Starting a business involves more than just a great idea; it requires a solid understanding of the financial landscape that will fuel your startup’s growth. If you’re navigating the world of startup funding for the first time, the jargon can be overwhelming. Terms like “equity,” “burn rate,” “Series A,” and “dilution” are frequently thrown around, but understanding them is critical to your success.
This guide breaks down 50 essential startup funding terms you need to know as a founder.
If you’re also curious about the specific stages of startup funding and the key players involved, check out our detailed guide on How Startup Funding Works: Key Stages and Investors. It provides an in-depth look at the various rounds of funding and the roles of investors in each stage, complementing the terminology discussed here.
1. Venture Capital (VC)
Venture capital is one of the most common types of funding for high-growth startups. Venture capitalists invest money into startups in exchange for equity, aiming for high returns if the startup succeeds. These investors typically take an active role in guiding the business toward its growth milestones.
2. Angel Investor
An angel investor is an individual who provides financial backing to startups in their early stages. Unlike venture capitalists, angel investors often use their own money and typically take smaller stakes in the company. They usually invest in exchange for equity and can also provide valuable mentorship.
3. Seed Funding
This is the first official equity funding stage for most startups. Seed funding is used to finance the early development of a company, including product development and market research. It often comes from angel investors or seed-stage venture capitalists.
4. Series A, B, C Funding
As a startup grows, it may go through multiple rounds of funding—Series A, B, and C. These rounds are used to fuel expansion and scale the business. Each round generally raises more money than the last, and the startup’s valuation increases as it gains more traction.
- Series A: The first significant round of venture funding, focusing on optimizing the product and scaling the business.
- Series B: Helps businesses expand, recruit talent, and build a robust business model.
- Series C: Typically used for scaling operations and preparing for an IPO.
5. Valuation
A startup’s valuation represents its economic worth. There are two key types of valuation:
- Pre-money Valuation: The company’s value before receiving external funding.
- Post-money Valuation: The company’s value after receiving investment.
6. Convertible Note
A convertible note is a type of short-term debt that converts into equity during a future funding round. This is a common tool in seed-stage financing, where determining a valuation may be difficult.
7. Burn Rate
The burn rate refers to how quickly a startup is spending its cash reserves. Understanding burn rate is crucial to ensure your startup doesn’t run out of money before raising the next funding round.
8. Runway
Runway is the amount of time a startup can continue operating before it runs out of money. It’s calculated by dividing the company’s current cash balance by its monthly burn rate.
9. Dilution
When a startup issues new shares during a funding round, the ownership percentage of existing shareholders decreases. This is known as dilution, and it’s something founders need to keep an eye on when raising funds.
10. Term Sheet
A term sheet is a non-binding agreement that outlines the key terms and conditions of a proposed investment. This document serves as a blueprint for future legal agreements.
11. Cap Table
The cap table, or capitalization table, is a document that shows the ownership stakes of all shareholders in a company. It’s important for tracking dilution and planning for future funding rounds.
12. Equity Financing
Equity financing involves selling shares of your company to raise money. Investors, in exchange, receive a stake in the business. This is a common method for startups to raise capital without taking on debt.
13. Debt Financing
Unlike equity financing, debt financing involves borrowing money that must be repaid with interest. Debt can be an attractive option for startups that don’t want to give up equity but need capital to grow.
14. Convertible Preferred Stock
Preferred stockholders often receive certain privileges over common stockholders, including liquidation preferences. Convertible preferred stock can convert into common stock at a predetermined rate, giving investors flexibility and protecting their investment.
15. Anti-Dilution Clause
This provision protects investors from losing ownership percentage when new shares are issued at a lower valuation than their initial investment. It’s common in venture capital agreements.
16. Pro Rata Rights
Pro rata rights allow investors to maintain their ownership percentage in subsequent funding rounds by purchasing additional shares.
17. Exit Strategy
An exit strategy is a plan for how investors will eventually “exit” the company and recoup their investment, typically through an acquisition or IPO.
18. Liquidity Event
A liquidity event is an occurrence that allows investors to cash out their shares, such as a merger, acquisition, or IPO.
19. IPO (Initial Public Offering)
An IPO is when a company’s stock is offered to the public for the first time. This is often the final step for a startup to provide liquidity to its early investors.
20. Lead Investor
The lead investor is the main party in a funding round, usually contributing the largest sum and setting the terms for the round. They often help attract other investors.
21. Revenue
Revenue is the income generated from normal business operations. It’s a critical metric investors look at to gauge the success and potential of a startup.
22. SAFE (Simple Agreement for Future Equity)
A SAFE is a financial contract where an investor provides startup funding in exchange for the right to receive equity at a later time. It’s often used during seed funding.
23. Customer Acquisition Cost (CAC)
This refers to the cost of acquiring a new customer. CAC is calculated by dividing total marketing and sales expenses by the number of new customers.
24. MVP (Minimum Viable Product)
A Minimum Viable Product is a version of a product with just enough features to attract early adopters and validate a product idea.
25. Bridge Loan
A bridge loan is a short-term financing solution used to maintain cash flow while waiting for long-term funding.
26. Cap
The cap in a convertible note or SAFE determines the maximum company valuation for converting investor funds into equity.
27. Interest Rate
In convertible notes, the interest rate doesn’t accrue in cash but instead adds to the number of shares the investor receives when the debt converts into equity.
28. Mezzanine Financing
Mezzanine financing is a hybrid of debt and equity financing that gives the lender the right to convert to equity if the loan is not repaid.
29. Lock-Up Period
The lock-up period refers to a specific time after an IPO during which certain shareholders cannot sell their shares.
30. Drag-Along Rights
Drag-along rights allow majority shareholders to force minority shareholders to participate in the sale of the company.
31. Tag-Along Rights
Tag-along rights give minority shareholders the ability to sell their shares when a majority shareholder sells theirs.
32. Liquidity
Liquidity is the ease with which an asset, like equity, can be converted into cash.
33. Incubator
An incubator provides resources like office space and mentorship to startups in exchange for equity.
34. Accelerator
Similar to an incubator, an accelerator provides mentorship and resources but typically focuses on speeding up growth within a limited time frame.
35. Unicorn
A unicorn refers to a privately held startup that reaches a valuation of over $1 billion.
36. Equity Stake
An equity stake refers to the percentage of ownership that an investor holds in a company.
37. SaaS (Software as a Service)
SaaS is a software licensing model in which users subscribe to software rather than purchasing it outright.
38. Pro Forma
Pro forma financials are projections of future financial performance based on current or proposed business operations.
39. Non-Disclosure Agreement (NDA)
An NDA is a legal agreement to protect sensitive information shared between parties.
40. Preferred Stock
Preferred stock gives investors priority over common stockholders when receiving dividends or liquidation proceeds.
41. Common Stock
Typically held by founders and employees, common stock gives shareholders voting rights but is riskier than preferred stock.
42. Follow-On Financing
This refers to additional funding provided to a company by investors who have already invested in it before.
43. Due Diligence
Due diligence is the investigation process an investor conducts to assess the viability of investing in a startup.
44. Harvesting Stage
The harvesting stage is the phase in a venture capital fund’s life where it focuses on exiting investments and returning capital to investors.
45. Convertible Preferred Stock
This type of preferred stock can be converted into common stock at a predetermined conversion ratio, providing investors with flexibility.
46. Initial Coin Offering (ICO)
An ICO is a fundraising method where startups issue tokens or cryptocurrencies in exchange for investment.
47. Crowdfunding
Crowdfunding allows startups to raise small amounts of money from a large number of people, usually through an online platform.
48. Cliff Vesting
In cliff vesting, employees or founders do not receive any shares until they’ve stayed with the company for a specific period.
49. Vesting Schedule
A vesting schedule outlines how and when employees or founders will earn their equity over time.
50. Liquidation Preference
This ensures that investors get their money back before other shareholders in the event of a liquidation.
With these 50 essential startup funding terms, this guide is now complete! Understanding these terms gives founders the foundation to navigate the complex world of startup financing, build strong relationships with investors, and make informed decisions that will ensure their startup’s growth and success.
