There is a lot of jargon in the investment world. For cannabis operators looking for growth capital it can can feel confusing or overly-complicated at first.
To help, we’ve put together a list of some key terms and definitions you’ll likely run into as you grow your cannabis business. Bookmark this page! We’ll add to it as we get feedback from operators looking for clarity on the world of financing and raising capital.
An alternative to traditional financing options (such as loans, equity investments or going public), royalty financing is when an investor provides capital to a company in exchange for an agreed-upon percentage of the company’s revenues in the future.
With this model, the operator maintains control of their company and avoids dilution, and investors get long-term returns. Read our What is Royalty Financing? article for more detail.
Equity financing is when an investor provides capital to a company in exchange for shares in that company. Equity gives the investor an ownership interest in the company, and is a fairly standard method of investment. There are many different types of equity financing, as the company can sell shares with different rights attached, making them more or less attractive to investors. Going public is a form of equity financing.
Debt financing is when a company borrows money from a lender, but does not give up any ownership as it would with equity financing. With debt financing, the principal plus interest needs to be paid back based on a defined timetable. In addition, borrowing capital usually comes with some restrictions imposed by the lender, such as the ability to raise more money or how to deal with certain assets in the business.
Capital markets is the broad term used to describe the activities of companies seeking capital (like operators), suppliers of capital, and their representatives. Suppliers of capital includes venture and private equity funds, high-net worth individuals, and others. Investment banks have numerous functions, but one of them is representing companies that are seeking capital. They act as an intermediary and connect the companies with their network of capital suppliers.
A capitalization table — or “cap table” for short — is a record of the ownership stakes in a company. It is usually in the form of a chart, and shows the ownership percentage of each shareholder, including the types of ownership they have (e.g. common shares, preferred shares, options). In some cases, it may state the price paid by each shareholder for their ownership position. It is generally used to keep track of ownership in private companies, as public company ownership is managed through brokers and changes frequently, making it difficult to maintain current information in a cap table.
A company’s capital structure — or “cap structure” for short — is a summary of how the company has financed its business up to that point. It sets out all the forms of financing the company has undertaken in the past, including raising capital from equity, debt, royalty financing or others. It is usually broken down further by the types of financing in greater detail, such as the priority of debt, the types of shares sold, etc.
A company’s cap structure is important because it provides a snapshot of the claims of various stakeholders on the business. It allows potential investors to determine who will have priority over them in certain scenarios (this helps them understand the risk of particular type of investment), and also the overall financing risks that the business faces. For example, a lot of senior, secured debt that is coming due could be risky for a business that doesn’t have the cash to repay it.
Valuation means what a company is worth. In most cases, investors will use the term to refer to the total enterprise value of company implied by the price paid for shares. In the context of an equity financing, valuation is then divided into pre-money and post-money. Pre-money valuation is the value of the company before the financing event. Post-money valuation is the value after the financing and is equal to the pre-money valuation plus the amount of money brought in by the sale of shares as part of the financing.
For example, a company that is worth $10MM is said to have a pre-money valuation of $10MM. If that company sells shares in exchange for $5MM, it will have a post-money valuation of $15MM.
Dilution refers to a situation where a shareholder’s ownership percentage is reduced as a result of the company issuing additional shares (for example, as a result of an equity financing event). While the number of shares the shareholder has not changed, the overall number of shares outstanding has, meaning their ownership percentage has decreased (or been diluted).
EBITA or EBITDA
EBITA is an acronym for “Earnings Before Interest, Taxes and Amortization” and EBITDA stands for “Earnings Before Interest, Taxes, Depreciation and Amortization.” These calculations of a company’s income gauge the profitability of a business as it relates to earnings generated.
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