These are key investment terms you should know as you navigate the startup funding process.
Equity and Ownership
Equity – an ownership stake in a company.
When you raise funds, investors typically receive equity in exchange for their investment.
Dilution – is when new shares are issued, existing shareholders’ ownership percentage decreases.
Cap table – a table that outlines the ownership stakes, including shares and options, of all shareholders in a startup.
Valuation
Pre-money valuation – the valuation of a company before new funding is added.
Post-money valuation – the valuation of a company after the new investment has been added.
Term sheet – a non-binding agreement outlining the terms and conditions of the investment.
Funding Rounds
Seed funding – the initial capital raised by a startup, usually to develop the product and begin market validation.
Series A/B/C funding – subsequent rounds of funding after the seed stage, often focused on scaling and expanding the business.
Convertible note – a type of short-term debt that converts into equity upon a later financing round, often used in seed-stage fundraising.
SAFE (Simple Agreement for Future Equity) – an agreement that allows an investor to buy equity at a later date, typically in the next round of funding.
Investor Types
Angel investor – an individual who invests personal funds into startups, typically in the early stages.
Venture capitalists (VC) – are professional investors who manage a fund that invests in high-growth startups in exchange for equity.
Micro-VC – smaller venture capital firms that invest smaller amounts of money in early-stage startups.
Metrics and Financial Terms
Burn rate – the rate at which a startup spends its capital to finance operations before generating positive cash flow.
Runway – the amount of time a startup can continue operating before it runs out of cash, based on its burn rate.
Customer acquisition cost (CAC) – the total cost of acquiring a new customer, including marketing and sales expenses.
Lifetime value (LTV) – the total revenue expected from a customer over the entire period they are a customer.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) – a measure of a company’s profitability that excludes certain expenses.
Investment Terms and Returns
Liquidation preference: – a clause that specifies how much investors get paid before other shareholders in the event of a sale or liquidation.
ROI (Return on Investment) – a measure of how much profit an investor makes relative to the amount invested.
Exit – the way investors get a return on their investment, usually through an IPO (Initial Public Offering) or acquisition of the startup.
Additional Terms
Down round – a funding round in which a startup raises money at a lower valuation than in previous rounds.
Secondary market – a marketplace where existing shareholders (like employees or early investors) can sell their shares to new investors.
Impact investing – investments made into companies that generate social or environmental benefits alongside financial returns.