Collection of specialized terms
Collection of specialized terms
Privately or publicly funded initiatives supporting startups for a predetermined period of time. They attempt to accelerate the development process of the company. The assistance is typically restricted to a few months and can be in form of transmission of know-how, coaching, or a boot camp. Accelerators often receive in return future revenue participation or even equity. Often boot camps terminate with demo days, where the business concept is presented to potential investors.
A term mostly used in the United States, it is defined in SEC Rule 501 of Regulation D as a wealthy investor/institution to whom the company can sell its securities under the registration exemption.
An accredited investor can be:
An adviser or advisor is normally a person with more and deeper knowledge in a specific area and usually also includes persons with cross-functional and multidisciplinary expertise. An adviser’s role is that of a mentor or guide and differs categorically from that of a task-specific consultant. An adviser is typically part of the leadership, whereas consultants fulfill functional roles
Investments in a non-traditional asset class. Traditional assets are usually stocks in listed companies, bonds, and cash. Alternative investments include, for example, real estate and derivatives, and any asset classes that are speculative or very high-risk.
High-risk investments are made by business angels, who provide seed financing for startups and also support them with know-how, experience, and personal networks.
An angel investor (also known as a private investor, seed investor, or angel funder) is a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company. Often, angel investors are found among an entrepreneur’s family and friends. The funds that angel investors provide may be a one-time investment to help the business get off the ground or an ongoing injection to support and carry the company through its difficult early stages.
Angel round is when you raise from Individual investors. It could come before seed or after a seed round.
A clause that protects the investor to prevent a subsequent issue of the equity from being made at a lower price than the investor originally paid. This protects the original investment or value from being diluted. Types of commonly-used anti-dilution protection include a full ratchet and weighted average. An anti-dilution clause is often included in the shareholder’s agreement or investment terms.
The process of comparing a company’s performance, costs, products, or strategies to those of leading firms, peers, or standards within the industry. Also used for the valuation of early-stage companies by comparing them to known examples.
A method for valuing pre-revenue startups. According to Berkus, the value depends on 5 main drivers: soundness of idea, quality of management team, quality of board, prototype, and product sales. Typical valuations range from 1 to 6 million US Dollars.
An interest-bearing debt instrument that governments and businesses use to borrow funds. Bonds are an alternative to bank loans and can be secured or non-secured, listed or non-listed.
A short-term loan is used in anticipation of a permanent loan or financing in order to meet current obligations.
The rate at which a startup is spending its capital to finance overhead before generating a positive cash flow. It is a measure of negative cash flow. The burn rate is usually quoted in terms of cash spent per month. For example, if a company is said to have a burn rate of $1 million, it would mean that the company is spending $1 million per month.
Individual investors who provide capital and support for startups and entrepreneurs. Usually, they bear very high risk and therefore they seek a high return on investment.
Business Model Canvas is strategic management and lean startup template for developing new or documenting existing business models. It is a visual chart with elements describing a firm’s or product’s value proposition, infrastructure, customers, and finances.
A written, formal description of a business that usually contains information at least on financial data, strategy, products and services, market analysis, and marketing plan.
A buyback, also known as a share repurchase, is when a company buys its own outstanding shares to reduce the number of shares available on the open market. Companies buy back shares for a number of reasons, such as to increase the value of remaining shares available by reducing the supply or to prevent other shareholders from taking a controlling stake.
A business plan template is often used by startup companies. It is a short and visual alternative to the traditional business plan and can be specifically geared towards startups. Specific variants include the Business Model Canvas, the Lean Canvas, and the Startup Canvas.
A specific kind of convertible debt. When notes are converted into equity the conversion valuation is capped or sealed, i.e the minimum conversion rate for the investor is fixed. This is considered a more favorable term to the investor than uncapped notes which have no such guarantees.
Compensation for a fund manager in the form of a share of profits of an investment. The purpose of the carried interest is to act as an incentive for the fund manager to improve the fund’s performance.
Specific conditions precedents that have to be met before one or both parties to an agreement have to honor their obligations in full. The parties concerned have no obligation to proceed with the agreement while closing conditions remain unsatisfied or incomplete.
The date when a transaction is brought to completion.
Investments did by an investment club, formed by a group of people for the purpose of pooling money and investing into several companies.
Investments into a company alongside other investors in the same round (but not necessarily a group of investors stable over time/several investments).
The risk of a loss of market share due to changes in the market or actions of competitors.
Rights to convert an existing type of investment into another. For example, a convertible bond gives the bondholder the right to convert the bond into shares (equity).
Debt that can be converted into shares (equity).
A term that is used when a company either invests internally in innovation and the development of a new product, makes an external investment in another company or creates an alliance with another company for innovation purposes.
Online services and communities make it possible to collect small financial contributions from a large group of people. This is an alternative to traditional loans or investments from friends and family, angel investors, and venture capital to finance production or services.
A framework with the purpose of validating the market for a product or service and building the right one for customers. The concept is an addition to the framework of product development. The 4 stages defined by customer development are customer discovery, customer validation, customer creation, and company building.
A secure location where confidential data and information about a target company are made available to potential investors or acquirers during a due diligence process.
The stream of investment opportunities that reach an investor (in whichever form – business plans, pitches at events, etc.).
The process of investors to quickly reduce the (usually very large) number of received investment opportunities (deal flow) down to the few most promising ones which warrant the further effort. Guided by the criteria of a suitable personal investment strategy prepared in advance.
The terms and structure of a transaction, whether it involves equity, bonds, convertible notes, or other ways to raise startup capital.
A type of financing where a company or government entity issues and sells bonds to finance its activities. An alternative to the traditional bank loan.
Any risk to the effectiveness or efficiency of the creation of a new product or service, for example, technical infeasibility or major delays.
Occurs when the percentage share of an original stake in a company decreases due to a new investment round where new shares are issued.
Acquisition of controlling interests or significant minority interests typically still permits some active control over future decisions.
Disruptive startups are those few that fundamentally change the way their industry works, often creating new markets or value networks in the process, for example through an unexpected but vastly superior business model.
The distribution of earnings (profits) to shareholders.
A situation where a company is financed by new investors at a lower valuation compared to earlier rounds.
The right of the majority shareholder to drag (force) the minority shareholder to sell its shares in the company along with the majority shareholder.
The process through which a potential buyer or investor carries out an in-depth analysis of a target company. Started only after there is already a clear and serious interest (because of the amount of work involved) and to be finished before the transaction gets signed. Basically a risk management exercise.
Short and focused presentations of business ideas. Should give a quick overview of the most important facts and a call to action. The presentation should not last longer than an elevator ride.
A term used mainly in the venture capital industry. It refers to an experienced entrepreneur with a lot of know-how in a particular area. An entrepreneur in residence can fulfill different roles such as looking for new entrepreneurial ventures, assisting in the evaluation of potential investments, and acting as a mentor for portfolio companies.
Investment in exchange for company ownership (equity).
The moment a company reaches growth momentum that puts it ahead of the competition.
The different routes available to company owners to sell (usually all of) their shares. Commonly sought exit channels are the sale to a strategic buyer, the sale to a financial buyer, or an initial public offering; other possibilities include a repurchase or simply liquidation.
Exiting an investment by selling or transferring one’s ownership stake in a company.
A company or structure that is established to manage the investments of a single wealthy person or family.
Type of exit where a company is sold to a financial investor, like a private equity fund who is interested mainly in the return on investment.
An attempt by a company to raise capital. Common terms include seed for the very first round, Series A/B/C, etc. for successively larger rounds, terms describing the types of investors involved (e.g. angel rounds or venture capital rounds), terms describing the purpose of the round (e.g. growth or expansion capital for strategically increasing capacity, bridge loans for the short periods of time), and terms describing the character of the investment instruments used (e.g. mezzanine can be a hybrid between debt and equity).
Any financing rounds after the first one.
Business model by which a basic version of a service or product is offered for free but if users want to use enhanced features, they have to upgrade to a paid version.
An investment fund that invests in other funds.
Financing the activities of the company through equity investment or other instruments such as convertible notes.
A fun, intense, and caffeine-filled collaborative gathering of software developers and other contributors to create an app or service. Hackathons often last 48 hours with little or no sleep.
A chart that resembles a hockey stick and projects fast growth
Facilities were established for startups and companies in the early stage for the purpose of supporting them with office spaces, management training, marketing assistance, or access to some form of financing. Incubation programs are often sponsored by economic development organizations, government entities, or academic institutions.
Often used in the shareholder’s agreement and mainly designed for minority investors to secure their access to crucial information regarding the company in which they have invested.
A securities transaction where a company offers its stock to the public for the first time. Usually abbreviated IPO.
Legal rights of owners of intangible assets, for example, trademarks, copyright, patents, designs, and trade secrets.
The interest rate is used to measure the profitability of investments, which makes the net present value of all cash flows from a particular project equal to zero.
A contract that states the rights and obligations of parties to an investment. The agreement can be made between investors, investors and an investment manager, etc.
A regulated financial institution that provides various financial consulting services such as capital-raising, M&A, trading, etc.
Different investors can provide different kinds of support to their portfolio companies, especially among business angels. They can act as advisors, board members, etc. Economic scientist Roland Engel classifies early-stage investors into five types: Cowboy (provides all resources except materials), Big Boy (financial investor), Landlord (assists startups through infrastructure or tangible materials), Co-founder (actively participates also on the operational level), and Godfather (has a strong network, participates in management).
Furthermore, if several investors invest at the same time in the same company, they can distribute their work amongst themselves and one can then distinguish between different roles during the investment process itself.
Initial public offering
Intellectual property rights
Internal rate of return
The process of (usually planned) repetitions of particular actions with the goal of getting better results each time due to learning effects. Iteration is important in the Lean Startup movement which focuses on iterating and reengineering products and services on the basis of feedback received from customers.
When several investors invest in the same company, one of them usually takes a more active role managing the process both before the investment (e.g. due diligence) and afterward (e.g. monitoring progress). Sometimes, the lead investor is granted an additional financial incentive by the other investors.
An approach to the process of building a company emphasizes learning by doing. Especially suited for startups with relatively little capital seeking to bring products or services to the market as soon as possible without complex pre-planning.
Using borrowed capital to purchase the company from its current owners.
The shutting down of a company through dissolution or bankruptcy. Confusingly, in venture capital parlance, it sometimes marks an exit – the sale or transfer of a company to a third party.
The preferred right of a venture investor to receive proceeds of the company before other shareholders in case of liquidation (dissolution, bankruptcy, or sale).
Any risk a business faces with regard to its (potential) customers, for example, whether they will buy a product now being developed, whether the market will experience crises or shrink permanently, etc.
Subordinated debt or preferred equity that is payable after the senior debt has been paid, with an option to convert subordinated debt into equity if debt obligations are not met.
Milestones are defined (planned) major achievements. In the context of investing, they can be used as conditions with tranches or ratchets.
A variation of the Berkus method for placing a financial value on pre-revenue startups. A major motivation is to take changed market conditions into account by reducing each driver to a maximum of half a million US Dollars. The method has also been modified to include entry barriers and strategic alliances.
Modified Berkus method
Valuation using multiples or relative valuation is a method of estimating the value of an asset by comparing it to the market value of similar or comparable assets on the basis of defined indicators (e.g. revenues or profits).
A legal contract stating restricting the sharing of certain information or knowledge beyond the involved parties.
Stock option agreement
Stock option plan
Stock option pool
The act of investors not getting involved in a particular investment opportunity presented to them. This does not imply that they don’t like the idea. The decision may be due simply to the fact that they are focused on different deal sizes, industries, etc.
A provision in venture capital where existing investors are forced to invest pro-rata in a subsequent round. Non-compliant investors will be penalized. Normally, used in next-round investments which are known as down rounds.
A concept popularized by the lean startup movement. It means that companies deliberately and substantially change their direction based on what they have learned in the past. Pivoting implies that startups make use of prior experience and apply the insight in new areas.
All current investments are made by an investor.
The value of a company is calculated after a round of funding.
The value of a company is calculated before a round of funding.
Pre-revenue refers to the early phase of startups when they do not yet generate income because they are still developing their first products.
Investment in a private company that is not listed on a stock exchange. The term is also often used to refer to later-stage transactions, as opposed to e.g. business angel or early venture capital rounds.
A right of investors to participate in future financing rounds, proportional to their already committed investment.
The money is provided to private companies by public institutions such as government agencies. Examples are government grants for research and loans through economic development banks.
The process checking recently developed goods to see whether specific requirements and standards are met. The aim is to identify defects before they get to customers.
Various types of anti-dilution provisions to protect existing shareholders. Full ratchet anti-dilution protection allows an investor to have their ownership percentage remain the same as it was after the initial investment in case the next funding round is completed at a lower valuation. Weighted average anti-dilution protection considers the weighted average price and size of the funding rounds.
Internal rate of return
The right of an investor to request the company to buyback (redeem) the investor’s shares.
An asset-valuation method that assesses the cost of replacing the asset with another of equal value and character.
A repurchase of outstanding securities by a company that wants to reduce the number of shares issued. By canceling the shares being bought back, the value of the remaining shares increases. Also called a buyback.
A preferential right of a shareholder to buy new shares in the company before a third party.
A rule of thumb for angel rounds, often employed as a sanity check for valuation ideas. It stipulates that typically around a third of the company equity will go to investors, another third will be held by the founders, and the final third will be reserved for employees (in an option pool).
The amount of time a startup has until it goes out of business, given the funding situation and assuming that income and expenses stay constant. The runway is calculated by dividing the current cash position by the current monthly burn rate.
The ability of a business to grow very large very fast. For example, selling e-books (where delivery is cheap and delivering many more can be done almost instantly) scales better than consulting (where new employees have to be hired and trained in order to deliver more).
Buying stock from an existing shareholder.
Borrowed money that a company must repay first if it becomes insolvent. If the company goes bankrupt, the holders of each type of financing have different levels of rights to the company’s assets.
Agreed terms between a company’s shareholders that govern its management and operation.
Co-investment funds that invest alongside (top-up) defined types of transactions (for example angel rounds with a certain minimum size).
Approximate indications of the current phase of a company’s development. Common terms include seed or ground floor for the very first phase, early vs. mid vs. later stage, and descriptive characterizations like proof of concept.
A company in the early stages of development, which seeks to create a new product or service under significant uncertainty. Economically interesting startups have a large growth opportunity in the first few years.
The right to buy or sell a company’s stock at predetermined conditions (price, quantity, time).
Stock option agreement
Stock option plan
Stock option pool
An agreement that gives investors, shareholders, or employees the right to buy or sell stock at predetermined conditions (price, quantity, time).
A benefit plan set by the company gives investors, shareholders, or employees an opportunity to buy (more) stock in the company.
The total number of shares that are subject to the option rights of investors, shareholders, or employees.
Stock option plan
An exit where the company is acquired by a strategic buyer, who usually operates in the same industry. Strategic buyers integrate the acquired company into their main operations. Strategic exits typically are relatively quick exits and often command a price premium compared to financial exits at the same stage.
A loan that ranks below other loans with regard to claims on assets or earnings.
A contract that governs an investor’s investment in the company.
Meeting the needs and demands of the present without restricting the ability of future stakeholders to meet their own needs. Sustainability is commonly classified into three pillars: economic, social, and environmental.
Investment syndication occurs when a group of investors pools their money in order to finance one or more companies. One advantage for investors is that with the same total amount of invested capital, they end up with better-diversified portfolios (less risk). Another advantage is that investors can distribute the effort associated with a transaction (e.g. due diligence) among each other.
The right of the minority shareholder to tag along with the majority shareholder at equal terms when the company is sold.
When investors are called to make a capital contribution, the amount and timing of the contribution is the takedown schedule. Also known as drawdowns.
Any risk associated with the founding team. The team is a crucial element of a startup and therefore the founders need to share the same vision and their know-how, experience, and personalities must fit together in order to build a successful company.
Any risk associated with technologies used by a business. For example, using a technology that depends on a single supplier (lock-in) can constitute a technology risk.
A short document that outlines the main conditions of the proposal or intended transaction.
The amount of money that goes into an investment transaction.
A possible exit method for investors where the business is sold to another company (for example to a competitor).
Portions of a deal or structured financing that are paid out only under certain conditions (typically the achievement of pre-agreed milestones).
Expenses occur when investors buy or sell securities. In the context of early-stage investments, the number of time investors put into deal screening, due diligence, negotiations, etc. should be regarded as part of the transactions costs, in addition to cash costs e.g. for lawyers.
A unique customer benefit of a product or service that clearly differentiates it from the competition.
Unique selling proposition
The idea of validation is to prove that a business concept really makes sense. Depending on the desired level of validation, this may for instance be product/market fit (proof that there are some willing buyers) or traction (proof that there are many/enough willing buyers).
The estimation of the economic worth of a company, assets, or liabilities. There is a range of different methods for determining the value depending for instance on the development stage of the company and the industry.
An institutional source of financing for startup companies made by entities and individuals seeking higher returns for taking greater risks. Also called risk capital. Startups talk to venture capitalists, who in turn manage funds contributed by limited partners.
In order to keep the interests of all parties aligned, it is common that some stock is reserved for founders (sometimes also for early employees or partners), but they have to earn it over a predetermined period of time (for instance 3 years). If they leave the company earlier, they will only get a part of the stock.
The power (in the context of investments usually of minority shareholders) to stop predefined business actions (usually those with far-reaching consequences, such as selling significant parts of the company).
Rights that regulate how shareholders can vote on matters of strategic importance, such as electing members of the board of directors.
An entity to which one or more shareholders have transferred their voting rights. Transferring the voting rights may accompany the transfer of shares. This is usually done for