If you don’t know these terms, have fun staying poor
In this week's newsletter, we're giving all the finance peeps some love with a breakdown of terminology. Want another term? How about 'diversified'? It's well-known that the more diversified and mixed your portfolio is, the less exposed you are to risk. In our Cashflow community, we teach people how to invest in different passive income streams and how to achieve financial freedom. So, if you want to diversify your investments (and maybe stop checking your Robinhood app every 3 minutes) like a true investor, then check it out.
American vs. European waterfalls, liquidation waterfalls that is.
INTRO
Speaking the Language
Everyone wants to be an investor, but most people don't speak the language of investing.
Here’s the trick, when you speak the language, words cannot intimidate you.
When words don't intimidate you, deals won't either.
We in finance like to make ourselves look smart by using acronyms and big words. We're highly paid because we've made the industry highly insular. It is overwhelming and confusing for the average person when they look at a modeled-out spreadsheet. It is scary to get a 60-page legal doc back from your attorney to do an acquisition. It is hard to understand the lingo of dealmaking when it's so full of acronyms. So we are going to change that for you. Let’s play a game and define some of the most commonly used words in VC, PE, and investing that most investors know, but in a way that won’t make you immediately fall asleep.
How, you may ask?
With memes my dear. You’re welcome.
Grab your deal sleds, prepare your Patagonia vest, and expand that ego baby.
GIVE ME ALL THE WORDS
Terms to Know, To Properly Finance Bro
Pipeline. Refers to the deal flow you have as an investor. If you have a lot of deals that are highly investable you have a strong pipeline. Then you can say things like...
Pari Passu. My personal favorite, completely ostentatious finance word to throw around. It means essentially, everyone gets treated the same. There are lots of ways to use it, such as we both invest (pari passu) at the same terms. Or it’s a "pari passu fund", aka two funds, same terms. Or stock and preferred equity get the same deal when a company gets dividends. Tag me in your most ridiculous usage on Twitter plz thx.
Buyout. A buyout is a transaction where an investor acquires control of a mature operating company and where a significant portion of the purchase price consists of debt (often called "leveraged buyouts" or LBOs). Our boy Romney loves himself a good LBO. NBD.
Spray and Pray. When an investor has no real plan. They invest a small amount in a bunch of different companies and hope one of them is a grand slam. No value, little strategy, a lot of hope. Fun usage: “A16z newest strategy is Spray, Pray and hope Adam Neumann is a New-man.”
Capitalization Table. A "Cap Table" is a spreadsheet that shows the ownership of a company. It can be very simple or very complex. Largely used by VCs to determine if Sequoia or A16z are on there… if not, see ya. I’m only half joking.
RAMBO. Means "Rescue after an MBO.” This is when a management buyout goes bad. RAMBO the actor good, RAMBO in real life not so good.
JAMBOG. Means "Just Another Middle-Market Buyout Group." Basically that the PE manager really hasn't differentiated themselves from all the others doing the same strategy. Not a good thing. Fun usage: “That guy's a JAMBOG."
Bake-off / Beauty Pageant. This means that a bunch of investment banks are going after the same business (IPO, financing, M&A), etc. So they make the analysts cram with 4578 versions of a pitch deck. Prepare for a lot of "Plz fixes." Plz fix has become its own subculture of higher-level investing, where exec’s telling analysts to fix the smallest PPT errors of all time.
Hairy deal. Means a hard deal, a nightmare company, or a crazy structure. The TLDR version is that it will be a lot of work and could go really sideways. You could also say "turnaround company". The company is a mess, so if we buy it we have to resuscitate a corpse on its last leg.
Below The Bar. This means a firm is going to pass on a deal. It's too small. The truth is that often a small deal takes just as much work as a large deal so why spend the time on pennies? Chamath (famous billy) has a very high bar I’d imagine.
Open the kimono. Can you even say this one? Usually used to talk about seeing the insides of a company's books and balance sheet, and getting into the inner details of a deal. Probably can get canceled for that these days.
Golden Handcuffs. Think your employees are going to leave after you buy a company? You lock 'em up with golden handcuffs aka equity, bonuses, etc that are too good to leave behind for your top people. Fun usage: “KKR handing out those Golden Handcuffs like it’s Halloween candy.”
We're already pregnant. Means we're too far into a deal, or we already did something that ties us in to completing the deal or taking some action.
Add-on Acquisition. An "add-on", "tuck-in" or "bolt-on" acquisition is where a platform (aka main) company acquires another company to help the platform company grow. Add-ons can help the platform grow its product line, customer base, geography, etc. Usually, PE firms do this, but also corporations do too.
Like Amazon, who is notorious for add-ons.
MORE SEXY WORDS
Add-Backs. Add-backs are things "added back" into the profit of the business because they are not repeated and were one-off purchases made by the last owner. They are calculated by fast-forwarding to a beautiful future where you are now the owner of the business (and where profit statements have been adjusted to reflect that).
Let’s say the current owner takes a $200,000 annual salary. When the owner leaves after you buy out the business, you automatically get an add-back of $200,000 to the business’s net income.
Break-Up Fee. You go to buy a company, sign all the papers, then you gotta wait. You need to finish financing, legal docs, or completing due diligence. What happens if something falls apart during that? Your contract may allow for the buyer or seller to back out and pay a breakup fee if they aren't wanting to go through with the transaction.
Cash Burn Rate. A company's "cash burn rate" or "burn rate" is the rate at which the company is spending its cash, usually expressed in months. This is usually for cash-flow negative companies in order to understand how long the company can operate before running out of cash (aka "runway.").
Corporate Carve-Out. When a company sells a part of its business to a buyer. The carve-out can be a sale of a non-core division or subsidiary, or a sale of assets. The buyer can be another company (a strategic buyer) or a financial buyer, such as a private equity fund, or me or you.
Data Room. Where all the terms, docs, and spreadsheets go while you're doing a deal. It's a web-based, secure depository of digital information. Think like a glorified Google Docs folder.
Due Diligence. This is where you find out if what you've been told before you invest is actually true, and if you believe it. You’ll run the people, market, business, IP, finances, operations, and projections through the wringer. Or at least you’re supposed to.
Earnings Before Interest Taxes Depreciation and Amortization (EBITDA). EBITDA is an approximation of a company's cash flow that we use to value companies. However, for our size acquisitions, "free cash flow" is the true measure of a company's cash flow. Aka the money in your bank account if you buy it is what you should actually look at. And don’t even get me started on Adjusted EBITDA.
Exit Strategy. I never buy a business without an exit strategy. Always start with the end in mind. Who can you sell it to when you're ready? Or who can take over and run it?
GP Catch-up. GP means the main investor. This GP catchup is kinda complicated but it's important if you're structuring your own deals. It's a carried interest, which means profit share (aka if the company makes $800 usually the carry is 20%, so the GP makes 200 of the provision that allows the GP to get a greater share of the carried interest until the GP has "caught up" with the LPs in the carrying structure).
Holding Period. How long you hold the investment - from the original investment to the exit from that investment. This is really important if you don’t want to get crushed by taxes. Fun usage: “My favorite holding period is forever.”
Letter of Intent (LOI). An offer sheet for a company transaction. It describes the principal terms of a transaction. Letters of intent are common in mergers and acquisitions. Letters of intent are similar to Term Sheets.
Liquidation Waterfall. This is how the money from your investment gets paid to varying types of investors. Important if you invest in a company or fund that has other investors or debt. You wanna know how you get paid in upside and downside scenarios. The two main types are European vs American waterfalls. WARNING: this is not a meme, but it’s actually kind of useful. Sorry about that.
Search Fund. When a group of people gives money to an MBA grad to go find, buy and run a company. Not my favorite model, but oh man do Harvard grads like to talk about it.
Payment-in-Kind (PIK). Payment-in-kind, or "PIK," is a payment made with stock instead of cash. PIK payments are most often associated with dividend payments, where the company issues shares of the company stock as a dividend in lieu of cash dividends. Let's say you owe a distribution but you don't have cash; you can use this instead. Fun usage: “I’ll take my bonus as PIK if you want boss?” Watch your boss rush to Google.
Purchase Agreement. A legally binding contract between a buyer and seller. They can cover transactions for just about any type of product. In real estate or business buying, a purchase agreement outlines the purchase price and other conditions under a title transfer.
Right of First Refusal (ROFR). ROFR, pronounced "Roafer," applies when an existing stockholder in a company wants to sell its shares. A ROFR provides the company and/or the other stockholders with a right to buy the selling stockholder's shares on the same terms as the potential buyer has offered to the selling stockholder. You get the first chance to buy it. Fun usage: “Boss, I’d like a ROFR on vacation days this month?”
Alright there you have it, you are now at a 202 level for private equity, investing, biz buying, and general meme lording in finance.
Disclaimer – This is the “Be an adult” section. Everything mentioned above isn’t advice, just a recount of what I did. That said: This article is presented for informational purposes only. The opinions stated here are not intended to recommend any investment or provide tax advice. Neither are they an offer to sell or the solicitation of an offer to purchase an interest in any current or future investment vehicle managed or sponsored by Codie Ventures, LLC or its affiliates. All material presented in this newsletter is not to be regarded as investment advice, but for general informational purposes only. Day trading and investing do involve risk, so caution must always be utilized. We cannot guarantee profits or freedom from loss. You assume the entire cost and risk. You are solely responsible for making your own investment decisions. We recommend consulting with a registered investment advisor, broker-dealer, and/or financial advisor. If you choose to invest with or without seeking advice from such an advisor or entity, then any consequences resulting from your investments are your sole responsibility. By reading/sharing this newsletter or consuming our content on our other channels, you are indicating your consent and agreement to our disclaimer.
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