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Glossary of Terms

Angel Investor: An individual (as opposed to a firm) who provides their person capital to fund a startup company.

Accredited Investor: An investor who meets specific SEC income and net worth criteria, allowing them to invest in startups and other high-risk private company securities.

Bridge loan: a loan which is designed to “bridge the gap” between institutional investment rounds.

Buyout: when a purchaser gets controlling interest in a company after it buys the requisite number of shares.

Cap: a valuation ceiling that exists in a convertible debt deal.

Cap Table: a detailed spreadsheet that outlines all the stockowners of a company and the terms at which they have invested.

Carry/Carried Interest: profits that a VC is entitled to after returning principal and interest to their investors. This can range from 10-30%.

Common Stock: The type of stock generally issues to company employees. This class of stock (shares) generally has the least amount of rights and privileges. Common stock is a lesser class of stock than preferred stock.

Convertible Debt: a debt or loan that will be paid back in the future in the form of equity or company stock.

Crowdfunding: the process by which a large number of individuals make small monetary contributions into a single pool, ultimately funding a new venture or project.

Debt financing: happens most often when a company sells a note to an investor, promising to repay the debt with interest.

Due diligence: or a thorough, detailed analysis of a company.

Equity financing: when a company raises money by selling its shares for cash. Shareholders then become partial owners of the company, facing both the risk and the reward that may follow. It’s worth noting that debt and equity financing can happen independently or in conjunction with each other.

Exit Strategy: the way an investor will see the return on their investment. It most commonly happens through an Initial Public Offering (IPO), or a buyout.

Incubator: entities that advise and develop young companies in their earlier days, most commonly before they have received significant investment. Aside from offering the companies physical workspace, they provide an array of services—marketing help, guidance on product development, legal assistance, access to a network of investors, and pitch/presentation training—designed to ready them for growth and success.

IPO: Initial Public Offering, marks the first moment that shares of stock are offered to the public. When this happens, the company becomes publically traded, and is subject to an entirely new array of securities regulations (among other things). This also means the company will be listed on an exchange.

Portfolio company: A company in which a venture capital firm has invested in (and thus, is a part of their portfolio of companies).

Pre-money and post-money valuation: pre-money valuation refers to what your company is worth before it receives any sort of funding. Let’s say the agreed upon valuation is $3 million. If a venture capital firm then invests another $1 million, the post-money valuation would of your company would be $4 million (or, the sum of the pre-money valuation, and the additional funding).

Return on investment: or ROI. The money the investor would get back from their initial investment.

Rounds of Financing: Startups raise money from venture capital firms in different rounds. These rounds are called Series A, B, C, etc.

Seed round: is the first official round and it happens relatively early on. At this point, the startup is looking for money to prove their concept, and that money can be helpful in building a prototype of their product. Depending on a variety of metrics that measure a company’s growth and development—for example, how they are acquiring and retaining customers, their revenue streams, and the amount of money they spend each month—the seed round may be followed by others.

Syndicate: a group of investors who invest in a startup together.

Term sheet: A non-binding document that details the terms and conditions of the investment. It’s sort of like the quick introduction to the investment opportunity, highlighting some of the more complex legal documents that will follow.

Valuation: the value ascribed to a startup by an investor

 

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