Learn more about commonly used investment and company funding terms and their definitions.
Borrowed capital consists of funds borrowed from either individuals or institutions. Borrowed capital can be used in a number of ways. Investors use borrowed capital to increase their potential investment returns; this use is known as leverage. The upside of investing with borrowed capital is the potential for greater percentage gains; the downside is the potential loss of someone else’s money, which must then be repaid. Another way borrowed capital can be used is by businesses as a loan or debenture.
On aescuvest, borrowers are also referred to as promoters. The borrower is the natural or legal person who receives money from the lender for a certain period and pays interest. Borrowers must be corporations.
The platform operator receives a remuneration dependent on the success of the investment (“Carried Interest”). This fee becomes due when and as soon as the total yield of the investment exceeds the investment amount made by the respective investor plus a yield of 10% p.a. (“Minimum Return”) since the payment of the respective investment amount (“Hurdle”). The carried interest amounts to 15 % of the performance-related yield after reaching the hurdle. This means that before reaching the hurdle, the success-dependent yield is 100% attributable to the investors and after reaching the hurdle, the further success-dependent yield is 85% attributable to the investors and 15% attributable to the platform operator.
To protect investors, aescuvest has developed a safety mechanism. All start-ups marked with “crowd voting” include additional protection for investors, thus minimizing the risk.
The funding of projects or ventures by raising money from a large number of people, usually online. The three main types of crowdfunding
, debt and rewards/donations.
A company or agency that is in the business of recovering money that is owed on delinquent accounts. Many debt collectors are hired by companies to which money is owed by debtors, operating for a fee or for a percentage of the total amount collected. Some debt collectors are debt buyers; these companies purchase debt at a fraction of its face value and then attempt to recover the full amount of the debt.
Diversification is a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.
The distribution of a portion of a company’s profits to investors.
Due diligence is the process of systematically researching and verifying the accuracy of a statement.
The term originated in the business world, where due diligence is required to validate financial statements. The goal of the process is to ensure that all stakeholders associated with a financial endeavor have the information they need to assess risk accurately.
When due diligence involves the offering of securities for purchase, as in an IPO (initial public offering), specific corporate officers are responsible for the proper completion of the process, including the issuer, issuer’s counsel, underwriters, CFO and the brokerage firm offering shares. Because of the delicate nature and importance of such judgments to the prospects for the performance of a company’s equities in the public market, there is a strong emphasis on neutral, unbiased analysis of both the current financial state and future prospects of the firm in question.
Generally speaking, equity is the value of an asset less the amount of all liabilities on that asset. It can be represented with the accounting equation: Assets – Liabilities = Equity.
Escrow is a legal concept in which a financial instrument or an asset is held by a third party on behalf of two other parties that are in the process of completing a transaction. The funds or assets are held by the escrow agent until it receives the appropriate instructions or until predetermined contractual obligations have been fulfilled. Money, securities, funds, and other assets can all be held in escrow.
When parties are in the process of completing a transaction, there may come a time when it is only interesting to move forward for one party if it knows with absolute certainty that the other party will be able to fulfill its obligations. This is where the use of escrow comes into play.
For example, a company selling goods internationally wants to be certain that it will get paid when the goods reach their destination. Conversely, the buyer wants to pay for the goods only if they arrive in good condition. The buyer can place the funds in escrow with an agent and give irrevocable instructions to disburse them to the seller once the goods arrive. This way, both parties are safe, and the transaction can proceed.
Passporting is the exercise of the right for a firm registered in the European Economic Area (EEA) to do business in any other EEA state without needing further authorization in each country. Often companies based outside of the EEA will get authorized in one EEA state and use its passporting rights to either open an establishment elsewhere in the EEA or providing cross-border services. This is valuable to multi-national companies because it eliminates a lot of red tape associated with gaining authorization from each individual country, a process that can be lengthy and costly for a business.
An event when investors may be able to cash in and sell their shares, such as an initial public offering (IPO) or trade sale.
An embedded option within a project that allows the firm abort their operations at little or no cost. An exit option can typically only be exercised after key developments have occurred within the project. Like any other option, this instrument must be purchased at a cost which factors into the capital budgeting decision, but its value is not determined by the price of an underlying asset.
The maximum amout of capital that can be invested through a campaign.
Interest is the charge for the privilege of borrowing money, typically expressed as annual percentage rate. Interest can also refer to the amount of ownership a stockholder has in a company, usually expressed as a percentage.
Internal rate of return (IRR) is a metric used in capital budgeting measuring the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does.
An issuer is a legal entity that develops, registers and sells securities to finance its operations. Issuers may be corporations, investment trusts, or domestic or foreign governments. Issuers are legally responsible for the obligations of the issue and for reporting financial conditions, material developments and any other operational activities as required by the regulations of their jurisdictions.
MiFID II, the new version of Directive 2014/65/EC on Markets in Financial Instruments of the European Union, entered into force on 3 January 2018. This directive newly regulates the reporting obligations of custodian banks, investment service providers and other financial service providers.
MiFID II applies to all participants in securities trading, with the exception of private individuals. The most important requirement for companies is the unambiguous identification of all trading participants. For this purpose, the European Securities and Markets Authority (ESMA) of LEI has established a binding identification number. This means that, since 3 January 2018, securities trading is no longer possible without a LEI.
How do you get a LEI?
You can apply for a LEI at all accredited awarding bodies worldwide – such as the LEIReg. LEIReg requires three steps for this:
- Register free of charge at www.leireg.de.
- Authenticate your company or as an authorised third party for a company by submitting the relevant documents (e.g. extract from the commercial register) to the Bundesanzeiger Verlag.
- Apply for and manage your globally valid LEIs quickly and easily online in an easy-to-use and clear web portal.
LEIReg charges a fee of 80 € for the first-time application for a LEI and 70 € for the annually required review of the company reference data. This already includes all fees that LEIReg has to pay to GLEIF.
Further information can be found at www.leireg.de.
Liability insurance is any insurance policy that protects an individual or business from the risk that they may be sued and held legally liable for something such as malpractice, injury or negligence.
Liability insurance policies cover both legal costs and any legal payouts for which the insured would be responsible if found legally liable. Intentional damage and contractual liabilities are typically not covered in these types of policies.
The markets in financial instruments directive (MiFID) is a regulation that increases the transparency across the European Union’s financial markets and standardizes the regulatory disclosures required for particular markets. The MiFID implemented new measures, such as pre- and post-trade transparency requirements, and set out the conduct standards for financial firms. The directive has been in force across the European Union (EU) since 2008. MiFID has a defined scope that primarily focuses on over the counter (OTC) transactions.
Mezzanine debt occurs when a hybrid debt issue is subordinated to another debt issue from the same issuer. Mezzanine debt has embedded equity instruments attached, often known as warrants, which increase the value of the subordinated debt and allow greater flexibility when dealing with bondholders. Mezzanine debt is frequently associated with acquisitions and buyouts, where it may be used to prioritize new owners ahead of existing owners in case of bankruptcy.
If mutual funds or bonds are investments you would like to make, it is simpler in terms of minimum deposit amounts. Both of these can be purchased through brokerage firms, where similar deposit rules apply as for stocks.
In a sense, private equity is the opposite of shareholders’ equity. It involves funding that is not noted on a public exchange. Private equity comes from funds and investors that directly invest in private companies, or that engage in leveraged buyouts (LBOs) of public companies.
Private investors can include institutions (pension funds, university endowments, insurance companies, etc.) or individuals (high net worth families, friends and relatives). Private equity also refers to mezzanine debt, private placement loans, distressed debt and funds of funds. Private equity comes into play at different points along a company’s life cycle. Typically, a very young company with no revenue and no earnings can’t afford to borrow, so capital must be obtained from friends and family, or individual “angel investors.” Venture capitalists enter the picture when the company has finally created its product or service, and is ready to bring it to market. (Some of the largest, most successful corporations in the tech sector, like Dell Technologies and Apple Inc. – began as venture-funded operations.)
generally provide all equity
financing, in return for a minority stake; sometimes a venture capitalist will take a seat on the board of directors for its portfolio companies, ensuring an active role in guiding the company along. Venture capitalists look to hit big early on, and exit investments within five to seven years. An LBO is one of the most common types of private equity financing, and might occur as a company matures.
In an LBO transaction, a company receives a loan from a private equity firm to fund the acquisition of a division or another company. The loan is usually secured by the cash flows or the assets of the company being acquired. Mezzanine debt is a private loan, usually provided by a commercial bank or a mezzanine venture capital firm. Mezzanine transactions often involve a mix of debt and equity in the form of a subordinated loan or warrants, common stock or preferred stock.
Unlike shareholders’ equity, private equity is not a thing for the average individual. To participate in private equity or venture capital partnerships, an investor must be “accredited” (have a net worth of at least $1 million). For investors who are less well-off, there is the option of exchange-traded funds (ETFs) that focus on investing in private companies.
Profit is a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profit
that is gained goes to the business’s owners, who may or may not decide to spend it on the business.
is a formal legal document that is required by and filed with the Securities and Exchange Commission that provides details about an investment offering for sale to the public. The preliminary prospectus is the first offering document provided by a security issuer and includes most of the details of the business and transaction in question; the final prospectus, containing finalized background information including such details as the exact number of shares/certificates issued and the precise offering price, is printed after the deal has been made effective. In the case of mutual funds, a fund prospectus contains details on its objectives, investment strategies, risks, performance, distribution policy, fees and expenses, and fund management.
Revenue is the amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the top line or gross income figure from which costs are subtracted to determine net income.
Revenue is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold.
Revenue is also known as sales on the income statement.
A security is a fungible, negotiable financial instrument that holds some type of monetary value. It represents an ownership position in a publicly-traded corporation (via stock), a creditor relationship with a governmental body or a corporation (represented by owning that entity’s bond), or rights to ownership as represented by an option.
A special purpose entity, sometimes called a special purpose vehicle, is a legal entity created for one very limited, particular task. Typically, SPEs are subsidiaries of a larger corporation.
Usually the task of a special purpose entity is to isolate risk. By setting up an SPE dedicated to the acquisition and financing of specific assets, the parent corporation is protected in case of bankruptcy, loan default or other loss on those assets.
Another use for an SPE is managing a single asset that has exceptionally complex financial transactions and requires numerous permits for its operation, such as a factory or a power plant. By placing the asset in the SPE, it’s easier to keep track of income and expenses associated with this entity. Plus, if the owner wants to sell the asset, any required permits will transfer with the SPE, eliminating the need to assign them over separately. This greatly simplifies a potentially difficult sale.
SSL (Secure Sockets Layer) is the standard security technology for establishing an encrypted link between a web server and a browser. This link ensures that all data passed between the web server and browsers remain private and integral.
The minimum amount of capital required for the funding to take place.
In case the threshold cannot be reached, all investments will be refunded by bank transfer.
The yield is the income return on an investment, such as the interest or dividends received from holding a particular security. The yield is usually expressed as an annual percentage rate based on the investment’s cost, current market value or face value. Yields may be considered known or anticipated depending on the security in question as certain securities may experience fluctuations in value.