Top 20 startup fundraising terms every entrepreneur should know

Top 20 startup fundraising terms every entrepreneur should know

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. Equity Financing: Raising capital through the sale of shares in the company. Investors receive ownership interest in exchange for their funds.
  6. Debt Financing: Borrowing funds that must be repaid over time with interest. Unlike equity financing, debt does not result in dilution of ownership.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. Dilution: The reduction in existing shareholders’ ownership percentages of a company as a result of the company issuing new equity to new investors.
  12. Liquidity Event: An event through which initial investors and founders can sell their shares to realize their profits. Examples include an IPO or acquisition.
  13. 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.
  14. Runway: The amount of time before a startup goes out of cash. Calculated by dividing current cash balances by the burn rate.
  15. Bootstrapping: Funding a business using personal resources or the revenue it generates, rather than seeking external investment.
  16. Pitch Deck: A brief presentation used by entrepreneurs to provide investors with a quick overview of their business plan during meetings.
  17. Due Diligence: The comprehensive appraisal of a business undertaken by a prospective buyer, especially regarding its assets and liabilities and its commercial potential.
  18. 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.
  19. 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.
  20. 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.
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