a QSB. Firms in the technology, retail, wholesale, and manufacturing sectors are eligible as QSBs, while those in the hospitality industry, personal services, the financial sector, farming, and mining are not.Qualified small business stock (QSBS) refers to shares of a qualified small business (QSB) as defined by the Internal Revenue Code (IRC).QSBS is treated favorably for capital gains purposes if both the investor and the company meet certain requirements.How much of a tax break the investor will receive depends on when they purchased the stock and how long they held it.Investors who sell their QSBS before the end of the required holding period can defer capital gains by investing the proceeds in another company's QSBS.

Qualified Small Business Stock

Qualifying Investments

In venture capital, a qualifying investment is a direct investment into a private company, while a non-qualifying investment is an investment into any other asset (including investments into other funds, cryptocurrency, real estate, secondaries transactions, and other alternative assets). Investors who participate in non-qualifying investments over a certain threshold (over 20% of their entire portfolio), and who manage $150M+ in investments overall (based on fair market value), may no longer benefit from certain VC exemptions. These managers 1) may have to register as an investment advisor with the SEC, which is a burdensome process that comes with additional reporting and financial audit requirements, and 2) can only raise money from “qualified clients,” defined as individuals who have a net worth over $2.2 million.

Qualifying Investments

R

Recycling

In venture capital, recycling refers to a process whereby money that is returned to a fund (from an exit) are reinvested into additional companies rather than distributed to fund LPs. If LPs are not particularly concerned with early liquidity, recycling proceeds can create higher long-term returns because more capital is deployed into companies overall. In addition to increasing total LP returns, recycling boost fund metrics like IRR and TVPI, which may impact a fund manager’s ability to raise future funds.

Recycling

Redemption

Redemption in venture capital refers to the right an investor has to withdraw from a fund by redeeming their interest in the fund.

Redemption

Redemption in venture capital refers to the right an investor has to withdraw from a fund by redeeming their interest in the fund.

Redemption

Redemption in venture capital refers to the right an investor has to withdraw from a fund by redeeming their interest in the fund.

Registered Agent

A Registered Agent is an individual who is designated to receive official papers, such as court papers, tax notices, or business renewal notices, on behalf of a business entity. A business must submit a person as their registered agent in the states in which they register to do business.

Registered Agent

Registered Investment Advisor

A Registered Investment Advisor (RIA) is an individual who is recommending investment decisions and taking fees for their advisory services. RIAs are required to register with the SEC and fulfill certain obligations, such as reporting and audits. Venture funds are typically exempt from registering with the SEC if they meet certain requirements (see 3(c)(1) Fund for additional detail).

Registered Investment Advisor

Right of First Refusal

Right of first refusal (ROFR) is a provision granted in venture deals that gives investors the right to either approve or block future sale of equity shares into the company. ROFR is typically activated when an investor wants to entertain a secondary sale. If an investor wants to sell some of their shares, they have to offer those shares to existing investors with ROFR before offering them to external third parties.

Right of First Refusal

Runway

A startup’s runway refers to how many months a business can keep operating before it's out of money. Startup runway is a crucial tool for budgeting, strategizing, forecasting, and fundraising throughout your company's lifecycle.

Runway

S

SAFE

Y Combinator introduced the SAFE (simple agreement for future equity) in late 2013, and since then, it has been used by almost all YC startups and countless non-YC startups as the main instrument for early-stage fundraising.

SAFE

Schedule K-1

A Schedule K-1 is a tax document that is commonly used in partnerships and certain other types of pass-through entities, including some venture capital funds. It is used to report the income, gains, losses, deductions, and other tax-related information that a partner or investor in such an entity needs to report on their individual tax return.Venture capital funds are often structured as limited partnerships (LPs) or limited liability companies (LLCs) taxed as partnerships. This means that the fund itself does not pay income taxes; instead, the tax obligations pass through to the individual investors or limited partners.The venture capital fund will invest in various startup companies. As these companies generate income, incur expenses, and realize gains or losses, the fund will allocate its share of these items to its individual investors, in proportion to their ownership interests.At the end of each tax year, the venture capital fund will prepare a Schedule K-1 for each of its investors. This schedule includes information on the investor's share of the fund's income, deductions, credits, and other tax items. Each investor will receive their Schedule K-1 and use the information on it to report their share of the venture capital fund's income and losses on their personal income tax return (e.g., Form 1040 in the United States). This ensures that the tax liability associated with the fund's activities is passed through to the investors rather than being paid at the entity level. It's important for venture capital investors to carefully review their Schedule K-1s, as they may need to account for both the income and losses associated with their investments in startup companies. Additionally, the tax treatment of venture capital investments can vary by jurisdiction, so investors should consult with tax professionals who are familiar with the specific tax laws in their region.

Schedule K-1

Secondary Transaction

A secondary transaction (or “secondary”) is any sale of ownership in a startup (typically common or preferred stock) where the seller is anyone other than the company itself. For instance, an investor may purchase Series Seed stock and then resell it to another investor several years down the line prior to the company going public or getting acquired (known as an “exit”). For a longer overview of secondaries, including regulatory and tax considerations, check out our Secondaries Guide.

Secondary Transaction

Series LLC

A series LLC is form of LLC that allows a group of LLCs to be owned in a tiered structure. The top-tier LLC, or “parent LLC”, controls the “child series" or “sub-LLCs” below it. Owners of a series LLC can create an unlimited number of sub-LLCs.This form of LLC was created in Delaware in 1996 and has been adopted in several other states. Some states, such as California, do not allow the creation of series LLCs but will authorize series LLCs created in other states to do business there.

Series LLC

Side Letter

A side letter is essentially a secondary agreement used to create bespoke terms between two parties. Side letters can exist between venture capitalists (including fund managers/GPs and deal leads) and their limited partners (LPs), as well as between startup companies and their VCs. The primary purpose of a side letter is to give an investor (either a VC or LP) some special or additional rights that are not granted to all of the other investors involved in a transaction. In almost all cases, these additional rights are advantageous to the investor.

Side Letter

Special Purpose Vehicle (SPV)

An SPV (”Special Purpose Vehicle”) enables a group of investors to pool capital to invest in a single deal. It’s basically crowdfunding for accredited investors: Deal leads acquire an allocation and “crowdfund” capital via the SPV, which invests as a single shareholder on the cap table.

Special Purpose Vehicle (SPV)

T

Tax Shelter

Defined as a partnership that has at least 35% of its losses allocable to members (aka “syndicate”)Pertains to Sec 448(a) prohibits tax shelters from using the cash method.Although a business with less than $25M in gross receipts may use the cash method of accounting, tax shelters are expressly denied the benefit.

Tax Shelter

Term Sheet

A term sheet is a document that outlines the key terms and conditions of an agreement, such as the size of a potential investment, the amount of equity and cash to be invested, vesting periods for stock options, board representation rights, management compensation, and so on.Term sheets are typically used by startups to raise capital from venture capitalists or private equity firms. In these cases, it’s often referred to as “Series A” capital because it will be used to fund the company through its first major round of growth (i.e., Series A).

Term Sheet

Total Value Paid In

Total Value Paid In (TVPI) is a primary measure of fund performance in venture capital. TVPI is calculated as the current value of a fund’s investments (unrealized gains) plus the cumulative value of distributions (minus fees / expenses), divided by the total amount of capital sent into a fund to date. The total capital into a fund includes any recycled capital.

Total Value Paid In

U

Unrelated Business Taxable Income

Tax-exempt organizations (such as pension plans, individual retirement accounts, foundations, and endowments) are subject to “unrelated business income tax” (UBIT) on their “unrelated business taxable income,” often referred to as UBTI. In connection with their investments in private investment funds, many tax-exempt investors seek to avoid or limit the funds’ generation of UBTI.To avoid UBTI, the fund cannot incur indebtedness and cannot invest in flow-through operating entities, except through “blocker” structures.Blocker structures: set up a corporation because debt incurred by a corporation (or other entity that is treated as a corporation for federal income tax purposes) is not treated as a debt of its shareholders, and there is an exclusion from UBTI for dividends received from a corporation, an investment in or held through a corporation generally does not generate UBTI (unless the shares themselves are debt-financed, as described above).

Unrelated Business Taxable Income

V

VCOC Letter

A Venture Capital Operating Company (VCOC) letter, also known as a Management Rights Letter (MRL), is a contract granting an investor specific management and operational participation rights in a portfolio company. These rights often include attending board meetings, receiving financial reports, and advising the management team.

VCOC Letter

W

Warehoused Deals

A warehoused deal (also known as a "warehoused investment" or simply, "warehousing") is one that is made before forming a fund, and then later transferred into the fund. This strategy enables fund managers to contribute prior investments, including syndicated SPV or angel investments, to a fund in its early days. The investments are transferred into the fund at cost, rather than at their increased value at the time of the fund's creation.