Glossary

This section of the online companion gives a snippet of the comprehensive glossary in Adventure Finance, it creates a space where terms can be updated to keep definitions relevant to the fast developing and changing space of innovative finance.

How to use this section

Unlike the book, where the terms are structured alphabetically - this glossary groups terms by categories.

Equity and Debt

  • Equity Capital

    Capital that can be used to purchase ownership.

  • Debt Capital

    Capital that can be lent out or borrowed.

  • Simple Agreement for Future Equity (SAFE)

    An agreement between a founder and a funder that stipulates that the funder will invest into the founder’s business, but allows the major terms of that investment to be set by the next round of equity funders.

  • Trade Finance

    Options that allow organizations (borrowers) to use customer orders or invoices as collateral to access working capital.

  • Factoring

    A loan that uses invoices or purchase orders as collateral.

  • Invoice Factoring

    Is a short-term funding option that allows you to borrow against your invoices to finance your working capital.

  • Supply Chain Financing

    Also known as reverse factoring. Uses pre-payments from your customers to help finance your working capital needs. Can be in the form of early payment, where suppliers pay companies early voluntarily, or dynamic discounting, where suppliers are offered a discount based on how early they pay. Some suppliers have established supply chain financing programs that you can participate in. If you have good relationships with larger, regular customers, you can initiate conversations with them outside of formal programs as well.

  • Mezzanine financing

    Combines elements of debt and equity to create funding that has more flexibility than pure debt and equity. Mezz funders are willing to consider different forms of risk assessment, such as the presence of a Venture Capital funder (venture debt). They are also willing to lend money that is completely unsecured. As they are taking additional risk by funding earlier stage businesses or sitting subordinated to other funders, they look for higher returns than secured debt funders. These returns come from a fixed interest rate and some kind of upside opportunity in the form of a kicker.

  • Convertible Note / Convertible Debt Agreement

    A debt agreement that converts into equity at a later date, normally when the investee raises a round of equity funding. In a convertible debt agreement, an investor agrees to loan a certain amount of money to an organization. This loan generally accrues interest, but that interest isn’t paid in cash. Instead, it is added to the amount of the loan over time. When the organization raises a round of equity capital, the amount of the loan outstanding is used to buy shares of the company. The cost of these shares is calculated by taking the price the equity investors are paying and applying a discount.

  • Mezzanine Debt

    A loan that is paid back with a fixed interest and has upside through kickers such as warrants or profit share.

  • Venture Debt

    Loans made to fast growing, venture backed companies.

  • Equity earn back

    Clause that allows founders to earn back ownership from funders through the achievement of impact milestones.

  • Keep it Simple Security (KISS)

    An agreement that is a cross between a convertible note and a SAFE. It accrues interest at a stated rate and establishes a maturity date after which the investor may convert the underlying investment, plus accrued interest, into newly created preferred stock of the company. 

Redesigning Risk Capital

  • Structured Exits

    A risk capital agreement where founders and funders contractually agree on a plan for the funder to fully (or partially) exit the investment. Unlike equity funders, who have an open-ended agreement that relies on exponential growth and an unknown future buyer or listing on a stock exchange, structured exit funders have a specific, achievable plan for how they are going to receive their return through dividends, profit sharing, redemptions or a combination of payment types.

  • Redeemable Equity

    Shares that can be repurchased by founders at a pre-agreed multiple or mutually agreed price.

  • Revenue based financing (RBF)

    Loan that is repaid as a percentage of future revenues or cash flows. Also called: revenue share agreement.

  • Demand Dividend

    A type of convertible RBF agreement that uses profit sharing to repay investors initial risk capital investment. 

  • Revenue-based mezzanine debt

    A loan that is repaid as a percentage of future revenue or cash flows and has upside through kickers such as warrants or profit share

Innovative Grant Funding

  • Blended finance

    Transactions where public or philanthropic funders collaborate with private investors in order to catalyse (additional) impact.

  • Catalytic Capital

    Investment capital that is risk-tolerant which aims to unlock impact and additional investment that would not otherwise occur.

  • Convertible Grant

    Capital allocated to allow companies to develop a product or service before raising investment capital. If a company raises equity financing in the future, the grant converts to equity ownership. 

  • Forgivable Loan

    Loan that converts to a grant and is used to support non-profits and social enterprises.

  • Recoverable Grants

    Recoverable grants are grants that are repaid to the funder if the grantee achieves certain pre-agreed financial outcomes.

  • Guarantor

    An individual who promises to pay a borrower’s debt in the event that the borrower defaults on his or her loan obli- gation. Guarantors pledge their own assets as collateral against the loans.

Link Financing to Impact

  • Interest Rate Rebate

    Reducing the cost of a loan based on achievement of impact milestones.

  • Outcome-based financing

    A financing contract where the funder only pays once the pre-agreed social and/or environmental outcomes have been achieved by the service provider.

  • Social Impact Bond

    A type of outcomes-based contract that operates like an equity agreement but instead of linking investors’ returns to a company or organization’s financial performance, returns are linked to impact achievements.

  • Social Impact Incentive (SIINC)

    A type of impact-linked finance, where an investor, a service provider and an outcomes payor come together to create impact through a financing agreement that incentivizes the service provider to achieve specifically social outcomes.

Impact Financing

  • Environment, Social and Governance (ESG)

    ESG refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business.

  • Impact investing

    Investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.

  • Impact audit

    Similar to a financial audit, an impact audit uses a third party to verify a company’s reported performance against its agreed-upon impact metrics.

  • Impact measurement and management (IMM)

    The process of identifying the positive and negative effects of a business’ activities on people and the planet, and managing these effects towards the business and/or the investor’s social or environmental objectives

  • Impact metrics

    A standard of measurement that is used to assess the impact or progress of a company

  • Impact risk

    The risk that an investment will not achieve the social or environmental impact that is projected.

  • Impact strategy

    A plan that articulates how the impact of an investment in the future, typically through a theory of change and supporting impact measurement and management methodologies.

  • Impact thesis

    A succinct and evidence-based proposition that indicates how an investment strategy will achieve its intended social or environmental impact.

  • Impact track record

    The historical performance of a business towards its stated impact objectives.

  • Theory of Change

    A schematic depicting the rationale and plan for achieving social and environmental outcomes. It makes explicit the connections and logic between activities (what you will do), outputs (the short-term, direct results), and outcomes and impacts (the longer-term shifts that occur, either directly or indirectly, from your activities).

Crowdfunding

  • Crowdfunding

    A fundraising method of collecting small amounts of capital from your community of supporters, end-users and everyday individuals in order to finance a new business venture or the evolution of your existing business.

  • Debt crowdfunding

    Individuals lending money to a company over a set period of time. Also called Peer to peer (P2P) or loan-based crowdfunding.

  • Equity crowdfunding

    Individuals investing into a company in return for ownership in the company.

  • Donation based crowdfunding

    Individuals donating money towards a social or environmental project.

Employee Ownership

  • Employee ownership

    An arrangement in which an employee owns shares of a company’s stock which they work in. This is also referred to as a Shared Ownership model.

  • Co-operative (Co-op)

    Partially or completely employee-owned companies. Also called Worker Co-ops.

  • Employee Ownership Trust (EOT)

    Also known as Perpetual Employee Trust or Employee Benefit Trust (EBT). EOTs are designed to preserve the business over the long-term for employees' benefit. Employees don't pay for their ownership benefits, and they receive a share of the company’s annual profits.

  • Employee Stock Ownership Plan (ESOP)

    ESOPs are the most common broad-based employee ownership model in the US. They effectively function like a 401(k) employee benefit plan in the US that allows a company to transfer full or partial ownership to its employees. With an ESOP, there is no requirement for profit-sharing or democratic governance, wherein employees have strategic decision-making rights.

  • Steward Ownership

    A set of legal structures that instill two core principles into the legal DNA of a business: self-governance and profits serve purpose. These structures ensure that control (voting rights) over the business is held by people inside the organization or very closely connected to its mission. Voting control in steward ownership forms is not a saleable commodity. Profits in steward-ownership companies are understood as a tool for pursuing the company’s purpose.

Funders

  • Asset Owners

    Individuals or institutions that own assets. These generally refer to insurance companies, pension funds, banks, foundations, endowments, family offices, as well as individual investors. 

  • Angel Investors

    Individuals or networks with resources who invest in very early start-ups (typically in exchange for equity) and provide additional support (often in the form of expertise).

  • Commercial bank

    Financial institution that accepts deposits, offers checking account services, makes business, personal, and mortgage loans to individuals and small businesses.

  • Development finance institution

    Specialized development banks or subsidiaries that are set up to support private sector development in developing countries.

  • Foundation

    Independent legal entity set up solely for charitable purposes, often drawing on the resources of a single individual, family, or corporation.

  • Microfinance institution

    Formal institutions whose major business is the provision of financial services and insurance products to low-income individuals and micro and small businesses.

  • Non-bank financial institution

    Institutions that provide certain types of banking services but do not have a full banking licenses (e.g., credit unions, CDFIs, fintech, etc.).

  • Venture capital fund

    A subset of private equity that specifically invests in start-up companies and provides advice and other non-finance resources.