Posted on September 5, 2023
Author: Tether Admin
Decoding Startup Jargon: 50 Key Startup Funding & Investment Terms You Need to Know!
Hello, fellow Enthusiasts!
New to the world of startups, and the jargon is beginning to sound like Greek and Latin to you?
You’re not alone. For most of us, these terms seem to originate from another planet. One where the inhabitants communicate in acronyms, percentages, and ‘Series.’
Welcome to Tether Community’s definitive, unpretentious, and, might we add, entertaining guide to decrypting startup and fintech lingo. This is your red pill, decoder ring, and Rosetta Stone to understand the 50 crucial startup funding and investment terms. We promise no jargon will be left unturned! (We tried!)
This listicle is set to break down these ‘alien’ terms into easily digestible nuggets of wisdom. And who knows? We could share a chuckle or two along the way. Because who said learning about convertible notes and equity financing couldn’t be fun?
So, tighten your seatbelts and prepare for a fun-filled journey through the intricate labyrinth of startup terminology. By the end of this piece, you’ll be throwing around phrases like ‘angel investor’ and ‘pro-rata rights’ like a seasoned pro.
Oh, and before you dive in, know we’ve done you a solid – we’ve organized this monster of a list alphabetically. Because who doesn’t love a little order in the chaotic universe of startup lingo, right?
Let the fintastic learning journey begin!
An accelerator, also known as a startup accelerator or seed accelerator, is a program that provides a fixed-term, intensive support structure to early-stage startups.
Picture an adrenaline-filled training camp for startups providing a fast-paced, time-limited program to propel startups to new heights. With mentorship, education, resources, and even investment, accelerators ignite the entrepreneurial spirit, transforming budding ideas into successful businesses at warp speed.
It’s like strapping a nitro booster to a race car, giving startups the extra power and momentum to zoom past the competition.
An angel investor is a high-net-worth individual who provides financial backing for startups or entrepreneurs, usually in exchange for ownership equity. They are the guardian angels of the startup world, investing their own funds into a startup in its early stages and receiving a stake in the company in return.
Think of them as the fairy godmother who invested in Cinderella’s disruptive fintech startup, poised to revolutionize the digital payment landscape with her innovative glass-slipper crypto!
A great example would be Kunal Shah, the visionary founder of CRED and prolific angel investor. With his support, over 220 startups have flourished, shaping the vibrant fintech landscape of India.
An angel network or angel group is a collection of angel investors who come together to invest collectively, share research, and pool their investment capital. This approach helps mitigate risk and enables participation in larger funding rounds.
It’s basically a ‘book club’ for Angels with an entrepreneurial spirit. These networks are like the matchmakers of the startup world, connecting ambitious entrepreneurs with angel investors through renowned angel networks like Y Combinator or Techstars. These networks bring together a diverse community of investors, mentors, and industry experts, fostering collaboration and fuelling the success of countless startups.
An angel round refers to an initial investment round where angel investors fund a startup. In exchange, they receive equity or convertible debt.
This is the first official invite to the funding party for external investors. It’s the startup equivalent of a housewarming party; only the presents come in the form of funding.
AngelList is an online platform connecting startups with angel investors. With its Syndicates platform, AngelList brings together a dream team of angel investors, venture capitalists, and other startup aficionados, pooling their resources to fuel the growth of high-potential startups.
From its Silicon Valley headquarters, AngelList spread its wings to India as ‘AngelList India’ creating a fintech playground where investors and startups unite in pursuit of innovation and success.
To put it simply, consider it the ‘Tinder’ for startups, matching companies with investors based on their profiles and preferences. It’s a match made in one swipe!
When startups need to get from one financial round to the next, they cross the funding ‘river’ using a ‘bridge’ financing. It’s a short-term loan to bridge the gap between major financing rounds. It’s not the Golden Gate, but in the startup world, it’s just as important! It can involve a combination of loans, equity investments, or other forms of financing.
A cousin of bridge financing, this short-term loan helps companies maintain their operations during a financial ‘drought’, until a longer-term financing option can be secured. It’s like a temporary life jacket keeping the startup afloat.
A capitalization table, or cap table, is a spreadsheet or table that displays the equity ownership stakes in a company.
Think of the cap table as the startup’s equivalent to a family tree, outlining who owns what and how much. But instead of relatives, you’ve got shareholders, and instead of familial ties, there’s a maze of equity shares. It’s a dynamic map charting the evolution of the company’s ownership structure as it grows and scales.
Convertible equity is a financial instrument that provides investors with the option to convert their investment into equity ownership at a later stage, offering flexibility and shared potential in startup financing.
This is equity that’s playing hide-and-seek. Initially, it takes the form of a different type of investment, like a loan, but later transforms into equity under specific conditions. It’s the investment world’s version of a Transformer!
A debt instrument commonly used in early-stage startup financing, where investors provide a loan that can be converted into an equity at a later stage, typically during a future financing round or upon specific predetermined conditions being met.
Similar to convertible equity, a convertible note starts off as a loan but has the potential to transform into equity during a future funding round.
Imagine lending a friend $10, and instead of getting it back, you end up owning 10% of their lucrative cookie business! Consider convertible equity as the mysterious chameleon of startup investments, seamlessly shifting its form like a master of disguise. On the other hand, convertible notes are akin to a hidden treasure that reveals its true value over time, each marking its signature style in the world of startup financing.
Corporate Venture Capital (CVC):
This refers to a subsidiary that a large corporation creates to invest in promising startups.
This is when established firms suit up and become startup surfers, riding the waves of innovation in search of the next big wave to catch. Through Corporate Venture Capital (CVC), these firms invest in promising startups, riding the exhilarating tides of new ideas and cutting-edge technologies. It’s like joining a thrilling surf competition, where the established players show off their skills and aim to ride the crest of the startup wave all the way to success.
Crowdfunding is a way of raising funds by asking a large number of people each for a small amount of money. This is usually done via online platforms.
Let’s simplify here, when a flock of regular folks chip in small amounts to fund a project or a startup, that’s crowdfunding. It’s like passing around a hat at a concert, except it’s done online, and the funds help kickstart a new business rather than a music performance.
To give you a glimpse of the power of the crowd, let’s rewind to 2016, when the fintech sensation Revolut (Neobank & fintech app based in the UK) pulled a crowdfunding rabbit out of their hat, leaving everyone in awe. They raised a mind-boggling $20 million!
Deal flow refers to the rate at which business proposals and investment pitches are presented to financiers. For example, a venture capitalist might refer to the number of business plans or pitches they review over a certain period as their deal flow.
Imagine deal flow as the pulse driving the heart of investment, an exhilarating roller-coaster of opportunities from mergers to startup ventures, ever rushing into the investor’s horizon. It’s a relentless wave of possibilities, a tantalizing dance of growth prospects and financial windfalls, keeping investors in a ceaseless pursuit of the next big find in the business terrain.
Dilution occurs when a company issues additional shares, which reduces the existing shareholders’ ownership percentage in the company.
Dilution is the bittersweet dance in the world of startup investments. It’s like a squeeze of lemon in your refreshing drink, adding a tangy twist. Dilution occurs when additional investors join the party, causing existing shareholders’ ownership percentage to decrease, like letting a little air out of a balloon. So, while dilution may sting a bit, it often comes hand-in-hand with growth and the potential for a bigger pie in the long run.
A down round is a round of funding where investors purchase stock from a company at a lower valuation than the previous round, which usually indicates the company is struggling.
It’s not a merry-go-round but rather the opposite. A down round is when a company raises more capital but at a lower valuation than before. Not the most festive of events, but sometimes necessary to keep the lights on. For example, if a company’s Series B is raised at a lower valuation than its Series A, that’s a down round. So, imagine a startup disco where the beats may change, but the resilient dancers keep grooving to the rhythm of survival.
This refers to the comprehensive appraisal of a business undertaken by a prospective buyer to establish its assets and liabilities, typically before an acquisition or investment.
This is when investors morph into super sleuths channeling their inner Sherlock Holmes. Armed with magnifying glasses and an insatiable curiosity, they embark on a grand investigation, leaving no stone unturned. No one wants surprises after the deal is sealed!
An elevator pitch is a brief, persuasive speech that communicates your business idea in a concise and appealing manner.
Imagine you’re in an elevator with a potential investor and you have just the ride duration to turn them into a believer of your vision. The elevator pitch is your theatrical trailer, as it quickly, succinctly, and memorably presents your business concept, luring the listener to crave the full movie – your complete business plan.
Equity is a form of ownership interest in a company, representing the residual value after deducting liabilities. It provides shareholders with a stake in the company’s assets, earnings, and decision-making processes.
Simply put, equity is your piece of the company pie. As a startup owner, you begin with 100% equity, but as you raise capital, you give away pieces of this pie to investors. The hope, of course, is to bake a much larger pie with their help.
This is a form of crowdfunding where investors receive a stake in the company, usually in the form of equity shares.
Here, startups raise money from the crowd, but instead of getting promotional goodies or products, the backers receive a small ownership stake in the company. It’s like being able to own a tiny piece of your favourite indie coffee shop.
An exit strategy is a plan for a business owner or investor to sell their stake in a company or for the company to cease operations while limiting financial damage.
It’s not as grim as it sounds. An exit strategy is a way for an investor to ‘exit’ their investment, usually through a sale, merger, or an IPO. It’s like knowing the emergency exits in a movie theatre – you hope you never have to use them, but it’s good to know they’re there.
The funding gap is the shortfall between the funds needed to complete a project or business plan and the amount of funds currently available.
A funding gap refers to the difference between funds needed to finance a startup’s growth and the amount that can be raised from readily accessible sources. It’s like wanting a grand wedding but only having enough for a backyard BBQ – you need to find a way to bridge the gap.
A funding round is a discrete round of investment where a company raises capital from investors. Common rounds include seed, Series A, Series B, and Series C funding rounds.
Startup funding is like the high-stakes game show in reality TV, where investors become judges, and startups vie for their support. Each funding round, from seed to Series A, B, C, and beyond, offers investors a chance to ‘buy in’ and fuel the startup’s growth to the next level. It’s like a captivating show where dreams meet investment, and every round adds a new chapter to the thrilling journey of entrepreneurial success.
This refers to capital invested in a mature company to aid in the expansion, acquisitions, or restructuring of the company’s operations.
Growth capital, fuel for a startup rocket ship, is funding that will be used specifically to accelerate growth in a company that has already proven its business model. It’s like buying high-performance running shoes for a sprinter who’s already winning races.
In a stellar feat, PhonePe, India’s fintech sensation, secured a jaw-dropping $850M in recent funding rounds in 2023. This growth capital injection will turbocharge their expansion plans, adding more sparkle to their already dazzling lineup of services and offerings.
Growth equity is a type of private equity investment, usually a minority investment, in relatively mature companies that are looking for capital to expand or restructure operations.
This type of investment is made in more mature companies that are still seeking to expand or restructure operations, enter new markets, or finance a significant acquisition without a change of control of the business.
Think of growth equity like a robust cup of coffee for a night owl. It’s that potent jolt of capital for mature companies ready to stretch their wings into new territories, pull off a ninja-like business overhaul, or even gobble up another venture, all while keeping their steering wheel on the right course.
Initial Public Offering (IPO):
An IPO is the first sale of stock by a company to the public. Before an IPO, a company is considered private, and its shares are not available to the general public.
Welcome to the grand stage of startup financing, the IPO! This is akin to turning your intimate jam session into a sell-out stadium gig – it’s no longer a hush-hush affair for close acquaintances but a rock concert where anyone can score a ticket.
A lead investor is an individual or firm that commits the most capital in a financing round and plays a significant role in negotiating the investment terms.
Visualize the lead investor as MS Dhoni and the startup world as the 2011 ICC World Cup. He’s the one who scores the most thrilling sixes (largest investments), astutely devises game strategies (shapes deal terms), and often holds the coach’s unwavering confidence (a pivotal board seat). It’s like captaining an invincible cricket team, with the cricket ground morphing into an expansive landscape of liquid assets.
Mezzanine financing is a hybrid of debt and equity financing that gives the lender the right to convert to an ownership or equity interest in the company if the loan is not paid back on time and in full. Private equity investors commonly use this to reduce the amount of equity capital required to finance a leveraged buyout or major expansion.
Picture mezzanine financing as the Swiss Army knife in the financial world – a slick combo of debt and equity financing. It starts off as a loan, but – presto change-o – it can morph into company ownership if the repayment is delayed. Much like an undercover agent in a Hollywood flick, it allows private equity investors to pull off thrilling buyouts or grand expansions, all while keeping their equity capital safe in the vault.
Non-dilutive funding refers to financing that doesn’t require surrendering company ownership in exchange for capital.
Imagine non-dilutive funding as that birthday cash gift from a rich uncle – it bulks up your wallet without any ownership claims! You’re in charge; you call the shots, no puppet strings attached
Take the real-life story of UK-based fintech startup, Clear Bank. In 2019, they received a hefty £60 million in non-dilutive funding from the RBS Alternative Remedies Package. This enabled them to turbocharge their innovative banking services without relinquishing a slice of their ownership pie.
An option pool is a portion of a startup’s equity reserved for future employee compensation, often distributed as stock options.
Picture the option pool as a tantalizing treasure chest filled with golden equity nuggets. No, it’s not a swanky dip pool for office parties, but a stash of potential fortune set aside to lure and hook top-notch talent. It’s like promising them a potentially lucrative slice of the ever-growing startup pie – who wouldn’t be tempted?
This refers to the estimated value of a company after outside financing and/or capital injections are added to its balance sheet.
Imagine post-money valuation as the ‘after’ photo in a home makeover. It’s the spruced-up estimate of your company’s worth after it’s been jazzed up with a fresh coat of outside investments. If your firm was worth a cool million ($1M) and you’ve successfully wooed half a million ($0.5M) in investments, voilà, you’re now prancing in the $1.5 million league!
The pre-money valuation is the value of a company before it goes public or receives external funding or financing.
This is the value of a company before it goes through a round of financing. It’s the ‘before’ in the ‘before and after’ snapshot of a company’s value related to a funding round. Picture a group of investors sizing up your business, much like antique experts at an auction. They agree that your company, in its untouched glory, is a gem worth $8 million. Smitten by the potential, they inject $2 million. That initial $8 million assessment is your pre-money valuation. Then, with their contribution, your business modestly steps into a $10 million post-money valuation.
Pre-seed funding is the initial capital sourced by founders or close associates, typically used for market research, product development, or drafting a business plan.
Think of pre-seed funding as the ‘pocket-money’ phase in the startup journey, the first baby step towards bigger financial adventures. It’s like cobbling together the loose change from your piggy bank to fuel that inaugural coffee-fuelled brainstorm.
Preferred stock represents shares that confer certain priority rights to holders, such as precedence in dividend payouts and asset claims in case of company liquidation.
Imagine preferred stock as the first-class ticket in the equity airlines. Like flaunting a VIP badge at a crowded concert, holders of preferred stock get their dividends dished out first and stand higher in line for assets if the business hits the skids. It’s an exclusive pass to the financial thrill ride!
It’s Latin for ‘in proportion.’ In this context, it’s Latin for, “No one’s stealing my seat.”
Consider pro-rata rights as your VIP reservation at your favorite pizza joint. Picture it this way – you love your Margherita so much that you always want to keep 10% of any pizza that gets served to your table. So, if a new, larger pizza (future funding round) is served, you still want your 10% – no matter how many new slices that might be in this size of pizza. It’s your golden ticket to maintain your rightful claim, ensuring no one can snatch your cheese-laden delight, no matter how crowded the table gets!
Return on Investment (ROI):
ROI measures the gain or loss made on an investment relative to the amount of money invested.
ROI is the holy grail every investor is on a quest for. It’s the yardstick of how much bang you’re getting for your buck. Imagine it as a fishing expedition – the goal isn’t just to cover the cost of your rod and worms, but to reel in a fish big enough to justify the whole early morning adventure. It’s about ensuring your investment splurge lands you a profit-sized catch!
Risk capital denotes funds earmarked for high-risk investments, which, while susceptible to complete loss, can yield considerable returns if successful.
Risk capital is the adrenaline junkie within the investment sphere, akin to embarking on an extreme mountaineering expedition: there’s a significant risk of losing it all on the perilous ascent, yet, conquer the summit, and you’re rewarded with an unparalleled, exhilarating view. It’s a daring escapade where both the risks and the potential rewards reach astounding heights!
Runway refers to the amount of time a startup can continue to operate before it runs out of cash, calculated by dividing the current cash position by the monthly burn rate.
Picture your startup as an airplane taxiing for take-off. Your ‘runway’ is the amount of financial tarmac you’ve got before you either take off (become profitable) or run out of asphalt (cash). The longer the runway, the higher your chances of achieving lift-off before needing to refuel (secure more funding).
A SAFE (Simple Agreement for Future Equity) is a contractual arrangement offering an investor the right to acquire future equity in a company, typically at a discount.
Imagine SAFE as the “rain-check” of the startup investment world. It’s like buying an option for an ice cream cone at today’s price, redeemable when the ice cream shop is restocked with your favorite flavor in the future. For example, if an investor pumps money into a startup via a SAFE, they’re betting on getting a bigger slice of the equity pie when the company goes for its next significant round of funding, and their bet is locked at a discount.
The secondary market is a platform facilitating investors to transact in securities they already possess.
Key examples in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
Consider the secondary market as the thrift shop of the financial realm. Here, investors display their previously treasured shares for others to acquire, injecting a splash of liquidity into their investment collection. It’s not just a run-of-the-mill marketplace; think of it as the stock manifestation of an upscale consignment store!
Seed funding refers to the initial investment to kickstart a business, often used for product development and market research.
Picture seed funding as the “let’s get this party started” stage of a business venture, the very first injection of official equity funding. It’s like planting the initial seed in your startup garden, with hopes of nurturing it into a towering tree of success.
This type of investor provides capital but does not have any involvement in the management of the business. It’s like having a silent partner in a group project, they contribute, but you never hear from them.
Silent investors are the ninjas of the business world: they slip in their capital but stay stealthily hidden from day-to-day operations or decision-making. Imagine you’re in a band, and you’ve got a benefactor who funds your smashing world tour but never suggests a song – that’s your silent investor.
Startup valuation is the estimated worth or value of a startup company as derived from its present and potential future performance.
In the startup world, coming up with your startup’s valuation is akin to a modern-day gold prospector estimating the worth of an unexplored mine. It’s a blend of science, art, and crystal ball gazing, taking into account your current standing, growth potential, and the market’s whimsical moods. Just as a prospector weighs nuggets and considers gold veins, valuing a startup involves a delicate balance of tangible assets and intangible potential.
A syndicate is a group of investors who pool their resources together to invest in large transactions.
Think of a syndicate as an investment Avengers squad, pooling their resources together to pack a mighty punch in the finance realm. Each investor brings their unique skills to the table with a shared goal: backing startups that promise a bright future. So, they’re not fighting off alien invasions, but their collective efforts could empower the next big thing in tech.
A term sheet is a non-binding document detailing the preliminary terms and conditions for an investment.
Picture a term sheet as the ‘sneak peek’ trailer for an upcoming blockbuster investment deal between startups and investors. It unveils the star cast (the parties involved), plotline (the basic terms), and potential climax (the deal structure). Yet, like any good trailer, it leaves enough room for suspense, as it’s tentative and subject to change.
A tranche is a portion of money or investments that are divided into specified amounts released once certain agreed-upon milestones have been met.
Imagine baking a layered cake; you wouldn’t pour all the batter into the pan at once. Instead, you’d add each layer (or tranche) as the previous one cooks and is ready.
Similarly, in the investment world, tranches ensure that a company only receives new funding once they’ve successfully met specified milestones, proving they’re a good investment ‘bake’.
A unicorn is a privately held startup company valued at over $1 billion.
In the land of startups, the term ‘unicorn’ has been creating ripples for quite some time, much like a buzzword that refuses to fade! Representing a rare breed of startup entities that have crossed the mystic valuation barrier of $1 billion, they stand as towering figures, adding an enticing allure to the entrepreneurial saga. Just as unicorns are coveted in mythical tales, these high-value startups have become the aspirational benchmark in the real-world business landscape!
A valuation cap is a predetermined maximum company valuation, post which convertible note holders can opt for equity conversion.
Imagine a convertible note as an elevator in the skyscraper of startup finance. The valuation cap is the topmost floor it can reach before its passengers, the investors, must step out and convert their notes into equity shares. It’s a ceiling that sets the stage for equity stakes, preventing an overly generous ascension of the company’s valuation.
Venture Capital is a subset of private equity, specifically targeting startups and early-stage companies with a high growth trajectory.
Venture Capital is the titan of startup financing, the game-changer, injecting substantial capital into fledgling businesses poised for greatness. Much like a master gardener sowing seeds, venture capitalists cultivate promising startups, nurturing them with capital, expertise, and connections. Their investment can turn a modest seedling into a flourishing tech giant, proving that with venture capital, not only the sky but space could be the limit.
A Vesting Schedule is a legal document that stipulates the periods and terms in which an investor or employee acquires full ownership of their equity stake or stock options.
Imagine a Vesting Schedule as an enticing treasure map, guiding stakeholders toward their hard-earned equity gold. It’s a meticulously plotted timeline that represents their journey to full ownership, transforming mere promises into tangible assets. Instead of digging for buried treasure, they’re steadily unlocking access to their piece of the corporate pie, one slice at a time.
A warrant is a financial instrument granting its holder the option to purchase a company’s stock at a predetermined price during a specified period.
Envision a warrant as a golden ticket, unlocking the power to acquire shares at your own terms and timing. It’s the financial world’s answer to a backstage pass, securing your spot to purchase the ‘show’ (shares) at a ‘set price’ (ticket fee), regardless of future sold-out scenarios. It’s not just about access, it’s about the choice and control in the grand concert of investment.
A washout round, also known as “burn-out” or “cram-down,” is a funding round where new investors acquire a substantial or controlling interest, causing substantial dilution for existing investors.
Imagine a washout round as an unexpected plot twist in a startup’s narrative, where new characters (investors) take center stage, relegating the earlier protagonists (previous investors) to the sidelines. The original cast still gets to act, but their roles are notably reduced, much like receiving a shrunken piece of your favorite pie when surprise guests show up at your party. It’s not just about dwindling shares; it’s a realignment of the power structure in the company’s story.
And there you have it, folks! We’ve traversed the turbulent sea of startup jargon, breaking down these complex terms into bite-sized, digestible (and hopefully humorous) morsels. So, whether you’re an aspiring entrepreneur, an investor, or a curious bystander, we hope you’ve gleaned some insights into the mysterious language of startup funding and investment.
Now, we’d absolutely love to hear from you! Got any more terms that baffle you? Or perhaps you have a unique way of remembering these terms? Dive into the comment section below and share your thoughts, let’s keep this conversation flowing.
Remember, in the world of startups, the only foolish question is the one left unasked. So, go ahead and dive right in! See you on the other side, folks!
To paraphrase a certain fishy Pixar character – Just keep swimming…in this case, swimming in the startup sea!