“Startup” is a very broad term. You could be whipping a business together from scratch, all the way up to having a highly-trained team that is ready to take an industry by storm.
In pretty much every case, however, there’s one thing that unites startups: the need for startup capital. Acquiring the funds and investments needed to run your business is an entirely different ballpark than running a business. So, even though you might be extremely knowledgeable in your field, you’ll still need to do some brushing up on your investment vocabulary.
We’ve compiled a few of the vocab words that you’ll need to know in the process of getting funding for your startup.
Investment Vocabulary: Startups
This article is not so much about how to find capital, rather, it’s about how to talk about it. Use this as a cheat sheet when you’re actually making moves to make money.
1. Convertible Note
A convertible note is a way for investors to gain equity in a company. An investor could put money into a startup in exchange for shares or partial ownership in a company.
This may be a great way to attract investors if you don’t have a clear idea of how valuable your company will be. At the same time, make sure that you don’t give up too much equity, as it could put you in some hot water later on.
2. Burn Rate
Burn rate is the term that tells how fast a company is using up its capital before it actually starts to generate positive revenue. The rate is typically determined by a monthly calculation.
Take the amount of capital that a startup has and divide it by the amount that the company is spending every month. The result will give you how long the company can survive without generating more profit.
3. Venture Capital
Financing that investors give to startups that they believe will provide long-term growth is called venture capital. This money usually comes from wealthy individuals and financial institutions.
Venture capital can also come in the form of advice and expertise. If your startup holds the potential for huge gains, venture capital shouldn’t be too difficult to acquire.
4. Angel Investors
An angel investor is a single individual who invests their own money into a startup. This can be anyone but is usually a close friend or family member who supports and believes in you.
These investors usually don’t invest as much as venture capitalists do, but that isn’t to say that’s always the case. Angel investors can be found through your immediate social network, social media, or other means. In many cases, angel investors work in groups, so you may need to prepare presentations and persuade multiple individuals.
Incubators are experts or investors that support startups in their early stages in exchange for equity in the company. This usually comes in the form of expertise and some financial support.
Many tech companies have used this option because the value of an expert is invaluable when you’re starting up. Some people are even calling incubators “the new business schools” because they can give the same insight into the goings-on of particular fields.
6. Seed Rounds
A seed round is the first period of funding from venture capitalists. Capital comes in funding periods, and the seed round is typically up to one million dollars, meant primarily for the developmental stage of a startup.
Subsequent rounds are referred to in alphabetical terms. They are referred to as series’ or stages. When referred to as series’, you might hear things like “series B or series C.”
When they’re referred to as stages, you’ll hear terms like “formative stage or startup stage.”
Valuation refers to the amount of money that your company is worth. The term comes along with the terms pre-money and post-money valuation. Pre-money valuation refers to the worth of your company before you factor in the investments from angel investors or venture capitalists.
Post-money valuation refers to the value of your company when you do factor in the money given by investors. You receive valuations at every round of funding, so these terms will be very important to remember.
Vesting refers to the schedule that investors use to disperse the money to a company over time. You may, for example, receive 25 percent of the funds every year, getting the entire thing after four years.
This keeps a company in line and establishes staff loyalty. It’s also a way for investors to make sure their funds being used responsibly.
9. Initial Public Offering
Normally referred to as an IPO, this is a way of offering your shares to be bought by people in the general public. It is essentially a method of increasing value.
It’s difficult to get to the point that investment banks will allow you to go public, but doing so can yield huge returns. A very small percentage of companies actually end up going public, but it’s something to keep in mind and understand while you work your way up the ladder.
10. Exit Strategy
In business terms, this is essentially your plan of cashing out and leaving the company. In other terms, it’s your way out. Having a good idea of your exit plan can help you keep your ultimate goals in mind.
Companies typically get sold, acquired, merged, or liquidated.
Have a Startup of Your Own?
Understanding investment vocabulary will only get you so far. Sometimes, we need a little help getting on our feet. That can come through a number of means, but one of the most effective ways is to work with someone who’s been through it all before.