Fundraising is a critical phase in a startup’s journey, often accompanied by a complex landscape of financial jargon that can be overwhelming for new entrepreneurs. Understanding these terms is essential to navigate the process effectively and communicate confidently with investors. Here’s a guide to the top 20 startup fundraising terms:
- Angel Investor: An individual who provides capital to startups at the early stages in exchange for equity or convertible debt. Angel investors often bring valuable experience and networks in addition to funding.
- Venture Capital (VC): Funding provided by firms or funds to small, early-stage, emerging startups that are deemed to have high growth potential, in exchange for equity.
- Seed Funding: An initial investment to start and grow the business to a point where it can generate its own cash flow or secure further investments. It’s often considered the first official equity funding stage.
- Series A/B/C Funding: These terms refer to the stages of investment a startup goes through after seed funding. Each series is a significant round of funding meant to meet specific business milestones, with Series A focused on early-stage businesses ready to scale.
- Equity Financing: Raising capital through the sale of shares in the company. Investors receive ownership interest in exchange for their funds.
- Debt Financing: Borrowing funds that must be repaid over time with interest. Unlike equity financing, debt does not result in dilution of ownership.
- Convertible Note: A short-term debt that converts into equity, typically in conjunction with a future financing round; investors loan money to a startup and instead of getting a return in cash, they receive equity.
- Valuation: The process of determining the current worth of a startup. It’s crucial during fundraising as it affects how much equity is given away for capital.
- Term Sheet: A non-binding agreement setting forth the basic terms and conditions under which an investment will be made. It serves as a template to develop more detailed legal documents.
- Cap Table (Capitalization Table): A spreadsheet or table that shows the equity capitalization for a company. It lists all company securities such as stocks, options, warrants, and who owns them.
- Dilution: The reduction in existing shareholders’ ownership percentages of a company as a result of the company issuing new equity to new investors.
- Liquidity Event: An event through which initial investors and founders can sell their shares to realize their profits. Examples include an IPO or acquisition.
- Burn Rate: The rate at which a company consumes its cash reserves before generating positive cash flow. It’s a measure of monthly negative cash flow.
- Runway: The amount of time before a startup goes out of cash. Calculated by dividing current cash balances by the burn rate.
- Bootstrapping: Funding a business using personal resources or the revenue it generates, rather than seeking external investment.
- Pitch Deck: A brief presentation used by entrepreneurs to provide investors with a quick overview of their business plan during meetings.
- Due Diligence: The comprehensive appraisal of a business undertaken by a prospective buyer, especially regarding its assets and liabilities and its commercial potential.
- Exit Strategy: The plan for a startup’s founders and investors to realize their investment returns through events such as selling the company or going public.
- Non-Dilutive Funding: Financing that does not require the sale of shares and, therefore, does not dilute the ownership of existing shareholders. Examples include grants and debt.
- Preferred Stock: A class of ownership in a corporation that has a higher claim on assets and earnings than common stock. Preferred shares often come with rights like dividends and liquidation preferences.