Glossary of Terms

Endogenous Risk Factor
A risk factor (i.e., enterprise attribute) that is internal to the enterprise.

Enterprise Classification (Industry Sector)
Each enterprise is classified at three levels of specificity in the EquityNet enterprise taxonomy: primary, secondary, and tertiary.

Exogenous Risk Factor
A risk factor that is external to the enterprise, such as interest rates.

Knowledge Base
A proprietary database of empirical correlations that relate endogenous and exogenous enterprise risk factors with the probability of enterprise success.

Market-Based Liquidity Value
The market-based value of an enterprise at its projected liquidity event. Founded on the law of one price, this value is based on the revenue of the enterprise at the liquidity event and the corresponding public market “price/sales” ratio for that enterprise classification. This ratio is determined as a function of the enterprise operating profit margin at the liquidity event.

Median IRR of Peer Group
The median internal rate of return for enterprises that are seeking capital and that are in the same industry sector as the enterprise of interest.

Multi-Stage Growth Model
The method of establishing financial projections through a model that incorporates more than one stage and rate of growth. Specifically, the EquityNet system accounts for financial projections beyond the 5th year of estimates through a multi-stage growth model.

Peer Group
Enterprises that are seeking capital and that are in the same industry sector as the enterprise of interest.

Probability of Enterprise Failure
The probability of failure quantifies the systematic and unsystematic risk (i.e., uncertainty) of an enterprise asset. Specifically, it estimates the statistical probability of enterprise failure to its projected fiscal year of liquidity event or debt maturation.

Probability of Enterprise Success
The probability of success quantifies the systematic and unsystematic risk (i.e., uncertainty) of an enterprise asset. Specifically, it estimates the statistical probability of enterprise survival to its projected fiscal year of liquidity event or debt maturation.

Risk-Adjusted Internal Rate of Return (IRR)
The discount rate that equates the enterprise pre-money valuation to the sum of its risk-adjusted and discounted free cash flows and liquidity value. The resulting discount rate is an estimate of the annual risk-adjusted internal rate of return for investors in that enterprise.

Risk-Unadjusted Internal Rate of Return (IRR)
The discount rate that equates the enterprise pre-money valuation to the sum of its discounted free cash flows and liquidity value. This metric excludes consideration of enterprise risk. The resulting discount rate is an estimate of the annual risk-unadjusted internal rate of return for investors in that enterprise.

Risk Categories
The total probability of success consists of ten component Risk Categories, each of which aggregates individual enterprise risk factors and their corresponding probability of success into a single segment (e.g., Capitalization & Financial Condition).

Risk Settings
The Risk Quantification System (RQS) aggregates its risk computations into ten enterprise risk categories. For each of twelve enterprise classifications, the weighting of each risk category can be customized by investor users to either emphasize or de-emphasize each category of enterprise risk in the RQS computation system.

Systematic Risk
The risk that is common to an entire class of assets. Also called market risk.

Undercapitalization
An estimate of any deficiency in projected net capitalization of the enterprise as it relates to achieving positive net cash flow from operations. It estimates any capital that, in addition to projected capitalization, will likely be required to achieve positive net cash flow from operations. It also indicates any potential for unanticipated dilution.

Unsystematic Risk
The risk that is due to the unique characteristics of a specific asset, as opposed to the overall market.