GLOSSARY OF INVESTMENT TERMS

Click on a term below for its definition.

1031 Exchange

A 1031 Exchange is a type of real estate transaction that enables an investor to swap one property with another of a similar use while deferring capital gains taxes. It is sometimes known as a “like kind exchange.”

Accredited Investor

An accredited investor is essentially one who has sufficient net worth or income to withstand investing in speculative or risky investments. The SEC defines an accredited investor in the context of a natural person as anyone with earned income of $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years and reasonable expectation of the same income level in the current year. These individuals or entities can make investments in non-registered transactions because they are presumed to have greater knowledge or financial ability to accept losses.

Angel Investment

Angel investors provide backing to small entrepreneurs, often startups, typically in exchange for some ownership interest in the venture. These are often the entrepreneur’s friends or family members but may also include “angel networks.” Angel networks are groups of investors who consider opportunities either individually or in collaboration.

B Corp

B Corp is shorthand for benefit corporation. These are generally for-profit enterprises that have a social or environmental component to their businesses. Businesses seeking a B Corp label are certified by B Lab, a nonprofit that evaluates and attests to the company’s alignment with the public’s interests.

Beneficiary

This is an individual or group of individuals that derive benefit from a business. The term is usually contrasted with clients or customers so that it encompasses a group generally larger than direct program participants, such as a client’s children.

Career Impact Bonds

As with the social impact bonds, career impact bonds are a misnomer—they are not actually bonds but rather a contract. Investors put up money to fund training providers who offer training to vulnerable populations. Once those students have graduated and found meaningful employment, they repay the cost of training to the investors and service providers who share in the funds.

Community Development Financial Institutions (CDFIs)

CDFIs are designated by the United States Treasury as organizations or companies that provide financial services or products to target populations, including low- to moderate-income individuals. Banks who partner with CDFIs earn credit from regulators for their Community Reinvestment Act requirements.

Corporate Social Responsibility Support (CSR)

CSR is a form of corporate policy, procedures, commitments, or investment (or all the above) in support of a company’s values, such as social justice or environmental well-being.

Customer

A customer is a purchaser of goods or services or a direct program participant if the goods and services are not “sold.”

“Do No Harm” Philosophy

The idea of “do no harm” borrows from the medical profession but now also applies to impact investing. It means to consider all consequences of an investment to evaluate whether it is beneficial or not. An example might be an investment in electric vehicles, which is perceived to be better for the environment, however the cobalt needed for the batteries is mined by child labor, which is harmful.

Donations

Gifts made without requirement of return of funds or interest paid.

Donor-Advised Funds (DAFs)

DAFs provide a way to support causes using flexible capital. Donors receive a tax benefit for contributing to a DAF, and those dollars can then be deployed to achieve the donor’s wishes through many forms of investment—gifts, grants, loans, loan guarantees, etc.

EB-5 Program

This is a federal government program that enables foreign investors to receive preferential visas in exchange for job-creating investments.

Endowment

An endowment is a reserve fund set aside by an institution to provide for long-term investment returns or perpetual operating support.

Environmental Social Governance (ESG)

ESG is a subset of impact investing in the focus areas of environmental, social, and corporate governance. Investors may apply these nonfinancial factors as part of their analysis process to identify material risks and growth opportunities. This is a growing area of investment.

Equity Equivalent (EQ2)

An EQ2 investment is a debt vehicle that is functionally equivalent to equity. It has no maturity date or has one that is continuously renewable, a very low interest rate, and is booked on the borrower’s balance sheet as equity not long-term debt.

Expansion Stage or Growth and Expansion Stage

This is the stage in a business lifecycle when it has been in existence for a few years and adds resources that it is confident will add predictable top line revenue gain and long-term value.

Fixed Income Allocation

This is a portion of an investor’s portfolio that comprises investment securities that pay a fixed interest until their maturity date. In a diversified portfolio, this is designed to be lower risk and provide steady recurrent income.

Grants

These are cash gifts to an organization, typically a nonprofit, often made by a foundation, that have no repayment requirement. In contrast to an equity investment, they are nondilutive to the recipient. They often have a stated purpose and may be restricted for that use.

Green Bonds

Green bonds are a debt vehicle that specifies use of proceeds for environmental purposes. There is a distinct and active market for green bonds, and they often come with specific reporting requirements.

Hybrid Structure

This is typically a social enterprise that combines both for-profit and nonprofit entities to achieve a specific goal.

Impact Investing

Impact Investing has many definitions but can be considered as a double-bottom-line (or triple) investment that includes measurable social impact alongside a financial returns, or, in the case of a triple-bottom-line investment, they also include measurable environmental returns. Profit can be thought of as a continuum with zero profit and max profit on each end. Impact investment straddles the space in between.

Investment Horizon

This term reflects the desired amount of time an investor wishes to remain in an investment before return of capital. Return of capital also known as an exit.

Investment Instrument

There are multiple types of instruments or tools available to satisfy investors’ requirements. Examples might be debt, equity, or grants.

Liquidity Requirements

Liquidity is a financial term that describes how easily an asset can be converted to cash.

Loan Guarantees

Guarantees are a way for investors to provide for the growth of an enterprise without committing cash. One investor might “backstop” another by offering a guarantee in the event of default. This can be a form of “catalytic first loss capital.”

Maturity and Exit Stage

This is the stage of a business life cycle where sales begin to decline, and the owners begin to look at planning for a sale or some other exit.

Mezzanine/Bridge Debt Pre-IPO

Mezzanine financing bridges a gap between debt and equity for pre-public companies.

Mission Driven

These are investors who look for opportunities to support businesses that have some preference for their stated mission, not just financial returns.

Mission-related Investment (MRI) Tools

This is an IRS-approved tool for foundations to use to support mission-driven businesses. It has slightly less advantages for the foundation than its sister tool—program-related investments—but is similarly useful for the beneficiary.

Multiple

When used in an investing context, a multiple is the number of times earnings (EBITDA), or invested capital of a target value. Investor might say, for example, that they are seeking a 10x multiple, which means they want the value of their investment at the exit to be equivalent to 10 times their invested capital. In the context of debt, it may be used to refer to the amount of debt to cash flow or the amount of debt to enterprise value. When not in the context of a specific investor, it will more often be related to earnings.

Negative/Positive Screen

Investors may be open minded about their investment philosophy with certain traits included or excluded. One example is an investor who excludes “sin stocks,” such as businesses involved with tobacco.

New Market Tax Credits (NMTCs)

NMTCs are useful tools for opportunities with a real estate component and a social mission. These complex structures involve allocations of tax credits from the United States Treasury, purchased by tax credit investors (usually banks), with the project funded by a “leverage lender.” They are only available on properties in qualifying census tracts and run for a period of seven years.

Nonprofit

Nonprofits are organizations that have a purely charitable focus. Often, they are designated by the IRS as a 501(c)(3) entity, which means they are exempt from taxation. This status is usually needed to receive grants from foundations.

Outcomes

Outcomes are the specific benefits (or they could be negative outcomes) associated with an impact effort, such as increased purchasing power due to improved credit scores.

Outputs

Outputs are units of measurement that result from an impact organization, such as the number of meals served by a food bank.

PACE Financing

PACE is a program that some municipal, county or state governments have elected to participate in that enables a lender to make a loan for environmentally beneficial improvements or renovations to a property wherein the security for the loan is an assessment on the property, like a tax.

Philanthropic Dollars

This is a term for nondilutive type of capital investors choose to make available for an impact project. Dollars in their philanthropic buckets are ones they are willing to lose or give away, often referred to as grants. They would be contrasted with dollars in their investment buckets that may have specific return requirements associated with them.

Program-related Investment (PRI) Tools

Similar to MRIs, PRIs (equity, debt, guarantee, grant or other) include various tools that the IRS has approved for foundations to use to support a social enterprise. So long as the intent is charitable and the return paid is less than market, the foundation may use any number of different tools to support the effort, and the dollars do not count against the required distributions or jeopardize the foundation’s tax status.

Public Improvement Districts (PIDs)

PIDs are most often used in real estate development and, like the PACE financing, enable projects to capture up-front funding for certain initiatives. They are repaid through assessments.

Publicly Offered Equity/Stock

These are opportunities offered for investment in the public stock markets. The SEC must approve the issuances. By purchasing stock, the investor obtains equity or ownership in the company and becomes a shareholder.

Return Requirements

For investors with a profit motive, return requirements are thresholds they want/need to achieve on their capital. With a debt instrument, these return requirements are essentially the interest they receive on their loan.

SAFE Note

SAFE refers to a Simple Agreement for Future Equity, a form of convertible investment that gives an investor the opportunity to convert capital into equity ownership in the company at some point in the future.

Seed Capital

Seed money, seed funding or seed capital is the first stage of investment that entails ownership. For many enterprises, seed funding may be made on a convertible basis where dollars come in as debt, for example, but convert to equity at some point in the future.

Seed/Development Stage

This is the point in a business life cycle where the entrepreneur begins to develop the potential for an idea to become a viable business.

Senior Loans

Senior loans have priority over other unsecured or otherwise more “junior debt” owed by the issuer in payback and are considered the most secure.

Social Bonds

Social bonds are bonds offered either publicly or privately that have a stated social purpose. They come with reporting obligations and are not to be confused with social impact bonds, which are not legally traded instruments.

Social Enterprise

A social enterprise is any endeavor, whether a for-profit company, a nonprofit organization, or a hybrid, that has a social mission attached to it.

Social Impact Bonds

Contrary to the name, social impact bonds are not bonds. They are contracts, rather than a traded security. They include an investor, a governmental entity, a service provider, an intermediary and an evaluator. Investors place money into a project with the objective of achieving some social impact outcome that reduces costs for government—such as housing the homeless, rather than caring for them at a hospital or jail. The government savings provides the funds to repay the investors.

Socially Responsible Business

This is usually a for-profit company, not a nonprofit, that seeks to be responsible in how it uses resources.

Startup Stage

This is the earliest stage of a business wherein an idea has not been tested by the market.

Subordinated Loans

Sometimes referred to as sub-debt, subordinated loans are behind senior loans in priority of payment. This is riskier debt capital in the capital stack but ranks higher in priority to equity.

Sustainability

Sustainability may be used in the context of the business lifecycle as representing the time in which breakeven has occurred and there is recurring cash flow that is sufficient to cover costs. It is also often used in an environmental context referring to efforts to protect natural resources.

Sustainability Bonds

When an issuance includes both social and green bonds, it is an offering of sustainability bonds.

Sustainability-linked Bonds

With sustainability-linked bonds, the return to the bondholders is kept at a lower than market rate so long as the issuer continues to meet stated sustainability objectives. The cost of the bond increases if these hurdles are not met.

Taxable Bonds

These bonds are subject to taxation and have a specific market of buyers.

Tax-exempt Bonds

These bonds are exempt from taxation and have a specific market of buyers.

Tax Increment Financing (TIF) or Tax Increment Reinvestment Zone (TIRZ)

TIFs and TIRZs are geofenced locations with incentives offered by the municipality in which they are located to persuade developers to construct the types of facilities the city seeks to have in that location. The incentives are taken from the incremental gain in tax revenue that occurs within that district or zone as improvements are made.

Theory of Change

A theory of change model depicts a desired future state (all people will be free of poverty, for example) and maps backwards the steps needed to reach that objective from the current state. It is usually a visual depiction of the inputs and processes required to achieve the desired outcomes and impact.

Traditional Business

A traditional business is a company that seeks to maximize shareholder returns.

Traditional Charity

A traditional charity is a nonprofit entity.

Venture Capital

Venture capital is a form of investment that is usually made to early-stage companies that have potential for significant growth. Venture capital funds take an ownership stake in the business in exchange for funds and often play a role in advising or even managing the company to steer it toward growth.

Venture Funds

Venture funds manage pooled investments in high-growth opportunities in startups and other early stage firms and are typically only open to accredited investors. Venture funds may be comprised of individual venture capital funds or may be a “fund of funds,” which aggregates capital from multiple venture capital funds.