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Glossary of Terms - 2
‘Internal Rate of Return’
IRR is the internal rate of return on an investment or project is the "annualized effective compounded return rate" or rate of return that makes the net present value of all cash flows (both positive and negative) from a particular investment equal to zero.
‘Senior Debt’
A loan with a high preference on repayment. Whether a bond (note) or a traditional bank loan, senior debt will be repaid first in the event of a liquidation or other company event.
‘Secured Debt’
The highest protection for investors, this is a loan that is in some way secured by certain assets of the
company. In the event of default creditors would have the ability to foreclose on the stated security,
which might be inventory, intellectual property, assets, leases, customer contracts, etc. After that they
would continue to have the rights of other debtholders in line with the type of debt (senior, subordinated,
etc.). The lender should “perfect” the security in the loan by filing a UCC-1.
‘Subordinated Debt’
An unsecured loan that ranks below all other obligations of the company. Subordinated debt can often
count towards capital of the borrower as it is practically without protection. All obligations of the company,
including employee wages, vendor payables, and other loans will be repaid before subordinated debt.
‘Option’
A contract that represents a right to acquire or sell the described securities of a company. Options
typically have some agreed upon vesting period (e.g. vesting monthly for three years) of the class of
equity they are issued for, at a fixed conversion price, and may have additional rights such as accelerated
vesting in the event of a merger. They also typically have an expiration date in the event they
are not executed and converted to the form of equity described in the contract.
‘Warrant’
A warrant is similar to an option except that it generally has no vesting period and can be executed
by the holder at any time. The warrant contract enables the holder to acquire the amount and type of
equity in a company at a set price or for the consideration stated (which may be non-monetary). Like
options, warrants typically have an expiration date.
‘Revenue, Royalty (or Profit) Sharing’
Revenue, Royalty or profit sharing can be a right in either a debt or equity security that provides investors with a right to a percentage of the company’s gross revenues (or profits) for a predetermined period of
time.
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