Accelerator: entities focused on helping entrepreneurs grow new business concepts. Accelerators offer fixed-term, cohort-based programs, often including professional advice and guidance, that culminate in a public pitch event or demo day.
Accredited Investor: an investor who meets specific SEC income and net worth criteria, allowing him or her to invest in startups and other high-risk private company securities.
Acquisition: the process through which one company obtains ownership of another entity’s stock, equity interests, or assets.
Angel Investor: a single individual (as opposed to a firm) who provides his or her personal capital to fund a startup company. The best angels often also offer expertise or introductions to support their investment.
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.
Closing: the final event to complete an investment, at which time all the legal documents are signed and the funds are transferred.
Common Stock: the type of stock generally issued 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 (or Convertible Notes): a debt or loan that will be paid back in the future in the form of equity or company stock. A common investment vehicle for seed round investments.
Debt Financing: when a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to investors, promising to repay the debt with interest.
Dilution: is the reduction in the investor’s ownership percentage of a share of stock caused by the issuance of new dilutive securities.
Due Diligence: comprehensive review or investigation of material facts in regards to an investment or transactions. It is highly recommended that the entrepreneur and investor seek their own advisors and counsel in any transaction.
Early Stage: a period of venture capital investment that falls between seed- and late-stage deals that includes Series A and Series B financings. These companies typically have a proven concept and little revenue.
Equity Financing: when a company raises money by selling its shares, allowing shareholders to become partial owners of the company through the purchase of stock. Both debt and equity financing can happen independently or in conjunction with each other.
Exit Strategy: also called a liquidity event, this the VC’s way of seeing a return on an investment in a company. Common types of exit strategies include initial public offerings (IPOs), strategic acquisitions, and management buyouts.
General Partner: an owner of a partnership who has unlimited liability and who is active in the day-to-day operations of the business.
Incubator: entities that advise young companies in their earlier days, most commonly before they have received a significant investment. Aside from offering the companies a physical workspace, incubators 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 companies for growth and success.
Initial Public Offering (IPO): marks the first moment that shares of stock are offered to the public. When this happens, the company becomes publicly 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.
Institutional Investors: investors represented by groups that invest and manage funds on the investors’ behalf, including pension funds, investment funds, and mutual funds.
Issuer: the legal entity that develops, registers, and sells securities (shares, bonds, notes, etc.) to finance its operations.
Late Stage: rounds Series C and later are typically categorized as late stage.
Leveraged Buyout (LBO): when one company uses a significant amount of borrowed money to meet the cost of acquiring another company. Assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company.
Limited Partner: a co-owner of a business organized as limited partnership who (unlike a general partner) does not participate in the management of the firm and has limited personal liability for the firm’s debts.
Lock-up Period: the length of time an investor must wait before selling or trading company shares after an exit.
Portfolio Company: a company in which a venture capital firm has invested, thus, making that company part of the VC firm’s portfolio.
Pre-money and Post-money Valuation: pre-money valuation refers to what a company is worth before it receives any sort of funding and post-money is the value after a capital investment. (Example, Start-up Inc. has a pre-money the initial agreed-upon valuation is $3 million. If an angel investor invests a $1 million into Start-up Inc., the post-money valuation would be $4 million (the sum of the pre-money valuation and the additional funding). Calculating equity pre-money and post-money are different calculations (see Dilution).
Preferred Stock: has a higher claim on assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and the shares usually do not carry voting rights.
Pro-rata Rights: the right of investors to participate in later funding rounds so they can maintain the amount of equity they own in a company.
Return on Investment (ROI): the money the investor would get back from his or her initial investment.
Risk: the likelihood of seeing a lower return than expected, including the possibility of losing some or all of the original investment.
Rounds of Financing: startups raise money from venture capital firms in different rounds, typically called Series Seed, A, B, C, D, etc. Series Seed is the first round and is typically for the company to figure out the product it is building, the market it is in, and the user base. Series A is intended to help the company scale distribution or develop a business model. Series B is typically scaling the business and continuing to build traction. Funding amounts in each round generally increase.
SAFE (Simple Agreement for Future Equity): a warrant to purchase stock in a future priced round. Both SAFE and convertible notes allow for a conversion into equity, but while a convertible note can allow for the conversion into the current round of stock, or a future financing event, a SAFE only allows for a conversion into the next round of financing.
Seed Stage: the first official round of financing, which happens relatively early on in a business’s development. At this point, the startup is looking for funds to prove its concept, and that money can be helpful in building a prototype. Depending on a variety of metrics that measure a company’s growth and development – for example, how it is acquiring and retaining customers, its revenue streams, and the amount of money it spends each month – the seed round may be followed by others.
Sophisticated Investor: an investor who does not meet the qualifications of an accredited investor but who holds sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.
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. This acts as quick introduction to the investment opportunity and highlights some of the more complex legal documents that will follow.
Valuation: the value ascribed to a startup by an investor or an entrepreneur.
Venture Capital (VC): financing that investors provide to startup companies that are believed to have long-term growth potential but also a substantial amount of risk.