29 Terms You Should Know Before You Invest.
This is not a definitive list.
Accredited Investor
An accredited investor is an individual, entity, or financial institution with a specific financial designation that allows them to invest in opportunities that are not legally available to ordinary investors. Accredited investors can invest in any venture capital and angel investments, which are special types of investments that build or support high-growth enterprises.
See: https://myfuturecapital.medium.com/what-is-an-accredited-investor-ed9c79632725
Angel
An individual who provides capital to early-stage, high growth companies, typically in exchange for equity.
Burn Rate
The burn rate (or ‘burn’) of an early-stage company refers to the rate at which cash flow is spent over time.
Cap Table
A capitalization table, or ‘cap table’, is a spreadsheet or table that shows the equity capitalization for a company
Churn Rate
The churn rate (or ‘churn’) is a calculation of the number of customers who leave a product over a given period of time, divided by total remaining customers.
The Churn Rate Formula can be calculated as the number of churned divided by the total number of customers:
number of churned customers / total number of customers
Cliff
A predetermined period of time when stocks gradually vest, such as a 1 year cliff which means if you leave within a year, you do not get any stocks.
Convertible Note
A convertible note is short-term debt that converts into equity. The debt typically automatically converts into shares of preferred stock upon the closing of a Series A round of financing. In other words, investors loan money to a startup as its first round of funding; and then rather than get their money back with interest, the investors receive shares of preferred stock as part of the startup’s initial preferred stock financing, based on the terms of the note.
Data Room
Data rooms are both a summary of the information you’ve presented throughout your fundraising process and the central point for data-heavy documents. Investors can quickly validate your market size (ACV/ARPU multiplied by the total number of potential customers), but cohort retention and customer acquisition costs across multiple channels require a bit more analysis
Deal Flow
Deal flow refers to the rate at which investors get access to opportunities to invest. The frequency & caliber of an investors deal flow will determine their capacity to invest and potential for driving attractive returns.
FAST Agreement
The FAST Agreement is used by entrepreneurs and advisors per year to establish productive working relationships, trading advice and support for a standardized amount of equity.
See: https://fi.co/fast
FMA (First Mover Advantage)
A first mover is a service or product that gains a competitive advantage by being the first to market with a product or service. Being first typically enables a company to establish strong brand recognition and customer loyalty before competitors enter the arena.
Fee carry
Carry is a percentage of a fund’s profits that fund managers get to keep on top of their management fees, and is a significant component of private equity compensation.
The carry is the GP’s share of any profits realized by the fund’s investors, and can run from 15% to 30% but will typically be 20%.
Founder Friendly Terms
A deal structure that is designed to protect the rights, autonomy and equity of the founder(s)
See: https://blog.samaltman.com/a-founder-friendly-term-sheet
Fund Manager
A fund manager is responsible for implementing a fund’s investing strategy and managing its portfolio trading activities.
General Partner (GP)
GPs raise and manage venture funds, set and make investment decisions, and help their portfolio companies exit, because they have a fiduciary responsibility to their Limited Partners.
Hit Rate
Ratio of the total number of winning investments to the number of losing investments. It does not take into account how much was won or lost, but simply if they were winners or losers.
LTV / CAC Ratio (Lifetime Value / Cost to Acquire Customer)
The LTV:CAC ratio measures the relationship between the lifetime value of a customer and the cost of acquiring that customer.
- Customer Lifetime Value indicates how long a the average customer sticks with you before they cancel their service. The longer a customer sticks around, the more valuable they are.
- Customer Acquisition Cost lets you know how much it costs you to acquire a new customer. Most of the time, it costs more to acquire a new customer than to keep an existing one.
Limited Partner (LP)
is someone who commits capital to the venture fund. LPs are mostly institutional investors, such as pension funds, insurance companies, endowments, foundations, family offices, and high net worth individuals.
Liquidity Events
VC funds can only realize gains if there is a liquidity event (aka “exit”), which generally means one of the following three situations:
- Share Purchase: A buyout of an investor’s position via a new investor looking to buy ownership or the company repurchasing stock.
- Acquisition (M&A): Strategic acquisition by an incumbent who is buying a differentiated technology, a large customer base, a rockstar team, or some other combinations. Google, Facebook, Yahoo, j2 Global and Microsoft are among the top buyers in the tech space.
- Initial Public Offerings (IPO): Large stand-alone businesses with stable customer base, product strategy and growth potential, i.e. True Car, Alibaba.
Product Market Fit
The degree to which a product satisfies a strong market demand.
Run Rate
The run rate refers to the financial performance of a company based on using current financial information as a predictor of future performance.
SAFE (Simple Agreement for Future Equity)
An agreement between an investor and a company that provides rights to the investor for future equity in the company similar to a warrant, except without determining a specific price per share at the time of the initial investment.
Special Purpose Vehicle (SPV)
A special purpose vehicle, also called a special purpose entity (SPE), is a subsidiary created by a parent company to isolate financial risk. Its legal status as a separate company makes its obligations secure even if the parent company goes bankrupt.
Syndicate
A syndicate is a VC fund created to make a single investment. They are led by experienced technology investors, and financed by institutional investors and sophisticated angels.
Syndicates are private. Investors can participate by applying to back a lead or investing in a fund.
See: https://angel.co/syndicates
Sweat Equity
Sweat equity is a non-monetary contribution that the individuals or founders of a company make towards the company.
Term Sheet / Deal Terms
A term sheet is a non-binding agreement that shows the basic terms and conditions of an investment. The term sheet serves as a template and basis for more detailed, legally binding documents. Once the parties involved reach an agreement on the details laid out in the term sheet, a binding agreement or contract that conforms to the term sheet details is drawn up.
Below are some conditions that a startup term sheet defines:
It is non-binding. Neither the entrepreneur nor the VC is legally obligated to abide by whatever is outlined on the term sheet.
Company valuations, investment amounts, the percentage of stakes, and anti-dilutive provisions should be spelled out clearly.
Voting rights. Startups seeking funding are usually at the mercy of VCs who want to maximize their investment return. This can result in the investor asking for and obtaining a disproportionate influence on the company’s direction.
Liquidation preference. The term sheet should state how the proceeds of a sale will be distributed between the entrepreneur and the investors.
Investor commitment. The term sheet should state how long the investor is required to remain vested.
Traction
Traction is evidence that a product or service has started that “hockey- stick” adoption rate which implies a large market, a valid business model and sustainable growth.
Unicorn
A unicorn is a term used in the venture capital industry to describe a privately held startup company with a value of over $1 billion.
See: https://techcrunch.com/2013/11/02/welcome-to-the-unicorn-club/
Valuation
Valuation is the analytical process of determining the current (or projected) worth of an asset or a company. There are many techniques used for doing a valuation.
