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September 28, 2003

Poor William's Unofficial, Post-Enron, Deal Terms Glossary


Nothing in this document constitutes financial (or any other kind of) advice. Neither is any statement herein intended to imply an offering of securities. Anyone foolish enough to take seriously the content of this document deserves whatever unkind fate may befall him or her.

Accredited Investors - High-rollers designated by the SEC, apparently because it doesn't care if they lose everything they put into your venture since they are rich and sophisticated, and should have known better.

Accrual - Accounting concept that allows creative accountants to recognize income or expense on a company's financial statements whenever they choose to, so as to maximize profit in a given period rather than at the time when the income is received or the expenses are paid in cash.

All or None Offering - A last resort by a financially strapped company. (Similar to calling the raiser with the deed to your house, and drawing two cards to an inside straight).

Angels - Ethereal creatures believed in by some entrepreneurs, thought to possess supernatural powers to save a business from financial disaster or ruin. These entities reputedly exist, and have been widely reported in various media, but their existence has yet to be scientifically confirmed. They are said to be recognizable by their large wing imprints in the snow. See also Venture Capitalists (since most angels, if they exist at all, are now indistinguishable from VCs).

Antidilution - Contractual provisions that protect new investors from the most serious consequences of future rounds that the founders, and their friends, family, and fools are subject to. The most frequent antidilution provisions are full ratchet, weighted average, and you won't see a dime of my new money unless you give me this protection.

Assets - Things of value that are owned by a company. Assets can be tangible, such as inventory, real estate, or equipment, or they may be intangible, such as accounts receivable or intellectual property rights. They may also be illusory, as has been revealed in the case of Enron and other similarly principled companies.

Audited Statement - A financial statement that has been examined by an independent auditor (like Arthur Andersen) who has expressed an opinion on it based on their audit. Audits include an assessment of the accounting principles used, and of the significant estimates and assumptions made by management. The independence of the audit is every bit as real as the business and consulting relationships between the accounting firm and the company are lucrative. Audits are supposed to be conducted in accordance with generally accepted auditing standards, and are used to reassure the investing public that the financial statements are free of misstatements, fraud or deceit. The source documents and working papers of the audit can apparently be shredded as soon as the conclusions based on them have been included in the audit report.

Best Efforts Offering - An offering in which the underwriter has no obligation to purchase those securities that are not sold to investors. Contrast with Worst Efforts Offering which is one in which there is no underwriter involved (sometimes known as a private placement).

Blank Check Preferred Stock - Permits a company to structure, offer, and sell stock quickly because the board of directors can negotiate the terms of issue of the securities directly with the purchaser, without further stockholder authorization. As events have revealed, stockholder authorization is an unnecessary and cumbersome impediment to the actions of management and the Board of Directors.

Blue Sky Laws - State securities laws. Not to be confused with sunshine laws, since many blue sky laws appear to come from a place where the sun never shines.

Board of Directors - Directors collective with legal responsibility to manage the business and operations of a corporation. As a practical matter, most boards of directors delegate oversight authority over management to committees largely made up of the management executives and corporate officers who run the day-to-day operations of a company. Examples of these committees are: the Audit Committee made up of those managers who can best select the accounting firm that is most receptive to their questionable business practices, and the Executive Compensation Committee made up of those executives who are in the best position to reward the CEO and his cronies for the performance of the company, or the lack thereof.

Bottom Line - A line left on the bottom formed when one is careless about his or her personal hygiene. For reasons that aren't entirely clear, venture capitalists seem to have a perverse fascination with it.

Business Model - A euphemism for the same old sales pitch now repackaged and presented using the currently trendy buzzwords, liberally embellished with PowerPoint tables, graphs and charts to conceal its numerous defects and multiple unwarranted assumptions.

Bylaws - A document that governs basic corporate activities, internal procedures, certain stockholders' rights, and other matters designed to protect and preserve the current management team.

C Corporation - The highest grade possible for a company whose management is not held personally responsible for its performance.

Class - Something distinctly lacking in a number of corporate boardrooms.

Cold Comfort Letter - A letter provided by a company's independent accountants confirming the financial information in the offering memorandum, and providing little comfort to the unwary investor who relies on it.

Collateral - The kind of damage sustained by individual shareholders and company employees when unscrupulous executives loot or mismanage companies.

Come Along Right - Investors' rights to sell their own securities at the same time, at the same price, and on the same terms and conditions as another stockholder (e.g. key management), like the small individual Enron investors might have done if the CEO had not lied to them.

Common Stock - The security in a company that we commoners might hold. Contrast with preferred stock, which is the kind that would be held by more privileged classes, members of the current administration, and their friends.

Convertible Debt - Debt that results from all the topless company vehicles that are provided to management.

Convertible Security - Severance provision in the senior executive's golden parachute agreement that allows him or her to keep the company vehicle upon termination for any reason.

Covenants - Contractual agreements a company makes to favor specified investors. It is said that a company that violates its covenants or wants to take an action prohibited by a covenant can do so without breaching it, provided that it obtains the consent or waiver of the investors who are protected by the covenant (or it can just conceal the violations by burying them in a complex series of transactions). Not to be confused with an ancient agreement between the Supreme Being and the children of Israel.

CPA - Compromised Passive Accountant.

Cumulative Voting - The process that arguably resulted in the first election of the current President of the United States.

Deal - An arranged marriage between an entrepreneur and a venture capitalist. Like most marriages not made in heaven, the offspring from this union inherit the worst qualities of the parents.

Dilution - Change to a founder's percentage ownership in a company that results from a subsequent issuance of additional equity securities to investors with new money, after the initial capital has been unwisely spent.

Dividend - An archaic term that was used to denote the distribution of earnings from a company to its stockholders, in cash or stock, in an earlier time when companies actually made profits and shared them with investors.

Due Diligence - A process engaged in by the those unlucky enough to be involved in a securities offering. It is intended to investigate the assertions made in the offering memorandum or prospectus in a futile effort to validate the information contained therein, and establish that the offering documents do not omit material facts.

Entrepreneur - An individual with an off-the-wall idea, a slick business plan, and no capital.

Exit Strategy - A euphemism employed by venture capitalists to describe the process by which they expect to get ten times the amount that they paid for securities in a private company in the unlikely event that company achieves liquidity. The normal exit strategies for an investor in a private company are a sale of the business, an IPO, a redemption, or a sale of the security to a less careful investor.

Fair Market Value - The cash price that an unwitting buyer will pay to a clever seller for an asset. The fair market value of a company is usually calculated based on the value of the company as an ongoing business (but see Float, below).

Float - What most startup companies are unable to do after they burn through their initial fund of meager capital. Also see Founders.

Founders - What happens to the business after the individuals who started the company have their inevitable falling-out. Founders are often entrenched in key management positions, and frequently hold a controlling interest in a private company, which is the chief reason why the business founders.

Full Ratchet - A downward change in the exercise price of a convertible security. For a full ratchet antidilution clause, the conversion price of the convertible security is reduced to the exact price at which any subsequent security of the issuer is sold at a lower price, regardless of the amount of subsequent securities sold.
[If you really understand this, please call me, collect.]

Fully Diluted - How you might feel after a five martini lunch with your business associates.

GAAP - Generally Absent Accounting Principles.

Green Shoe - A subterfuge that permits an underwriter to purchase additional stock in connection with a public offering during the 30 days following the IPO. (Typically an additional 15 percent of the underwriting amount). Green shoes are similar to the magical red shoes that Dorothy wore as she followed the Yellow Brick Road.

Holding Period - The maximum period of time a corporate officer may be locked up without being formally charged. Also see, Lock-up.

Intellectual property - A concept used by clever lawyers who, with the help of the U.S. Patent Office, take common business practices and make them the exclusive preserve of the first person to file the required paperwork.

IPO - Initial Public Offense. The first offering of a company's securities to the unsuspecting public, which is soon followed by further and more serious offenses.

Liability - Something that corporate counsel worry about constantly, and that management is determined to avoid at all costs. See also: Responsibility and Accountability.

Liquidation Preference - Money that a later investor is entitled to receive when the company goes toes up. The preference holder is cashed out before any distribution of funds is made to the holders of the common stock, based on the questionable logic that new money is always better than the money you early on spent unwisely.

Liquidity Event - The blessed occasion when a venture capitalist is able to convert a security interest in a company to cash or its equivalent, and abandon the company to its management.

Lock Up - See Holding Period.

Managing Underwriter - The investment banking firm that leads and controls the underwriting syndicate by virtue of its favorable market analysis and its buy recommendation concerning the company's stock. The managing underwriter is listed on the left side of the prospectus.

Market Standoff - The attitude of much of the investing public toward the market following Enron, based on a lack of confidence in the integrity of those who control it.

Mezzanine Securities - Securities that are sold in the lobby, from pushcarts, or from the trunk of a vehicle.

Net Worth - The difference between the assets and liabilities of a company. Not to be confused with Valuation, which is a concept that is not necessarily based on assets, liabilities, or reason.

Non-Competition Agreements - Informal agreements between and among companies in a given market to artificially inflate prices, such as were used to manipulate the price of energy in California and create a phony power shortage.

Offering - A ritual engaged in by companies that have run out of funds, and that involves the sale or distribution of their securities. An offering can be a public offering or a private placement, depending on whether a human or animal sacrifice is involved in the ceremony.

Option - A way to overcompensate selected members of the management team by giving them the right to purchase shares of company stock at bargain prices in the future without booking the obligation as a current expense or giving it much visibility to shareholders.

Pari passu - What many Americans are doing in response to the French opposition to the Iraq war.

Pay to Play - One of the many corporate perks given to senior management as incentives.

Piggyback Rights - Piggyback rights are usually subject to the approval of your underwriter, or your daddy, and they can be shared with others who also have piggyback rights. Sharing is good.

Post-Money Value - The value of a company's equity immediately after a securities offering. If a company has a pre-money value of $50 million and conducts a $20 million IPO, and the company's post-money value is $20 million, you might want to ask your broker a few pointed questions.

Preemptive Rights - Rights that the Commander in Chief has asserted that this nation possesses, allowing us to make war on less powerful countries because our intelligence has told us that they could pose a threat with their WMD (Weapons that Mysteriously Disappear).

Pro forma - A bunch of numbers stuffed into a spreadsheet in the futile attempt to entice venture capitalists or angels into investing their ill-gotten gains in a risky start-up.

Public Float - A company's public float normally excludes those securities held by officers, directors and affiliates of a company, since officers and directors generally are not active traders (except when they are privy to inside information that the company stock will soon go in the toilet as the result of their mismanagement).

Put Right - What you wish someone would make a company do after it becomes known that it has deceived its stockholders.

Redemption - A state unlikely to be attained by several recently indicted CEOs and CFOs.

Regulation D - The average corporate grade in Character and Citizenship.

Right of First Refusal - No means no! Not to be confused with the Right of Second Refusal, which usually follows dinner and a show.

Rounds - Three minute intervals during which the participants try to beat each other senseless with their fists.

S-Corporation - Expletive deleted.

SEC - Somnambulant Enforcement Commission. The federal agency that oversees and administers the federal securities laws. This is an agency that has historically been understaffed and underfunded, as well as ignored or thwarted by the Congress on those rare occasions when it found the backbone to take a strong stand to attempt to protect the public interest.

Senior Debt - What all the soon-to-be college graduates are faced with when they must begin to make payments on their student loans.

Series - An annual contest between the best American and National League teams for baseball bragging rights that is won far too often by the New York Yankees.

Strike Price - What the company must pay when labor-management relations break down and reach an impasse.

Strategic Partners - The guys that you figure will not hesitate to rip you off in a New York minute, so you decide to invite them to join you at your table where you can at least keep an eye on them.

Subordinated Debt - Debt that you incur when you borrow money from the employees who work for you.

Tag Along Rights - Rights generally granted to your little brother.

Term Sheet - This is a prenuptial agreement prepared by lawyers and intended to promote the deal between a company and its potential investors. If done correctly, it leaves the investors feeling like they have been fleeced, the founders feeling like they have been gang raped, and the lawyers wondering why the inmates have been placed in charge of the asylum that houses their clients.

Underwriter - An investment bank that purchases registered securities from a company and resells them to public investors. Not to be confused with Undertakers, who are the folks that you call when your company's life support is turned off.

Underwriter's Cutback - Right of an underwriter to reduce the number of securities being sold in an offering. Not to be confused with Underwriter's Kickback. See also Underwriting Discounts and Commissions.

Underwriting Syndicate - Group formed by the major families.

Valuation - An arcane and controversial black art practiced by business analysts that is marked by little logic and a lot of magic. Also, a hotly disputed contest engaged in between new investors and the current shareholders in which the prize is measured by which side is forced to make the greatest number of concessions to the other.

Value Proposition - This is what happens when that very attractive person who was so friendly to you down in the lounge comes up to your room with you and you suddenly realize that this is strictly a cash transaction.

Venture Capital - A giant species of risk equity investing that flourished in the previous millennium, but that was rendered extinct at the beginning of this one. Many theories have been advanced for the demise of these large creatures. Some have speculated that a massive object from outer space entered the Earth's atmosphere and collided with the "Dot-com Bubble," causing it to burst, thus forever altering the delicate business ecosystem. In any event, only skeletal remains and artifacts of the venture capital species are found today in the fossil record.

Venture Capitalists - These mammals enjoyed a symbiotic relationship with the herds of venture capital that existed in the prior millennium, and apparently fed off them. Curiously, they have adapted and survived in great numbers. They are frequently seen today at their old watering holes, at seminars, at fora, and in public places networking with others of their species and giving out mating calls. They have, however, created few offspring, and their numbers may be diminishing. Some observers believe that they have become so risk-averse that their continued survival may be in doubt.

Vesting - Attire worn by Wall Street Bankers.

Waiver - What you must never do when dealing with venture capitalists, lest they sense your weakness, fall upon you, and devour you.

Warrant - A document served by law enforcement officers authorizing the search of the business premises for evidence of your illegal corporate activities.

Ken Lay

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