Suppose you’re an Operator with deep functional know-how in a specific industry. In that case, you already know every piece of slang or jargon necessary to sound like you aren’t speaking English to the everyday person. But, if you’re looking to make the switch into the fast-paced, hyper-growth-focused realm of venture capital-backed companies, there are a few more pieces of lingo to add to your arsenal to stop being an outsider.
Incubators are institutions (frequently having deep ties to a venture capital firm, or being one itself) that provide early-stage companies with mentorship, office space, a growth-focused community, and introductions to investors. The incubator is incentivized to provide these perks by either charging the startup a fee or taking equity in the project.
Like an incubator, startup accelerators provide introductions to key relationships, office space, and mentorship opportunities to a startup. The key difference is that accelerators are cohort-based with a fixed term (often 3-6 months), and the end result hosting a ‘pitch day’ with the founders of each startup telling their story to early-stage investors and angels. Accelerators will host earlier-stage teams and take a more hands-on approach with mentorship, prepping high-potential projects for venture capital investments. Accelerators will provide equity-free grant money, invest capital into the startup, or charge the startup a fee (never a good idea to pay for these sorts of things in our opinion). The most famous and successful startup accelerator is YCombinator, which has alumni companies such as Stripe, Instacart, Reddit, Airbnb, and Coinbase.
A startup is considered bootstrapped when the founding team uses their own personal capital to develop the project and pay the bills, and not taking any outside capital from angel or venture investors. Famous bootstrapped companies include Apple and Meta (Facebook).
Having an angel investor in your startup comes at a very crucial time (i.e. an angel). Angel investors are extremely early-stage investors, investing in startups in their infancy, thus receiving favorable valuations for a larger portion of equity, simultaneously taking on the most risk. Angel investors consist of wealthy individuals, and will not take an active approach to the growth of the startup, but often will provide key introductions for additional investors, mentors, and advisory board members.
A seed investment is the first official ‘round’ of a startup (although ‘pre-seed’ rounds are becoming more commonplace) where investors will participate in investing up to a certain target dollar amount. A seed-stage company is one that has a minimum viable product and early proof of concept.
When a startup is raising money, it will go through various ‘rounds’ of fundraising, each becoming larger than the previous, as the startup grows and additional traction is realized within the market. The most common rounds are Angel/Pre-seed, Seed, Series A, Series B, Series C, and Series D / Pre-Public / Mezzanine rounds. Typically after a Series C fundraise the startup will prepare to go public on the public markets to give access to all retail investors, which is revered as the holy grail of a startup founder (for the recognition of abilities as well as the payday).
A unicorn is a startup with a $1 billion valuation. There are roughly 1,000 unicorns existing today. Recent unicorns include Kraken, a cryptocurrency trading application, and GoPuff, a consumer goods delivery service. Similarly, a deca-corn is a company valued at more than $10 billion valuation, with a recent example being Klarna, an e-commerce ‘buy now, pay later’ company.
Deal flow is what investors use to define the amount or frequency of potential investments, pitches, and proposals that will come across their desks at any time. More deal flow is never a bad thing in the investment world, it’s all a numbers game, right?
Before any investment is made in a company or startup, a meticulous research process must be done by the investment firm to determine the true potential of the investment. The diligence process includes asking the team a long series of questions regarding the business, operations, legal, and product features to ensure there are no surprises post-acquisition, as well as determining where the investors would be able to add the most value once an investment is made.
If a startup is not yet profitable, determining its burn rate will show how much runway the company has left before it will have to shut down. Burn rate is the rate at that a startup is spending its money, oftentimes spending more than it is bringing in. The formula is the starting balance minus the ending balance, divided by the number of months. A good burn rate is typically 1/12 of the total available cash, which means that the startup will have at least twelve months of runway on hand at all times.
An NDA or Non-Disclosure Agreement is a contract between two parties to protect sensitive or confidential information, usually used during the diligence period to ensure the potential investor does not share trade secrets, sensitive information, or even the fact that the company is considering an investment or acquisition, with outside parties. NDAs are standard in all engagements, regardless of the investor or company.
After an NDA is signed, if the investment firm or acquiring party is looking to move forward with a purchase or investment, they will submit an LOI outlining the intended contract terms, pricing, and commitment. The LOI is non-binding but shows that the buyer or investor is serious about moving forward, and displays the rough terms, contingent on the confirmation of items from the initial due diligence.
A term sheet is a document used to outline the proposed terms of a proposed investment. The majority of terms are non-binding beyond confidentiality and exclusivity rights. Founders receiving a term sheet for the first time must take great care to understand everything being proposed, as there is a history of first-time founders being taken advantage of by aggressive investors. The main factors to look at within a term sheet are the valuation, board rights, investor protection, securities being issued, dealing with the shares, and various provisions.
The term sheet will often include pro-rata rights, especially for early-stage investors. These rights give the investing party the right, but not the obligation, to participate in future rounds of financing. For a high-potential startup that will be oversubscribed in future rounds, this can be essential for investors to continue their relationship with the founder and team as they grow.
A cap table is an extremely important document outlining the capital structure of the startup, showing the ownership structure of investors, founders, and employees. Every company’s cap table will amount to 100% ownership, and as the startup grows, the founders will have less ownership of the company as more employees are given equity, and more investors come into the picture.
A convertible loan is a form of financing via debt. Often when a startup is funded by an accelerator such as Techstars, they will provide an initial investment and a convertible loan which is a short-term piece of debt that is converted into equity once more money is raised. Convertible loans are favorable at times due to the simplicity of the document, speed of execution, and the debt not requiring immediate payment of interest. There are plenty of downsides that should not be overlooked, such as, until the loan is converted into equity, the investor has priority to claim assets, typically cash, to repay the loan. Convertible loans are not right for all startups, but there are countless examples of startups that were built on the breathing room that a convertible loan from a trusted investor provided.
Is the restructuring of the capital structure of a company, i.e. the debt and equity ratio. There are countless reasons to ‘recap’ a company, such as minimizing tax payments, implementing an exit strategy for the founders, or reorganizing the structure during a bankruptcy process.
When founders hire key employees and give equity, they will give a vesting period to ensure the equity is earned, and the employee is incentivized to stay longer-term with the company. This ensures that the employee is aligned with the startup and will be motivated to excel in their role and help the company grow. The standard vesting schedule is four years with a one-year cliff, meaning that one-fourth of the equity amount will be given after the first year, and the remaining balance will vest in equal monthly installments over the following 3 years.
Hopefully you learned something from the outline of common words used. Thanks to the Baader-Meinhof phenomenon, you will start to see and hear these words everywhere. If you're looking to work with the top venture capital firms and their portfolio companies, get in contact with us below to see if you're a fit.