Seed Stage Startup: Planting the First Financial Seeds

The seed stage of startup life is when the founders really get to work on their idea in practice. Most often, the seed stage financing is offered to the entrepreneurs in loose proportions, which will be enough to take them through activities like market research, product development, and team building, among others. Normally, it may range from $50,000 to $2 million.

Characteristics of a Seed Stage Company

A seed stage company often exhibits the following features:

• Product Development: Focus is on developing a prototype or minimum viable product (MVP) to validate business concepts.
• Team Building: Assembling a small, efficient team capable of executing the startup’s vision.
• Market Research: Conducting analysis to identify potential customers and understand market needs.

Funding Sources for Seed Stage Startups

Seed funding can come from various sources:

• Angel Investors: Wealthy individuals who provide capital for a startup, usually in exchange for convertible debt or ownership equity.
• Venture Capital Firms: Some firms offer seed funding, though they typically seek startups with high growth potential.
• Crowdfunding: Platforms like Kickstarter or Indiegogo, where businesses can raise money from the general public.

Stages of Startup Funding: From Seed to Success

Understanding the entire funding lifecycle is crucial for any entrepreneur. The journey typically starts with pre-seed and seed funding and progresses through several rounds of financing as the business grows. Let’s delve deeper into the stages of startup funding and the key considerations associated with each stage:

Pre-Seed Funding

Pre-seed funding marks the initial stage of startup financing, where entrepreneurs raise capital to validate their business idea and lay the groundwork for further development. This phase is characterized by:

• Source of Funds: Pre-seed funding is often sourced from personal savings, friends and family, or angel investors within the entrepreneur’s personal network. These early backers provide initial capital to kickstart the business and support its early-stage initiatives.
• Purpose: The primary focus of pre-seed funding is to refine the business idea, conduct market research, and develop a prototype or minimum viable product (MVP). Entrepreneurs use these funds to validate their concept, assess market demand, and iterate on their value proposition based on early feedback.
• Key Activities: During the pre-seed stage, entrepreneurs engage in activities such as market research, product validation, and building initial prototypes or proof-of-concepts. The goal is to gain insights into customer needs, preferences, and pain points, laying the foundation for future product development and market entry.

Seed Funding

Seed funding represents the next stage of financing, where startups raise capital to accelerate product development, scale operations, and build out their team. This stage is characterized by:

• Investment Focus: Seed funding is primarily directed towards product refinement, market validation, and team expansion. It enables startups to transition from concept to execution and establish a solid foundation for growth. Investors at this stage are typically early-stage venture capital firms, angel investors, or seed-stage accelerators looking to back promising ventures with high growth potential.
• Utilization: Funds raised in a seed funding round are used to optimize products or services, scale operations, and expand market reach. Startups leverage these resources to attract top talent, invest in marketing and sales efforts, and iterate on their product offerings based on customer feedback and market demand.
• Milestones: Achieving key milestones such as product-market fit, customer acquisition targets, and revenue growth metrics is critical during the seed stage. Startups use these milestones to demonstrate progress to investors, attract additional funding, and validate their potential for long-term success.

Series A

Series A financing follows the seed stage and typically occurs once the startup has proven its business model, demonstrated traction in the market, and achieved significant growth milestones. This stage is characterized by:

• Validation: Series A funding is raised on the basis of validated market demand, product-market fit, and early revenue or user metrics. It signals confidence from investors in the startup’s potential for growth and scalability. Series A investors are typically institutional venture capital firms or strategic investors looking to capitalize on the startup’s momentum and support its expansion efforts.
• Utilization: Funds raised in a Series A round are used to optimize products or services, scale operations, and expand market reach. Startups focus on building out their sales and marketing infrastructure, scaling customer acquisition efforts, and investing in research and development to drive innovation and differentiation in the market.
• Scaling Initiatives: Achieving scalability and operational efficiency becomes a key focus during the Series A stage. Startups invest in scaling initiatives such as hiring top talent, expanding into new markets or geographies, and enhancing product features and functionality to capture market share and drive revenue growth.

Series B and Beyond

Series B and subsequent funding rounds focus on accelerating growth, expanding market penetration, and preparing the startup for further scaling or a potential exit event. This stage is characterized by:

• Expansion: With a proven business model and established market presence, startups in Series B and beyond seek to fuel rapid expansion into new markets, geographies, or customer segments. They focus on scaling their operations, increasing market share, and solidifying their position as market leaders in their respective industries.
• Investor Profile: Funding rounds at this stage typically involve participation from institutional investors, venture capital firms, and strategic investors looking to capitalize on the startup’s growth trajectory. These investors provide significant capital injections to support the startup’s ambitious growth plans and fuel its expansion initiatives.
• Preparation for Exit: In some cases, startups may use later-stage funding rounds to prepare for an initial public offering (IPO) or other forms of exit, such as acquisition or merger. They focus on optimizing their financial performance, enhancing corporate governance practices, and building relationships with potential acquirers or investors to maximize value for shareholders.

Financial Milestones in the Seed Stage

Achieving specific financial milestones can enhance a seed stage company’s likelihood of success:

Budget Management

Efficient budget management is paramount for seed stage companies, as it directly impacts the longevity and sustainability of the business. Key considerations in budget management include:

• Resource Allocation: Careful allocation of funds to critical areas such as product development, marketing, and talent acquisition is essential. Startups must prioritize initiatives that contribute directly to achieving key milestones and advancing the company’s objectives.
• Runway Extension: Maximizing runway—the length of time until the startup runs out of funds—is a primary goal in the seed stage. Effective budget management allows startups to extend their runway as long as possible, providing more time to iterate on the product, validate the market, and secure additional funding.
• Cost Optimization: Identifying and minimizing unnecessary expenses is crucial for preserving capital and optimizing cash flow. Startups should continually assess their spending habits, renegotiate contracts, and explore cost-saving measures to ensure financial sustainability.

Revenue Streams

While generating revenue may not be the primary focus in the seed stage, establishing initial revenue streams can validate the viability of the business model and accelerate growth. Key considerations in revenue generation include:

• Market Validation: Generating revenue, even if minimal, serves as validation of the business model and market demand for the product or service. It demonstrates that customers are willing to pay for the solution offered by the startup, enhancing investor confidence and credibility.
• Feedback Loop: Revenue generation enables startups to gather valuable feedback from early customers, informing product development and refinement. By understanding customers’ needs and pain points, startups can iterate on their offerings and tailor them to better meet market demand.
• Early Traction: Revenue generation creates early traction for the startup, attracting attention from investors, partners, and potential customers. It provides proof of concept and demonstrates the startup’s ability to execute its business model effectively, setting the stage for future growth and scalability.

Legal and Regulatory Considerations

Navigating the legal and regulatory landscape is a critical aspect of launching and operating a startup. By addressing key legal considerations early on, entrepreneurs can mitigate risks, protect their intellectual property, and ensure compliance with relevant regulations. Let’s delve into three fundamental legal and regulatory considerations for startups:

Incorporation

Properly incorporating your startup as a legal entity is essential for establishing its identity, protecting personal assets, and facilitating business operations. Here are some key aspects to consider:

• Entity Selection: Entrepreneurs must choose the appropriate legal structure for their startup, such as a sole proprietorship, partnership, corporation, or limited liability company (LLC). Each structure has different implications for taxation, liability, and governance.
• Articles of Incorporation: Drafting and filing articles of incorporation with the relevant state authorities is necessary to formally establish the startup as a legal entity. This document outlines essential details such as the company’s name, purpose, ownership structure, and registered agent.
• Corporate Governance: Implementing proper corporate governance practices, such as adopting bylaws, appointing directors and officers, and holding regular meetings, helps ensure transparency, accountability, and compliance with legal obligations.

Intellectual Property Protection

Protecting intellectual property (IP) assets is vital for startups to safeguard their innovations, inventions, and brand identity. Key considerations include:

• Patents: For inventions or novel processes, obtaining patents grants exclusive rights to prevent others from making, using, or selling the patented invention for a specified period. Startups should conduct thorough patent searches and consider filing patent applications to protect their unique technologies.
• Trademarks: Registering trademarks for the startup’s brand name, logo, and other distinctive elements helps prevent unauthorized use by competitors and establishes brand recognition in the marketplace. Entrepreneurs should conduct trademark searches and file trademark applications to secure legal protection for their brand assets.
• Copyrights: Protecting original works of authorship, such as software code, artistic creations, and written content, through copyright registration provides legal recourse against infringement and unauthorized use. Startups should consider registering copyrights for their creative works to assert ownership and control over their intellectual property.

Regulatory Compliance

Ensuring compliance with applicable laws, regulations, and industry standards is crucial for startups to operate legally and avoid potential penalties or liabilities. Key areas of regulatory compliance include:

• Industry-Specific Regulations: Startups operating in regulated industries, such as finance, healthcare, or telecommunications, must comply with industry-specific regulations and licensing requirements. Entrepreneurs should familiarize themselves with relevant laws and regulations governing their sector and seek legal counsel to navigate compliance complexities.
• Data Privacy and Security: Protecting customer data and maintaining compliance with data privacy regulations, such as the General Data Protection Regulation (GDPR) or the California Consumer Privacy Act (CCPA), is essential for startups handling sensitive personal information. Implementing robust data privacy policies, security measures, and compliance procedures helps mitigate the risk of data breaches and regulatory violations.
• Labor and Employment Laws: Startups must adhere to labor and employment laws governing hiring practices, employee classification, wage and hour requirements, workplace safety, and discrimination prevention. Understanding and complying with these laws ensures fair treatment of employees and minimizes the risk of legal disputes or enforcement actions.

Market Fit and Product Development

Developing a product that fits the market needs is paramount:

Customer Feedback

Regular interaction with early users is essential for gathering feedback and refining the product to meet market needs. Here’s how startups can leverage customer feedback effectively:

• Feedback Channels: Establishing channels for collecting feedback, such as surveys, interviews, user testing sessions, and social media engagement, allows startups to gather insights directly from their target audience. Engaging with customers in meaningful conversations enables startups to understand their pain points, preferences, and expectations.
• Iterative Development: Incorporating customer feedback into the product development process through iterative cycles of testing, iteration, and validation helps startups iterate on their product roadmap and make informed decisions. By prioritizing features and enhancements based on user feedback, startups can optimize the user experience and increase the likelihood of achieving market fit.
• Validation: Validating product hypotheses and assumptions through experiments, prototypes, and minimum viable products (MVPs) allows startups to test product-market fit early and often. By soliciting feedback from early adopters and iterating based on their responses, startups can refine their value proposition and address customer needs more effectively.

Pivoting

A willingness to pivot—to shift directions based on market feedback and changing conditions—is a hallmark of successful startups. Here’s how startups can navigate the pivot process effectively:

• Market Validation: Monitoring key metrics, market trends, and customer feedback enables startups to identify signs of product-market fit or the need for a pivot. By staying agile and responsive to market dynamics, startups can seize opportunities and mitigate risks.
• Strategic Evaluation: Assessing the viability of different pivot options, such as altering the target market, adjusting the product offering, or refining the business model, requires careful analysis of market data, customer insights, and competitive positioning. Startups should evaluate the potential impact, risks, and resource requirements associated with each pivot option before making decisions.
• Execution: Implementing pivots effectively involves clear communication, cross-functional collaboration, and rapid iteration. Startups must mobilize resources, reallocate priorities, and adapt their strategies and tactics to align with the new direction. Maintaining transparency and alignment among team members and stakeholders is crucial for navigating the pivot process smoothly.

Building the Right Team

The importance of assembling a motivated and skilled team cannot be overstated. Key roles might include:

Technical Expertise

Technical expertise is essential for handling product development, technology infrastructure, and innovation. Here’s a breakdown of key roles within this domain:

• Software Engineers: Responsible for developing and maintaining the company’s software products, including coding, testing, and debugging. They possess expertise in programming languages, frameworks, and development methodologies.
• Product Managers: Bridge the gap between technical development and customer needs, defining product features, prioritizing development tasks, and ensuring alignment with business objectives. They possess strong analytical skills, market understanding, and project management capabilities.
• Data Scientists: Analyze large datasets to extract valuable insights, inform decision-making, and drive product improvements. They possess expertise in statistical analysis, machine learning algorithms, and data visualization techniques.

Marketing and Sales

Marketing and sales functions are critical for driving customer acquisition, revenue growth, and market expansion. Here’s a breakdown of key roles within this domain:

• Marketing Specialists: Develop and execute marketing strategies to increase brand awareness, generate leads, and engage customers across various channels. They possess expertise in digital marketing, content creation, social media management, and analytics.
• Sales Representatives: Build relationships with prospects, qualify leads, and close sales to drive revenue growth. They possess strong communication skills, negotiation abilities, and a deep understanding of the company’s products and value proposition.
• Customer Success Managers: Focus on nurturing existing customer relationships, ensuring satisfaction, and driving retention and upsell opportunities. They possess expertise in customer relationship management, problem-solving, and customer advocacy.

Operational Management

Operational management is essential for keeping the day-to-day operations of the startup running smoothly and efficiently. Here’s a breakdown of key roles within this domain:

• Operations Managers: Oversee various operational functions such as supply chain management, logistics, and resource allocation. They possess strong organizational skills, attention to detail, and the ability to optimize processes for efficiency.
• Human Resources Specialists: Manage recruitment, onboarding, training, and employee relations to build a talented and motivated team. They possess expertise in talent acquisition, performance management, and organizational development.
• Finance and Accounting Professionals: Ensure financial stability, compliance, and strategic planning through effective financial management and reporting. They possess expertise in budgeting, forecasting, financial analysis, and regulatory compliance.

Challenges Faced by Seed Stage Startups

Despite the excitement, the seed stage is fraught with challenges:

Funding Shortfalls

One of the primary challenges faced by seed stage startups is managing cash flow effectively to avoid running out of funds. Key considerations in addressing funding shortfalls include:

• Budget Planning: Develop a detailed budget that accounts for all expenses, including product development, marketing, personnel, and overhead costs. Regularly review and adjust the budget based on evolving needs and priorities.
• Bootstrapping: Explore opportunities to minimize expenses and self-fund the startup through personal savings, revenue generated from early sales, or part-time consulting gigs. Bootstrapping allows startups to retain control and mitigate reliance on external funding sources.
• Seeking Investment: Proactively pursue funding opportunities from angel investors, venture capital firms, and crowdfunding platforms. Prepare a compelling pitch deck, conduct thorough due diligence on potential investors, and tailor your funding strategy to align with your growth objectives and milestones.

Market Competition

Navigating competition in a crowded market is another significant challenge for seed stage startups. To differentiate from competitors and carve out a unique value proposition, consider the following strategies:

• Market Research: Conduct comprehensive market research to understand customer needs, preferences, and pain points. Identify gaps in the market and areas where your startup can offer differentiated solutions or value-added services.
• Unique Value Proposition: Define a clear and compelling value proposition that communicates the unique benefits of your product or service to potential customers. Emphasize factors such as innovation, quality, affordability, or convenience that set your startup apart from competitors.
• Customer Engagement: Build strong relationships with customers through personalized interactions, exceptional customer service, and active engagement on social media and other communication channels. Focus on delivering value and exceeding customer expectations to foster loyalty and advocacy.

Scalability Issues

Ensuring scalability—the ability to grow the business without compromising on quality or operational efficiency—is a critical challenge for seed stage startups. Consider the following strategies to address scalability issues:

• Scalable Infrastructure: Invest in scalable infrastructure, technology systems, and processes that can accommodate growth and expansion. Implement cloud-based solutions, automation tools, and scalable architectures to support increasing demands and user volumes.
• Flexible Operations: Design flexible and agile operations that can adapt to changing market conditions, customer preferences, and business requirements. Foster a culture of innovation, experimentation, and continuous improvement to drive scalability and efficiency.
• Talent Acquisition: Hire talented and adaptable team members who possess the skills, experience, and mindset needed to support growth and scalability. Prioritize candidates who are passionate about the company’s mission and values and can contribute to a dynamic and collaborative work environment.

Conclusion

Navigating the seed stage of startup funding requires a blend of courage, strategy, and tenacity. By understanding the unique challenges and opportunities of this early phase, entrepreneurs can set the stage for future success, moving effectively from seed to series funding stages. As you sow the seeds of your startup, remember that this is just the beginning of what can be an exhilarating and rewarding entrepreneurial journey.

FAQ

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Entrepreneurship Acronym

Let’s start by looking at a popular acronym that captures the essence of entrepreneurship. For the sake of clarity and depth, we will consider the acronym ‘IDEAS’:

Innovation

Entrepreneurship relies heavily on innovation. It entails the development and implementation of unique ideas, products, or processes that challenge established conventions and provide considerable value to consumers or enterprises. Entrepreneurs keen on fostering innovation often engage in activities such as:

• Market Research: Identifying gaps or unmet needs in the market.
• Creative Problem-Solving: Generating unique solutions to address identified challenges.
• Product Development: Bringing inventive ideas to life through prototyping and iteration.
• Continuous Learning: Staying abreast of emerging trends and technologies to fuel ongoing innovation.

Determination

Determination serves as the driving force behind entrepreneurial endeavors. It encompasses the resilience, persistence, and unwavering commitment required to navigate the inevitable obstacles encountered along the entrepreneurial journey. Key attributes of determination include:

• Grit: Demonstrating perseverance and resilience in the face of setbacks.
• Goal Setting: Establishing clear objectives and maintaining focus on achieving them.
• Optimism: Maintaining a positive outlook despite challenges and setbacks.
• Resourcefulness: Finding creative solutions to overcome barriers and limitations.

Execution

Execution is the process of translating ideas into tangible outcomes. While innovation lays the foundation, effective execution is what transforms concepts into successful ventures. Essential components of execution include:

• Strategic Planning: Developing a roadmap to guide the implementation of entrepreneurial initiatives.
• Resource Allocation: Allocating human, financial, and other resources effectively to support execution efforts.
• Project Management: Coordinating and overseeing various tasks and activities to ensure timely completion.
• Quality Control: Maintaining high standards throughout the execution process to deliver superior outcomes.

Adaptability

Adaptability is the ability to respond effectively to change and uncertainty. In the dynamic landscape of entrepreneurship, adaptability is crucial for survival and sustained success. Key aspects of adaptability include:

• Flexibility: Willingness to adjust plans and strategies in response to shifting market dynamics or unexpected challenges.
• Agility: Ability to make quick and nimble decisions in rapidly evolving environments.
• Learning Orientation: Embracing a growth mindset and actively seeking opportunities for learning and development.
• Risk Management: Anticipating potential risks and proactively mitigating them through adaptive strategies.

Service

Service underscores the fundamental purpose of entrepreneurship: to create value for others. Whether through innovative products, exceptional customer experiences, or job creation, successful entrepreneurs prioritize serving the needs of their stakeholders. Key dimensions of service include:

• Customer-Centricity: Placing the needs and preferences of customers at the forefront of business decisions.
• Social Responsibility: Recognizing the broader impact of entrepreneurial activities on society and striving to contribute positively.
• Community Engagement: Building strong relationships with local communities and actively participating in initiatives that benefit society.
• Ethical Leadership: Operating with integrity and adhering to ethical principles in all business dealings.

Acronym of Entrepreneurship Using an Adjective

Expanding on the concept, we can apply adjectives to each element of our acronym to provide further insight:

Intelligent Innovation

Not all innovations are created equal; some soar while others falter. Intelligent innovation distinguishes itself through strategic thinking, meticulous planning, and savvy execution. Entrepreneurs engaging in intelligent innovation demonstrate:

• Market Insight: Understanding market trends, consumer behavior, and competitive landscapes to inform innovation efforts.
• Strategic Alignment: Ensuring that innovative ideas are aligned with broader business goals and objectives.
• Risk Management: Assessing potential risks and uncertainties associated with innovation initiatives and implementing mitigation strategies.
• Iterative Improvement: Embracing a culture of continuous improvement and iteration to refine and enhance innovative solutions over time.

Driven Determination

Driven determination embodies a relentless pursuit of entrepreneurial goals fueled by unwavering passion, resilience, and focus. Entrepreneurs characterized by driven determination exhibit:

• Passionate Pursuit: A burning desire to succeed and a deep-seated commitment to realizing entrepreneurial visions.
• Resilient Resolve: Bouncing back from setbacks, failures, and obstacles with renewed determination and vigor.
• Goal Clarity: Crystal-clear clarity regarding short-term and long-term objectives, coupled with unwavering focus on achieving them.
• Persistence: Persevering in the face of adversity, setbacks, and challenges, refusing to succumb to discouragement or disillusionment.

Effective Execution

Effective execution epitomizes the seamless and efficient translation of entrepreneurial ideas into tangible outcomes. Entrepreneurs renowned for effective execution exemplify:

• Strategic Planning: Developing comprehensive plans and roadmaps to guide the implementation of entrepreneurial initiatives.
• Resource Optimization: Maximizing the utilization of available resources, including human capital, financial assets, and technological infrastructure.
• Timely Delivery: Meeting deadlines, milestones, and deliverables with precision and punctuality, ensuring timely completion of projects.
• Quality Assurance: Maintaining rigorous quality standards throughout the execution process, striving for excellence in every aspect of the venture.

Adaptable Adaptability

In a rapidly evolving business landscape, adaptability is not merely desirable but imperative for entrepreneurial success. Adaptable adaptability underscores the ability to thrive in an environment of constant change, exhibiting:

• Flexibility: Embracing change and uncertainty with open arms, willingly adjusting plans, strategies, and tactics as needed.
• Agility: Responding swiftly and decisively to emerging opportunities, challenges, and market dynamics, without being encumbered by inertia or rigidity.
• Innovative Problem-Solving: Leveraging creativity and resourcefulness to overcome obstacles and capitalize on evolving market conditions.
• Continuous Learning: Cultivating a growth mindset and actively seeking opportunities for personal and professional development, recognizing that adaptability is a journey, not a destination.

Superior Service

Superior service transcends mere satisfaction; it entails delivering exceptional value, exceeding customer expectations, and differentiating oneself in the marketplace. Entrepreneurs committed to superior service demonstrate:

• Customer-Centricity: Placing the needs, preferences, and aspirations of customers at the forefront of business decisions and actions.
• Personalization: Tailoring products, services, and experiences to individual customer preferences and requirements, fostering deeper connections and loyalty.
• Innovative Excellence: Constantly innovating and evolving to deliver unparalleled value and differentiate oneself from competitors.
• Feedback Integration: Soliciting and leveraging customer feedback to refine and enhance products, services, and processes, thereby continuously elevating the standard of service excellence.

Real Data and Application

In the dynamic landscape of entrepreneurship, success often hinges on a combination of factors including innovation, determination, execution excellence, adaptability, and superior service. Let’s delve into each of these aspects, backed by real data and practical applications.

The Role of Innovation

Innovation serves as the cornerstone of entrepreneurial success, with a staggering 95% of entrepreneurs attributing their accomplishments to innovative solutions that address existing challenges and needs in the market. The transformative impact of innovation is exemplified by trailblazing companies such as Tesla and SpaceX, which have redefined their respective industries through groundbreaking advancements.

• Tesla’s Electric Vehicles: Tesla disrupted the automotive sector by introducing high-performance electric vehicles that combine sustainability with cutting-edge technology. By challenging conventional notions of vehicle design and propulsion, Tesla has set new benchmarks for environmental responsibility and driving experience.
• SpaceX’s Space Exploration: SpaceX revolutionized space exploration by developing reusable rocket technology, significantly reducing the cost of accessing space. Through relentless innovation and a bold vision for the future of space travel, SpaceX has democratized access to space and sparked renewed interest in space exploration.

The Power of Determination

Research conducted by Harvard Business Review underscores the pivotal role of determination and resilience in the entrepreneurial journey. While talent and intelligence are undoubtedly valuable, it is determination that often distinguishes successful entrepreneurs from their counterparts. In the face of adversity and setbacks, the unwavering determination of entrepreneurs propels them forward on the path to success.

• Overcoming Setbacks: Entrepreneurship is rife with challenges and setbacks, ranging from funding issues to market fluctuations. However, it is the ability of entrepreneurs to persevere in the face of adversity that sets them apart. Each setback becomes an opportunity for growth and learning, fueling the entrepreneurial spirit.
• Resilience Amidst Challenges: Resilient entrepreneurs possess the resilience to bounce back from failures and setbacks, adapting their strategies and approaches as necessary. Rather than being deterred by obstacles, they view challenges as stepping stones on the path to success, leveraging setbacks as opportunities for innovation and improvement.

Execution Excellence

Effective execution is paramount to the success of any entrepreneurial venture, yet it remains a significant challenge for many startups. According to Forbes, a staggering 70% of startup failures can be attributed to either premature scaling or poor execution. Achieving execution excellence requires meticulous planning, attention to detail, and the ability to adapt to changing circumstances.

• Strategic Planning: Successful startups invest time and resources in developing clear and actionable strategic plans that align with their long-term goals and vision. Strategic planning involves identifying target markets, defining competitive advantages, and charting a roadmap for growth and expansion.
• Operational Excellence: Meticulous attention to operational details is essential for executing strategic plans effectively. From supply chain management to customer service, every aspect of the business must be optimized for efficiency and effectiveness. Startups that prioritize operational excellence are better equipped to navigate challenges and capitalize on opportunities in the market.

Adaptability in Action

The rapid pace of change in today’s business landscape necessitates a high degree of adaptability among entrepreneurs. Recent global shifts, such as those prompted by the COVID-19 pandemic, have underscored the importance of adaptability in responding to unforeseen challenges and opportunities. Flexibility and agility are key attributes of successful entrepreneurs in dynamic environments.

• Flexibility: Entrepreneurs must be willing to pivot their strategies and business models in response to changing market conditions and consumer preferences. Being flexible helps entrepreneurs to take advantage of fresh chances and successfully manage risks, which guarantees their long-term success and sustainability.
• Agility: Agile startups possess the ability to rapidly adjust their operations and offerings in response to emerging trends and disruptions. By staying attuned to market dynamics and customer needs, agile entrepreneurs can capitalize on opportunities and maintain a competitive edge in rapidly evolving industries.

Superiority in Service

In today’s hyper-competitive marketplace, delivering superior service is essential for building customer loyalty and differentiating a startup from its competitors. According to a survey by American Express, 60% of customers are willing to pay more for a better service experience, highlighting the significant impact of service quality on consumer behavior and purchasing decisions.

• Customer-Centric Approach: Successful startups prioritize the needs and preferences of their customers, placing a premium on delivering exceptional service experiences at every touchpoint. By understanding the unique challenges and pain points of their target audience, startups can tailor their products and services to address specific needs effectively.
• Building Customer Loyalty: Superior service fosters strong customer relationships and fosters brand loyalty, encouraging repeat business and positive word-of-mouth referrals. By consistently exceeding customer expectations and delivering value beyond the transaction, startups can cultivate a loyal customer base that serves as a foundation for sustainable growth and success.

Conclusion

The entrepreneur acronym and the acronym of entrepreneurship using an adjective provide a framework to understand the complex qualities required for successful entrepreneurship. By dissecting these acronyms, we gain insight into the fundamental traits and skills that propel entrepreneurs forward in their journeys. Remember, whether it’s through intelligent innovation or driven determination, the path of entrepreneurship is as challenging as it is rewarding. Embrace these traits, and you’ll be well on your way to building something truly impactful.

FAQ

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What is the Competitive Environment?

The competitive landscape which is the area where the business organization is operating is of utmost importance for a business to be successfully operable. This area helps the organization thrive through scope of opportunities, identifying challenges, and strategically equipping itself for its sustainable growth and competitive advantage. An effort to analyze the main elements of a competitive environment is given below:

Competitors

Competitors are evidently the ones that belong to the same industry segment or market as the competing party and offer products or services that are almost similar to those of the competing entity, although the objective may be basically the same range of customers. Very vital for a business is to have the knowledge of the strengths and shortcomings of the competitors as well as the strategies they adopt and their market position so that they are able to carve out a better niche by offering superior value to the customers. Some of the critical considerations include:

• Competitor Analysis: Through Competitor Analysis, companies have the ability to objectively size up their competitive strengths and weaknesses versus the rivals, find out any unfilled areas of the market, and see whether they are in the benchmark with their counterparts within the same industry.
• Competitive Strategies: Seeing competitors’ strategies of pricing, marketing, distribution channels, and product innovation from inside out would be the key to both understanding trends and best practices and then building and refining their own strategies to reach higher than competitors.

Market Trends

Market trends embrace the existing trends and changes in the business field or its segment where companies operate. Identifying trends in advance allows businesses to forecast consumer taste changes, technological innovations, regulatory shifts, and competition parameters. Key considerations include:

• Consumer Behavior: Retailers can examine consumer behavior, such as how shopping habits and consumption patterns change, or what preferences prevail, in order to remodel, refine marketing, or create new products or services to better attract and fit consumer needs as they evolve.
• Technological Advancements: The business innovations, disruptive technologies, and industry trends have a combined effect in that they help businesses in exploring the emerging technologies to avoid the downward trend of their products and operations.
• Regulatory Environment: By closely watching up the new regulations, legislations and the requirements of compliance companies are able to foresee changes that can affect their operations, risk management practices and access to the market.

Customer Demographics

Awareness of the portfolio of traits, aptitude, tendencies, interests, and preferences of the customer in a specified market or segment is significant. Key considerations include:

• Market Segmentation: The use of demographic information including age, gender, income, education, and lifestyle to segment the market gives marketers an opportunity to strategically target different consumer groups that are homogeneous and can, therefore, be satisfied through focused marketing, and product development.
• Customer Insights: Using customers’ feedback, online tools, and market research tend to provide deeper insight into the needs, touch points, and buying patterns of customers and eventually drive development of client focused business strategies.

Regulatory Policies

These are a collection of statutes, rules, norms, and government administrative regulations that define how corporate operations, industries, market conduct, and market arrangements are carried out. Operation within the law and ethical boundaries is not possible without the mapping and management of the multitude of risks and ultimately, it can also hardly be achieved without maintaining trust among the stakeholders. Key considerations include:

• Compliance Requirements: Businesses should trace all regulatory requirements to receive letters of standards and notifications about compliance obligation to keep themselves away from legal liabilities, financial penalties and damages to their brand image which may emerge from non-compliance.
• Risk Management: A good risk management policy will assist in the mitigation of regulatory risks and show how to address a range of challenges proactively. Once the challenges are disclosed there will be better control to avoid threats.
• Government Policies: Keeping a close watch out for policies and economic trends of the government, geopolitical developments, changing regulations, and unfavorable conditions in the market which may affect supply chain and business continuity is needed.

Why Analyze the Competitive Environment?

The analysis of the competitive environment is a definitive step in strategic planning for almost all businesses irrespective of the spheres of activity. Through evaluating the interconnected factors including the industry environment, the business can develop successful strategies and manage the competitive settings effectively. Here are the main reasons why analyzing the competitive environment is essential:

Identify Potential Threats and Opportunities

The competitive landscape allows business entities to grasp not only the competitors’ threats but also the chances that may increasingly emerge due to market changes, changing market trends and competitor reactions. An in-depth analysis, in turn, helps businesses foresee not only that of competitors, but new trends and disruptive forces that could sway the market a company operates in. Key considerations include:

• Competitor Actions: Competitor analysis of competitors’ strategies, prices and products reveals the emanations of competition and shows relative strengths and flaws.
• Market Trends: The tracking of changes in social trends, consumer behavior, technological advancements, and modified regulations, aid enterprises in figuring out growth possibilities, newer concepts of innovation, and market expansion.
• SWOT Analysis: By means of SWOT analysis (Strengths, Weaknesses,Opportunities and Threats) the companies can assess the internal capacities and the external factors that affect a competitive position of a company. While that, they define the strategies for capitalizing on strengths and opportunities as well as dealing with weaknesses and threats.

Tailor Strategies to Leverage Market Strengths

By conducting competitive landscape analysis, businesses will be able to envisage market pros and cons towards what market offers and what they will bolster strongly. These strategies empirical and factual evidence to understand their peculiar value proposition, their place in the market, and the strategies which will be based on these differentiating factors in such a way that it appeals to the target customers and it leads to the sustainability in business success.Key considerations are:

• Value Proposition: The statement of a succinct, convincing value proposition that hits the target customers’ hot buttons is the reason why your enterprise differs from its competitors and thus wins in the challenge of the market.
• Market Positioning: This measure will be beneficial since it will help to take the assessment of the environmental forces that the business will face. After thorough evaluation, the business will then develop the strategies that will help it in either targeting the customer segments that ignore plainly or the niche market.
• Differentiation Strategy: It assists a business to set apart its products and solutions which have unique selling points from competitors and other solutions from competitors. The way its competitive edge is built and stickiness of customers as well as brand equity are the underlying mechanisms which this action works on.

Mitigate Risks Associated with Market Weaknesses

Conducting a thorough analysis of the competitive environment will allow businesses to discover and deal with dangerous situations arising thanks to internal problems, market threats, and external risks. Through proactive addressing of the mentioned problems, companies can fortify their stability, reduce risks to their business operation and protect performance and competitiveness as a result.Key considerations include:

• Risk Assessment: Enterprises should carry out risk evaluation and scenario analysis to identify disasters and weak spots that adversely impact their business operations, supply chains, or market positions.
• Risk Mitigation Strategies: It is so important to have programs for risk mitigation, contingency planning and business continuity. This proactive approach in risk management would allow these organizations to minimize effects and still maintain operations during the tough times.
• Adaptability and Agility: There is no denying that businesses are in need of organizational adaptability and agility so that they can react in a timely manner and act effectively to the changes in the competitive environment, market conditions, and customer preferences to make sure they answer the ever-changing market conditions and the competitive environment.

Ensure Business Agility and Responsiveness to Change

Keeping an eye on the changing competitive environment at all times guarantees the flexibility, adaptiveness, as well as responsiveness of businesses’ market responses. Through a well-managed market monitoring that involves a strict focus on market trends, competition movements and external developments, organizations can modify their strategies, prioritize resources and open to the opportunities for growth and innovation.Considerations include:

• Market Intelligence: Ensuring robust market intelligence capabilities and monitoring tools is the assurance that the business has continuous access to timely, current and actionable information about market trends, competitor behavior and customers’ preferences on the basis of which strategic planning and decision-making is carried out.
• Strategic Flexibility: The ability to maintain strategic flexibility and be open to change gives businesses the chance to adjust their strategies to the conditions in the market which may change over time or have new trends, or unplanned disruptions, they remain competitive and resilient in a dynamic environment.
• Continuous Improvement: The commitment to the concepts of a learning and developmental organization facilitates innovation, agility, and responsiveness, and subsequently, equips organizations with growth opportunities, cycle of improvement, adjustment, and optimization of the strategies and process over time.

Key Steps in Conducting a Competitive Environment Analysis

Identification of competitors becomes a routine process, which includes gathering competitive intelligence, analyzing competitor strategies, benchmarking performance, SWOT analysis, and taking some strategic actions, to improve on one’s own competitive edge. Let’s explore each step in detail:

Identify Competitors

Identifying competitors is the first step in analyzing the competitive environment. Competitors can be classified into two categories:

• Direct Competitors: These are companies that are competing with the same goods and services that attract the same target groups.
• Indirect Competitors: These are businesses that operate under different names but give the same level of satisfaction to the customers.

Gather Competitive Intelligence

After chosen competitors are studied, the company will start a process of gaining as much information and insight as possible to understand their plans, strengths, and weaknesses. Sources of competitive intelligence include:

• Public Sources: The financial statements, reports on operations, companies’ websites, and industry publications are all the sources where you can find activities and performance of the competitors.
• Trade Shows and Conferences: Personal exposure to other industry players in fairs and seminars provide the industry with evidence about new products, market trends, and competitor’s strategies.
• Customer Feedback: The reviews, surveys, and customers` feedback give clues about competitors` strong/weak points from the user’s standpoint.

Analyze Competitor Strategies

Analyze competitor strategies across key areas such as product offerings, marketing, and sales tactics. Key aspects to analyze include:

• Product Analysis: Evaluate the features, quality, and diversity of competitors’ offerings compared to your own.
• Marketing Analysis: Assess competitors’ advertising channels, branding, and promotional strategies to identify areas of differentiation.
• Sales Analysis: Analyze competitors’ pricing strategies, distribution channels, and sales tactics to understand their approach to market penetration and customer acquisition.

Benchmarking

Benchmark your business processes and performance against top competitors to identify areas for improvement and opportunities for differentiation. Key metrics to benchmark include:

• Operational Efficiency: Compare your operational processes, supply chain management, and resource allocation against industry benchmarks to identify opportunities for efficiency gains.
• Financial Performance: Analyze financial metrics such as revenue growth, profitability, and return on investment to benchmark your financial performance against competitors.
• Customer Satisfaction: Assess customer satisfaction levels and loyalty metrics to benchmark your customer service and engagement efforts against industry standards.

SWOT Analysis

Conduct a SWOT analysis to assess your business’s strengths, weaknesses, opportunities, and threats in relation to competitors. Key considerations include:

• Strengths: Identify what your business does well, such as unique product features, strong brand reputation, or loyal customer base.
• Weaknesses: Identify areas where your business is vulnerable, such as limited market reach, outdated technology, or lack of brand awareness.
• Opportunities: Identify potential avenues for growth and expansion, such as emerging market trends, untapped customer segments, or technological advancements.
• Threats: Identify external challenges that could impact your business, such as increased competition, changing regulatory landscape, or economic downturns.

Develop Strategic Actions

Based on the insights gathered from the competitive environment analysis, formulate strategic actions to enhance your competitive position and capitalize on opportunities. This might include:

• Product Innovation: Develop new products or services that address unmet customer needs or differentiate your offerings from competitors.
• Customer Service Improvement: Enhance customer service and engagement initiatives to build loyalty and differentiate your brand in the marketplace.
• Marketing Optimization: Optimize marketing campaigns, branding strategies, and customer acquisition tactics to increase market share and visibility.

Real-World Application of Competitive Environment Analysis

Consider a real-world example: the smartphone industry. Companies like Apple and Samsung continually assess their competitive environments by analyzing each other’s product launches, marketing campaigns, and customer engagements. They monitor emerging trends such as foldable screens and 5G technology to stay ahead. This relentless analysis allows them to adjust their strategies, ensuring they meet consumer demands and stay competitive.

Conclusion

Effective analysis of the competitive environment enables businesses to anticipate changes, align their strategic direction, and secure a competitive edge. By integrating continuous competitive assessments into their strategic planning, companies can not only survive but thrive in their industries. Remember, knowledge of your competitors is as crucial as knowledge of your own business.

FAQ

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Understanding the Basics: Angel Investors vs. Venture Capitalists

Before delving into the intricacies of due diligence, it’s crucial to establish a solid understanding of the fundamental disparities between angel investors and venture capitalists. Both play pivotal roles in the startup ecosystem, yet they operate distinctively in terms of investment approach, funding size, and involvement levels.

Angel Investors

Venture into the realm of startup investment, and you’ll inevitably encounter the enigmatic figures known as angel investors. These individuals, driven by a blend of financial acumen and a fervent zeal for innovation, inject their personal fortunes into burgeoning ventures, often at their inception. But what defines these angels of entrepreneurship? Let’s delve into their distinctive traits:

• Investment Stage: Angel investors are the early birds of the investment ecosystem, favoring fledgling enterprises still in the embryonic stages of development. They’re the knights of the startup roundtable, offering their support when traditional funding avenues seem like a distant mirage.
• Funding Size: Picture a spectrum of financial backing, with angel investments occupying the modest end. Ranging from a modest few thousand to a princely sum of several hundred thousand dollars, these investments represent a lifeline for startups navigating the tumultuous seas of business infancy.
• Source of Funds: Unlike the faceless entities of venture capitalism, angel investors are the embodiment of individual agency. Their coffers overflow with the spoils of entrepreneurial conquests, inheritance windfalls, or the spoils of past business triumphs. Each investment decision is a testament to their personal conviction and financial prowess.
• Involvement Level: Beyond the mere exchange of capital, angel investors bring a treasure trove of intangible assets to the table. From sage mentorship to coveted industry connections, they’re the guiding stars illuminating the path to success for the startups they champion. Their involvement runs the gamut, from occasional sage advice to the immersive mentorship of a seasoned guide, tailored to the unique needs of each venture.

Venture Capitalists

In contrast, venture capitalists represent professional investment businesses that handle pooled assets from institutional investors, high-net-worth individuals, and corporations. They play a crucial role in scaling startups by injecting substantial capital and expertise. Here are some key characteristics of venture capitalists:

• Investment Stage: Venture capitalists typically target more mature startups that have demonstrated market traction, validated business models, and the potential for rapid growth. They often invest in Series A, B, and later rounds, providing capital to fuel expansion and scaling efforts.
• Funding Size: Venture capital investments are significantly larger than angel investments, often ranging from several hundred thousand dollars to tens of millions or even hundreds of millions, depending on the startup’s growth trajectory and funding requirements.
• Source of Funds: Venture capital firms raise funds from institutional investors such as pension funds, university endowments, and foundations, as well as high-net-worth individuals and corporations. These pooled funds are then deployed strategically to invest in promising startups across various industries and sectors.
• Involvement Level: While venture capitalists primarily contribute capital to startups, they also offer extensive strategic support, operational guidance, and networking opportunities. Many venture capital firms have dedicated teams of analysts, advisors, and industry experts who work closely with portfolio companies to maximize their growth potential.

Scale of Investment

The scale of investment plays a pivotal role in shaping the due diligence processes undertaken by both angel investors and venture capitalists. Understanding this disparity is crucial for entrepreneurs seeking funding and investors looking to optimize their investment strategies.

Angel Investors

Angel investors typically deal with smaller investment amounts compared to venture capitalists. As a result, their due diligence process may be less extensive and rigorous. Here’s how the scale of investment impacts angel investors’ approach to due diligence:

• Smaller Investment Amounts: Angel investors typically invest smaller sums, ranging from a few thousand to several hundred thousand dollars, into startups. This lower financial commitment allows them to be more flexible in their due diligence process.
• Limited Resources: With smaller investment amounts, angel investors may have limited resources to conduct thorough due diligence. They may rely more on their personal judgment, network, and gut feeling when evaluating investment opportunities.
• Focus on Founder Relationships: Due to the smaller scale of investment, angel investors often prioritize building strong relationships with the founders. They may place greater emphasis on the founder’s vision, passion, and commitment, rather than conducting extensive financial analysis or market research.

Venture Capitalists

Venture capitalists, dealing with larger investment amounts and managing pooled funds, undertake a more comprehensive due diligence process. Here’s how the scale of investment influences venture capitalists’ approach to due diligence:

• Larger Investment Sums: Venture capitalists invest significantly larger amounts, ranging from hundreds of thousands to tens of millions of dollars, into startups. This substantial financial commitment necessitates a more thorough due diligence process to mitigate risks.
• Dedicated Resources: Venture capital firms have dedicated teams of analysts, advisors, and industry experts who conduct in-depth due diligence on potential investments. They utilize extensive resources, including market research, financial analysis, and technology assessments, to evaluate the viability and scalability of startups.
• Risk Mitigation: Due of the higher financial risks of larger investments, venture capitalists prioritize risk reduction during due diligence. To invest, they consider the startup’s market potential, competitive landscape, intellectual property, team dynamics, and growth trajectory.

Stages of Investment

The stages of investment, ranging from early-stage to later-stage funding rounds, significantly influence the due diligence processes conducted by both angel investors and venture capitalists. Understanding these stages is crucial for entrepreneurs seeking funding and investors evaluating investment opportunities.

Early Stage

Early-stage investments are characterized by the nascent phases of a startup, where less historical data is available, posing challenges for extensive due diligence. Here’s how the early-stage investment phase impacts the due diligence processes of angel investors:

• Limited Historical Data: Early-stage startups often lack significant operational history, financial records, or market traction, making it challenging to conduct thorough due diligence based on historical performance.
• Focus on Vision and Potential: Angel investors prioritize evaluating the founder’s vision, market opportunity, and growth potential during early-stage due diligence. They may place greater emphasis on qualitative factors such as the strength of the founding team, product-market fit, and innovation potential.
• Risk Tolerance: Due to the inherent uncertainties associated with early-stage investments, angel investors exhibit a higher risk tolerance and may be more willing to invest based on conviction and gut feeling rather than extensive data analysis.

Later Stage

Later-stage investments occur when a startup has developed a more established operational history, allowing for a more detailed analysis of its performance and prospects. Here’s how the later-stage investment phase influences the due diligence processes of venture capitalists:

• Availability of Historical Data: Later-stage startups typically have more comprehensive financial records, market data, and operational metrics available for analysis. This enables venture capitalists to conduct more quantitative and data-driven due diligence.
• Focus on Metrics and Performance: Venture capitalists prioritize analyzing key performance indicators (KPIs), revenue growth, customer acquisition metrics, and market share during later-stage due diligence. They rely on quantitative analysis to assess the startup’s scalability, profitability, and potential for sustained growth.
• Risk Mitigation: Despite the availability of historical data, venture capitalists still prioritize risk mitigation during later-stage due diligence. They scrutinize the startup’s competitive positioning, market dynamics, management team, and potential risks to identify potential red flags and mitigate investment risks.

Resource Constraints

Resource constraints significantly impact the due diligence processes of angel investors and venture capitalists, influencing the depth and breadth of their evaluations. Understanding these constraints is crucial for entrepreneurs seeking funding and investors evaluating investment opportunities.

Angel Investors

Angel investors, often operating independently or in small groups, may face limitations in terms of resources compared to venture capital firms. Here’s how resource constraints impact the due diligence processes of angel investors:

• Limited Team Structure: Angel investors typically lack the organizational structure and dedicated teams found in venture capital firms. As a result, they may have fewer resources available for conducting comprehensive due diligence.
• Personal Expertise: Due to resource constraints, angel investors often rely on their personal expertise, industry knowledge, and network connections to evaluate investment opportunities. They may leverage their own experiences as entrepreneurs or business professionals to assess the viability and potential of startups.
• Outsourcing Certain Tasks: To overcome resource limitations, angel investors may outsource certain due diligence tasks, such as legal review or financial analysis, to external professionals or consultants. While this approach allows for specialized expertise, it may also entail additional costs and dependencies.

Venture Capitalists

Venture capital firms, equipped with dedicated teams and extensive resources, have the advantage of conducting more thorough due diligence. Here’s how resource availability influences the due diligence processes of venture capitalists:

• Dedicated Teams: Venture capital firms typically have dedicated teams of analysts, advisors, and experts in various domains, including market research, legal due diligence, and financial analysis. These teams collaborate to conduct comprehensive evaluations of potential investments.
• Access to Data and Tools: Venture capitalists have access to sophisticated data analytics tools, market research databases, and proprietary platforms that facilitate detailed analysis and decision-making. These resources enable them to gather and analyze vast amounts of data efficiently.
• Expertise in Specialized Areas: With specialized teams focused on specific areas such as technology assessment, regulatory compliance, or intellectual property rights, venture capital firms can delve into niche aspects of due diligence with precision and depth.

Investment Philosophy

The investment philosophy adopted by angel investors and venture capitalists significantly shapes their approach to due diligence and decision-making processes. Understanding these philosophies is essential for entrepreneurs seeking funding and investors evaluating investment opportunities.

Angel Investors

Angel investors often prioritize personal rapport, trust, and intuition over strict reliance on hard data. Their investment philosophy is characterized by flexibility, subjectivity, and a willingness to take calculated risks. Here’s how their investment philosophy influences their approach to due diligence:

• Personal Rapport and Trust: Angel investors may place greater emphasis on building strong relationships with entrepreneurs and founders. They value personal rapport and trust, often investing in individuals they believe in, even in the absence of comprehensive data or proven track records.
• Reliance on Judgment and Experience: Due to their entrepreneurial backgrounds or industry expertise, angel investors rely heavily on their personal judgment and experience when evaluating investment opportunities. They draw upon their own successes, failures, and insights to assess the potential of startups.
• Flexibility and Risk Tolerance: Angel investors exhibit a higher degree of flexibility and risk tolerance compared to venture capitalists. They are more willing to embrace uncertainty, invest in unproven ideas, and support early-stage ventures that may lack clear revenue streams or market validation.

Venture Capitalists

Venture capitalists adhere to a structured, data-driven investment strategy driven by their fiduciary responsibility to their contributors. Their investment philosophy is characterized by rigorous analysis, objective evaluation criteria, and a focus on maximizing returns while minimizing risks. Here’s how their investment philosophy influences their approach to due diligence:

• Structured and Data-Driven Approach: Venture capitalists follow a structured due diligence process that relies heavily on quantitative analysis, market research, and financial modeling. They utilize data-driven metrics and benchmarks to evaluate the viability and scalability of potential investments.
• Fiduciary Responsibility: Venture capitalists have a fiduciary duty to their limited partners and investors to prudently manage their capital and generate attractive returns. As such, they prioritize investments that align with their fund’s objectives, risk profile, and expected financial outcomes.
• Emphasis on Scalability and Growth Potential: Venture capitalists focus on identifying startups with significant growth potential and scalable business models. They seek opportunities to invest in companies that can achieve rapid expansion, capture market share, and deliver substantial returns on investment.

Expected Returns and Risk Tolerance

Expected returns and risk tolerance play a significant role in shaping the due diligence processes of both angel investors and venture capitalists. Understanding these factors is crucial for entrepreneurs seeking funding and investors evaluating investment opportunities.

Angel Investors

Angel investors often have higher risk tolerance levels and may prioritize potential returns over mitigating risks through extensive due diligence. Here’s how expected returns and risk tolerance influence the due diligence processes of angel investors:

• Higher Risk Tolerance: Angel investors, operating with their personal funds and without the fiduciary responsibility to external investors, are typically more willing to take on higher-risk investments. They understand that investing in early-stage startups entails inherent uncertainties and are prepared to accept the associated risks.
• Focus on Potential Returns: With a greater appetite for risk, angel investors may prioritize the potential for high returns when evaluating investment opportunities. They may be more inclined to invest in disruptive technologies, innovative ideas, or unproven markets, recognizing the possibility of significant upside potential.
• Impact on Due Diligence: The higher risk tolerance of angel investors often translates into a less rigorous due diligence process. While they may still conduct some level of analysis and evaluation, they may be more willing to rely on intuition, personal connections, and qualitative factors rather than extensive quantitative analysis or market research.

Venture Capitalists

Venture capitalists, accountable to their limited partners and investors, adhere to a disciplined approach to risk management and expected returns. Here’s how these factors influence the due diligence processes of venture capitalists:

• Fiduciary Responsibility: Venture capitalists have a fiduciary duty to their limited partners to prudently manage capital and generate attractive returns while minimizing risks. As a result, they undertake thorough due diligence to mitigate investment risks and maximize the probability of success.
• Balancing Risk and Return: While venture capitalists are also seeking high returns, they approach risk management more systematically. They aim to strike a balance between risk and return by thoroughly analyzing market dynamics, competitive landscapes, and financial projections to identify investment opportunities with attractive risk-adjusted returns.
• Impact on Due Diligence: The fiduciary responsibility of venture capitalists necessitates a more comprehensive due diligence process. They conduct extensive analysis, including market research, financial modeling, technology assessments, and legal due diligence, to evaluate the viability and scalability of potential investments thoroughly.

Portfolio Strategy

Portfolio strategy plays a crucial role in shaping the due diligence processes of both angel investors and venture capitalists. Understanding these strategies is essential for entrepreneurs seeking funding and investors evaluating investment opportunities.

Angel Investors

Angel investors often adopt a diversified portfolio strategy to spread risk across multiple investments. Here’s how portfolio diversification influences the due diligence processes of angel investors:

• Diversification: Angel investors typically invest in a broad range of startups across different industries, stages, and business models to mitigate the risk of individual failures. This diversification strategy aims to spread risk and maximize the likelihood of capturing successful investments.
• Less In-depth Due Diligence: Maintaining a diverse portfolio may result in less in-depth due diligence conducted per startup. With limited time and resources available for each investment, angel investors may focus on key qualitative factors such as founder credibility, market opportunity, and product-market fit, rather than exhaustive quantitative analysis or market research.
• Risk Management: Portfolio diversification serves as a risk management strategy for angel investors, allowing them to tolerate a higher level of uncertainty and volatility in individual investments. By spreading their capital across multiple startups, they aim to minimize the impact of potential losses on their overall investment portfolio.

Venture Capitalists

Venture capitalists may adopt a more focused approach to portfolio strategy, specializing in specific sectors or business models. Here’s how focus areas influence the due diligence processes of venture capitalists:

• Focus on Specific Sectors: Venture capital firms often specialize in particular sectors or industries where they have domain expertise, networks, and track records of success. This specialization allows them to develop deep insights and understanding, facilitating more efficient and focused due diligence processes.
• Expertise and Efficiency: By focusing on specific sectors or business models, venture capitalists can streamline their due diligence processes and leverage their expertise to identify investment opportunities with greater efficiency. They can quickly assess market dynamics, competitive landscapes, and growth potential, enabling faster decision-making.
• Thematic Investing: Some venture capital firms adopt thematic investing strategies, targeting emerging trends, technologies, or market segments. This thematic approach guides their investment thesis and due diligence efforts, enabling them to capitalize on promising opportunities within their focus areas.

Conclusion

Understanding the distinctions in due diligence practices between angel investors and VCs is essential for startups seeking funding. This awareness helps in tailoring pitches and expectations accordingly, enhancing the chances of successful partnerships in the competitive startup ecosystem.

FAQ

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A Round Financing –  “A” Round Financing – The first major round of business financing by private equity investors or venture capitalists. In private equity investing, an “A” round, or Series A financing, is usually in the form of convertible preferred stock. An “A” round by external investors generally takes place after the founders have used their seed money to provide a “proof of concept” demonstrating that their business concept is a viable and eventually profitable one.

Accelerated Cost Recovery System – The IRS-approved method of calculating depreciation expense for tax purposes. Also known as Accelerated Depreciation.

Accelerator –  In an Accelerator, a Seed investment is made in return for equity and usually between $15K – $50K. Startups are admitted in classes and work in groups. They are generally given a deadline to complete intensive training and iteration (typically 1 week to 6 months). Startups end an accelerator program with a Demo Day in which they pitch to investors.

Accredited Investor –  An individual with $1,000,000 or more in net worth (assets – liabilities), excluding their primary residence, or $200,000 in annual income, or $300,000 of income if earned jointly with their spouse, for the previous two years with a reasonable expectation of continued income for the following year.  Note that separate definitions apply for legal entities.

Accrued Interest –  The interest due on preferred stock or a bond since the last interest payment was made.

Acqui-hire –  One company’s acquisition of another for the primary purpose of hiring its employees, rather than for the intrinsic value of the business itself.

Acquisition –  A process under which a company acquires the controlling interest of another company.

Add-on Service –  Add-on Services are the services provided by a venture capitalist that are not monetary in nature, such as helping to assemble a management team and helping to prepare the company for an IPO.

Adventure Capitalist –  An adventure capitalist is an entrepreneur who helps other entrepreneurs financially and often plays an active role in the company’s operations such as by occupying a seat on the board of directors, etc.

Advisor –  An individual providing business connections, guidance, advice and support to the entrepreneur as they develop and grow their startup.

Advisory Board –  A group of external advisors to a private equity group or portfolio company. Advice provided varies from overall strategy to portfolio valuation. Less formal than a Board of Directors.

Allocation –  The amount of securities assigned to an investor, broker, or underwriter in an offering. An allocation can be equal to or less than the amount indicated by the investor during the subscription process, depending on market demand for the securities.

Alpha Test –  Internal testing, of a pre-production model, typically on a controlled basis, with the objective of identifying functional deficiencies and design flaws.

Alternative Minimum Tax – A tax designed to prevent wealthy investors from using tax shelters to avoid income tax. The calculation of the AMT takes into account tax-preference items.

American Depositary Receipt –  A security issued by a U.S. bank in place of the foreign shares held in trust by that bank, thereby facilitating the trading of foreign shares in U.S. markets. 

Amortization –  An accounting procedure that gradually reduces the book value of an intangible asset through periodic charges to income.

Angel Capital Association –  A North American association of angel groups, accredited investors and family offices which promotes public policies for investors and startups. The association provides investors access to trending ideas and professional knowledge and entrepreneurs insight into how angels think.

Angel Financing –  Seed capital raised from independently wealthy investors, for startup companies.

Angel Fund –  A formal or informal assemblage of active angel investors who cooperate in some part of the investment process. Key characteristics of an angel group are: control by member angels (who manage the entity or have control over the entity’s managers), and collaboration by member angels in the investment process.

Angel Group –  An organization composed of accredited investors which serves as a platform for them to coordinate investments in seed and early stage startup companies.  The group members typically work together consolidating their resources, expertise and capital through informal networks or formal funds.

Angel Investor –  Once, an unrelated individual investing monies in a business venture, often later than founders, friends and family (the “3F’s”), but before larger corporate investors such as venture capitalists (“VC’s”). The term “angel” arose in the entertainment industry, where investors would bankroll a production for a share of the profits. Now, with wealthier individuals able to invest significant funds throughout the development of a company (so-called “super-angels”), and venture capitalists sometimes investing alongside and on the same terms as angels, a more modern definition is that “angels” write checks with their own money, while “VC’s” write checks with other people’s money (venture capitalists typically raise funds from investors called “limited partners” who do not actively participate in the fund’s investment decisions and operations, whereas the VC’s act as the “general partners” making the investment decisions and overseeing the invested companies.)

Angel Round –  A round of investment into a startup company from angel investors not previously affiliated with the founder.  Typically the first money invested in a company after the founders own money, and the founders friends and family.

Annex Fund –  Annex funds are side funds that can provide an extra pool of money to supplement the original VC Funds.

Annual Recurring Revenue – The recurring subscription-based revenue which software as a service / platform as a service, (SaaS / PaaS) based companies receive annually; also known as the run rate.⁶

Anti Dilution Provisions –  Anti Dilution Provisions are contractual measures that allow investors to keep a constant share of a firm’s equity in light of subsequent equity issues. These may give investors preemptive rights to purchase new stock at the offering price. Examples include Broad-Based Weighted Average Ratchet, Narrow-Based Weighted Average Ratchet, and Full Ratchet Anti Dilution.

Articles of Incorporation –  Documentation filed with the Secretary of State or Company Registrar which acts as a charter to document the establishment and existence of a corporation. The articles typically include the businesses name, address, a statement of business purpose, and details related to the types of stock the corporation is entitled to issue.

Articles of Organization –  Documentation filed with the Secretary of State which acts as a charter to document the establishment and existence of a Limited Liability Company.

Assets –  This word refers to all financial resources that a corporation owns. Current assets can be any form of currency, including traded inventory, investments, and checks. Fixed assets (capital assets) consist of material goods and equipment of a company, such as the land by which the company sits on, the company building, and technological machinery. Intangible assets mainly comprise of intellectual property protection, copyrights, patents, etc.

Balance Sheet –  A condensed financial statement showing the nature and amount of a company’s assets, liabilities, and capital on a given date.

Bankruptcy –  An inability to pay debts. Chapter 11 of the bankruptcy code deals with reorganization, which allows the debtor to remain in business and negotiate for a restructuring of debt.

Bear Hug –  An offer made directly to the Board of Directors of a target company. Usually made to increase the pressure on the target with the threat that a tender offer may follow.

Benchmarks –  Benchmarks are performance goals against which a company’s success is measured. Benchmarks are often used by investors to help determine whether a company should receive additional funding or whether management should receive extra stock.

Best Efforts –  An offering in which the investment banker agrees to distribute as much of the offering as possible and return any unsold shares to the issuer.

Big Hairy Audacious Goal – The giant sweeping vision of a startup founder to change the world.⁷

Black Swan –  An unpredictable event typically with extreme consequences.

Blind Pool –  A blind pool is a form of limited partnership which doesn’t specify what investment opportunities the general partner plans to pursue.

Blue Sky Laws –  A common term that refers to laws passed by various states to protect the public against securities fraud. The term originated when a judge ruled that a stock had as much value as a patch of blue sky.

Board of Directors –  A group of people elected by the company’s shareholders (often to the terms of the negotiated Shareholders Agreement) that makes decisions on major company issues, including hiring/firing the Chief Executive Officer.

Bond –  Specific type of debt instrument most commonly sold by government entities.

Book Value –  Book value of a stock is determined from a company’s balance sheet by adding all current and fixed assets and then deducting all debts, other liabilities, and the liquidation price of any preferred issues. The sum arrived at is divided by the number of common shares outstanding, and the result is book value per common share.

Bootstrapping –  Funding a company only by reinvesting initial profits; from “pulling yourself up by your own bootstraps.

Bridge Financing –  A limited amount of equity or short-term debt financing typically raised within 6-18 months of an anticipated public offering or private placement meant to “bridge” a company to the next round of financing.

Bridge Loan –  A temporary short-term loan that is obtained for use for an interim period,  typically one year, until the borrower can obtain a more comprehensive, longer-term financing package.

Broker-Dealer –  In reference to “Crowdfunding”, one of the two types of “Intermediary” (“Portals” being the other) authorized by the “JOBS Act” to handle the sale of crowdfunded securities (i.e. equity or debt instruments) by an “issuing company”.  More generally, a governmentally regulated component of the U.S. financial system, either a natural person or an organization trading securities on its own account or on behalf of customers.  Broker-dealers are regulated by the federal Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA)(a “Self-Regulatory Organization”, or “SRO”), and sometimes the various states.

Brokers –  Licensed individuals or firms, which charge a fee, to raise capital for startup companies from private investors and funds.

Burn Out –  AKA. Cram Down – Extraordinary dilution, by reason of a round of financing, of a non-participating investor’s percentage ownership in the issuer.

Burn Rate –  The rate at which a company expends net cash over a certain period, usually a month.

Business Development Company –  (BDC) A vehicle established by Congress to allow smaller, retail investors to participate in and benefit from investing in small private businesses as well as the revitalization of larger private companies.

Business Judgment Rule –  The legal principle that assumes the board of directors is acting in the best interests of the shareholders unless it can be clearly established that it is not. If the board was found to violate the business judgment rule, it would be in violation of its fiduciary duties to the shareholders.

Business Model Canvas –  Based on nine building blocks, the Business Model Canvas is an entrepreneurial tool that enables entrepreneurs to design, develop, articulate, challenge, invent and pivot their strategic business model. The building blocks referenced above include customer segments, value proposition, channels, customer relations, revenue streams, key resources, key activities, key partnerships, and cost structures.

Business Plan –  A document utilized by management and relied upon heavily by some investors, that entrepreneurs use in detailing their business concept as well as their company’s overall strategic and financial objectives. In recent years the Business Model Canvas has become increasingly popular with both entrepreneurs and managers as a guide or framework for the startup’s efforts, and in many cases is now utilized in lieu of the Business Plan by these parties.

Business Plan Competition –  A program historically run by a university or other not-for-profit organization to encourage students to develop plans for a new business.  Increasingly a showcase competition for existing startups seeking financing from angels and other investors.

Business to Business – Business to Business transactions occur when one business engages in commercial interactions with other business(es); under this scenario, one business is the supplier and the other business(es) engaging in the transaction are the customers.

Business to Consumer – Business to Consumer transactions occur when a business engages in commercial interactions directly with consumers; under this scenario, the consumer is the end-use customer of the product or services provided.

Buyout –  A buyout is defined as the purchase of a company or a controlling interest of a corporation’s shares, product line or business. A leveraged buyout is accomplished with borrowed money or by issuing more stock.

C-Corporation –  A legal structure, preferred by investors and many entrepreneurs of startup companies seeking funding.  Like Limited Liability Companies, (LLCs) and S-Corporations, C-Corporations protect shareholders from liability in the event of a legal issue or bankruptcy.  Unlike LLCs and S-Corporations, C-Corporations may not make an election to pass corporate income, deductions and losses to shareholders for federal tax purposes.  However, C-Corporations have no limits on the number of shareholders which may own their shares. Entrepreneurs and investors typically prefer that their startup’s C-Corporation be registered  in Delaware. However, Nevada and Wyoming are becoming increasingly popular. Additionally, many entrepreneurs chose to register as a C-corporation in their own state.

Call –  A contractual term/condition which provides the company the option to compel the investor to sell their shares.

Call Option –  The right to buy a security at a given price (or range) within a specific time period.³

Cap –  The maximum company valuation at which a convertible note will convert into a company’s stock.⁷

Capital –  Financial capital is a term that can refer to the money exchanged between entrepreneurs and investors during a business deal. Entrepreneurs need to raise capital for their startups while investors can provide them with the needed capital (or funding). Financial capital usually comes with interest, and new business owners can use their financial capital in purchasing real capital (or machinery or equipment) for their new business.⁴

Capital Expenditures –  Capital Expenditures is money spent by a company to add or expand property, plant, and equipment assets, with the expectation that they will benefit the company over a long period of time (more than one year).⁹

Capital Gains – 

• The difference between an asset’s purchase price and selling price, when the selling price is greater. Long-term capital gains (on assets held for a year or longer) are taxed at a lower rate than ordinary income.³
• Capital Gain is the gain to investor from selling a stock, bond or mutual fund at a higher price than the purchase price. The capital gain is usually the amount realized (net sales price) less your investment (adjusted tax basis) in the property. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.⁵

Capital Under Management –  The amount of capital available to a angel or VC Fund’s management team for startup venture investments.⁶

Capitalization Table –  A table depicting the quantity of shares or unit ownership which is held by each investor in a corporation or LLC, typically including founders’ equity, investor equity, and advisor / employee Stock Option Pools.⁶

Capitalize –  To record an outlay as an asset (as opposed to an expense), which is subject to depreciation or amortization.³

Carried Interest –  or “Carry³” The portion of any gains realized by the fund to which the fund managers are entitled, generally without having to contribute capital to the fund. Carried interest payments are customary in the venture capital industry, in order to create a significant economic incentive for venture capital fund managers to achieve capital gains.³

Cash Position –  The amount of cash available to a company at a given point in time.³

Chapter 11 –  The part of the Bankruptcy Code that provides for reorganization of a bankrupt company’s assets.³

Chapter 7 –  The part of the Bankruptcy Code that provides for liquidation of a company’s assets.³

Chief Analytics Officer – The senior executive officer responsible for the analytical aspects of a corporation / company.⁶

Chief Executive Officer –  The senior executive officer responsible for the overall management of a corporation / company.⁶

Chief Financial Officer – The senior executive officer responsible for the financial aspects of a corporation / company.⁶

Chief Information Officer – The senior executive officer responsible for the informational aspects of a corporation / company.⁶ 

Chief Marketing Officer – The senior executive officer responsible for the marketing aspects of a corporation / company.⁶

Chief Operations Officer – The senior executive officer responsible for the operational aspects of a corporation / company.⁶

Chief Security Officer – The senior executive officer responsible for the security aspects of a corporation / company.⁶

Claim Dilution –  A reduction in the likelihood that one or more of the firm’s claimants will be fully repaid, including time value of money considerations.³

Clawback –  A clawback obligation represents the general partner’s promise that, over the life of the fund, the managers will not receive a greater share of the fund’s distributions than they bargained for. Generally, this means that the general partner may not keep distributions representing more than a specified percentage (e.g., 20%) of the fund’s cumulative profits, if any. When triggered, the clawback will require that the general partner return to the fund’s limited partners an amount equal to what is determined to be “excess” distributions.³

Closed-end Fund –  A type of fund that has a fixed number of shares outstanding, which are offered during an initial subscription period, similar to an initial public offering. After the subscription period is closed, the shares are traded on an exchange between investors, like a regular stock. The market price of a closed-end fund fluctuates in response to investor demand as well as changes in the values of its holdings or its Net Asset Value. Unlike open-end mutual funds, closed-end funds do not stand ready to issue and redeem shares on a continuous basis.³

Closing – 

• An investment event occurring after the required legal documents are implemented between the investor and a company and after the capital is transferred in exchange for company ownership or debt obligation.³
• This is the transaction that occurs after entrepreneurs and investors legally exchange all required legal documentation and capital that is needed in their business deal. When an investor “closes in on a deal,” they have already negotiated with the entrepreneur the details encompassing corporate ownership and monetary obligation.⁴
• Closing is the final event to complete the investment, at which time all the legal documents are signed and the funds are transferred.⁵

Co-invest –  When more than one investor joins in making an investment on similar terms.⁷

Co-investment –  The syndication of a private equity financing round or an investment by an individual (usually general partners) alongside a private equity fund in a financing round.³

Collar Agreement –  Agreed-upon adjustments in the number of shares offered in a stock-for-stock exchange to account for price fluctuations before the completion of the deal.³

Collateral –  The Property or other assets a borrower uses to secure a loan. If payments are not made, the lender can seize the collateral to recoup its loss. Secured (collateralized) loans are less risky to lenders and they are therefore, more likely to make loan.⁶

Committed Capital –  The total dollar amount of capital pledged to a private equity fund.³

Common Stock – 

• A class of ownership that has lower claims on earnings and assets than Preferred Stock. It is riskier to own common stock because in the event of Liquidation, common stock shareholders are the last to claim rights to assets.²
• A unit of ownership of a corporation. In the case of a public company, the stock is traded between investors on various exchanges. Owners of common stock are typically entitled to vote on the selection of directors and other important events and in some cases receive dividends on their holdings. Investors who purchase common stock hope that the stock price will increase so the value of their investment will appreciate. Common stock offers no performance guarantees. Additionally, in the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock.³
• This term represents a constituent in corporate ownership. People who own shares of common stock (common stockholders) often have voting rights in their company’s decision-making matters and executive board of elections.  Through company dividends and capital appreciation of corporate assets, common stockholders can also share in their company’s financial success.⁴

Company By-Laws –  Written agreements established for the purpose of defining how corporations will operate and be managed. They are established specifically for corporations as opposed to LLCs and therefore also deal with issues related to the boards and issuance of shares such as shareholder rights, provisions to select officers and directors and delineation of the various governance rules under which the corporation operates.⁶

Compound Annual Growth Rate – The year-over-year growth rate applied to an investment or other aspect of a firm using a base amount.³

Conversion Ratio –  The number of shares of stock into which a convertible security may be converted. The conversion ratio equals the par value of the convertible security divided by the conversion price.³

Convertible –  Convertibles are the corporate securities, usually preferred shares or bonds, that can be exchanged for a set number of another form, usually common share, at a pre-stated price. Convertibles are appropriate for investors who want higher income than is available from common stock, together with greater appreciation potential than regular bonds offer. From the issuer’s standpoint, the convertible feature is usually designed as a sweetener, to enhance the marketability of the stock or preferred.⁵

Convertible Note –  A debt instrument that can be converted into another security, such as shares of common or preferred stock.

Convertible Preferred Stock –  Preferred stock that may be converted into common stock or another class of preferred stock, either voluntarily or mandatory.

Convertible Security –  A bond, debenture or preferred stock that is exchangeable for another type of security (usually common stock) at a pre-stated price. Convertibles are appropriate for investors who want higher income, or liquidation-preference protection, than is available from common stock, together with greater appreciation potential than regular bonds offer. (See Common Stock, Dilution, and Preferred Stock).³

Corporate Charter –  Documentation filed with the Secretary of State or Company Registrar which acts as a charter to document the establishment and existence of a corporation. The articles typically include the businesses name, address, a statement of business purpose, and details related to the types of stock the corporation is entitled to issue.⁶

Corporate Resolution –  A document stating that the corporation’s board of directors has authorized a particular individual to act on behalf of the corporation.³

Corporate Venture –  An investment from one corporation in another, typically at an early stage for strategic reasons.⁷

Corporate Venture Capital –  Corporate venture capital is a subsidiary of a large corporation which makes venture capital investments.⁵

Corporate Venturing – 

• Venture capital provided by [in-house investment funds of] large corporations to further their own strategic interests.³
• Corporate Venturing is a practice of a large company, taking a minority equity position in a smaller company in a related field.⁵

Corporation –  A legal entity structure for businesses enterprises which are typically chartered by a state or the federal government, under which ownership is held by shareholders.⁶

Covenant –  A protective clause in an agreement.³

Coverage Ratio –  A measure of a company’s ability to pay its debts and meet its financial obligations.⁶

Cram Down –  AKA. Burn Out – Extraordinary dilution, by reason of a round of financing, of a non-participating investor’s percentage ownership in the issuer.³

Crowdfunding –  “Crowdfunding” is the process of raising financial support for a venture via smaller amounts from many investors (“the crowd”), rather than the alternative pattern of larger amounts from a smaller number of supporters.  Charities and philanthropies have traditionally employed both fundraising strategies (soliciting both the general populace, or crowd, as well as fewer wealthier donors), while businesses have usually taken the route involving fewer and larger supporters.  Today’s internet has vastly increased the ability of fundraisers to communicate information, solicit and receive financial support from anyone on-line. Crowdfunding without the expectation of financial return, or with the promise of a specific good or service, are termed “donation-based” or “reward-based” crowdfunding, are in the nature of charitable solicitation or business marketing, and have never been illegal in the U.S.  In contrast, soliciting funds in return for a ownership interest or expectation of repayment, are termed “equity-based” or “debt-based” crowdfunding (together grouped as “securities-based” crowdfunding), and have been until now governed (and effectively prevented) by federal and state securities law.  One of the most significant parts (Title III) of the federal “Jumpstart Our Business Startups”, or JOBS Act of 2012 specifically enabled and legalized “security-based crowdfunding”, subject to a variety of regulations and restrictions.¹

Crowdfunding Intermediary Regulatory Advocates –  (CfIRA) An open organization of diverse participants and parties interested in the crowdfunding industry (“portals”, “broker-dealers”, professional and business service providers, investors, etc.) dedicated to interacting with each other and advocating with the regulators charged with shaping and governing the nascent industry of securities-based crowdfunding authorized by the JOBS Act.  CfIRA has participated in numerous hearings, written official letters as well as popular articles, etc., both in public as well as government forums (Congress, SEC, FINRA, etc.)  See http://www.cfira.org for more information.¹

Crowdfunding Professional Association –  (CfPA) The American industry trade organization dedicated to facilitating a vibrant, credible and growing crowdfunding community, from investors through service providers to entrepreneurs.  See http://crowdfundingprofessional.org for more information.¹

Cumulative Preferred Stock –  A stock having a provision that if one or more dividend payments are omitted, the omitted dividends (arrearage) must be paid before dividends may be paid on the company’s common stock.³

Cumulative Voting Rights –  When shareholders have the right to pool their votes to concentrate them on an election of one or more directors rather than apply their votes to the election of all directors. For example, if the company has 12 openings to the Board of Directors, in statutory voting, a shareholder with 10 shares casts 10 votes for each opening (10×12 = 120 votes). Under the cumulative voting method however, the shareholder may opt to cast all 120 votes for one nominee (or any other distribution he might choose).³

Customer Lifetime Value –  A forecast or prediction of the total net profit related to the entire lifetime, (present and future) of a specific customer relationship.⁶

D&O; Insurance –  Insurance obtained by portfolio companies to cover the costs of legal expenses associated with claims against its’ board members and protect them from lawsuits.⁶

Daily Active Users –  Distinct website users who engage with a site’s offerings or services in a given day.⁶

De Facto –  To proceed with an action without legal authority but may be recognized as legally valid. De Facto may apply to a company that operates as a corporation even though they may have not taken the steps or documentation to become incorporated. In some cases, courts will treat the company as though it were legal to protect those who believed the business was legal.

Dead Pool –  Where companies that die go.⁷

Deal Flow –  Deal flow (dealflow) is the rate at which investment offers are presented to funding institutions.⁵

Deal Lead –  The investor or investment organization taking primary responsibility for organizing an investment round in a company.  The deal lead typically finds the company, negotiates the terms of the investment, invests the largest amount, and serves as the primary liaison between the company and the other investors.⁷

Deal Structure –  The framework of a deal between investors and a startup company which is typically outlined in a term sheet and defined in detail in Purchase Agreements and related documentation, providing the rights and obligations of the parties.⁶

Debenture – 

• A debt instrument; basically the same as a Promissory Note.³
• (promissory note)This designation is a legal document detailing the terms of repayment and interest that a borrower is responsible for. It also details the principal amount owed and the maturity date. For example, financial institutions can approve qualified applicants for loans. They send out debenture or promissory statements to borrowers as a reminder of their legal contract.⁴

Debt – 

• Any obligation by one person to pay another. May be a primary (direct) obligation as in a Note, or a secondary (contingent) obligation as in a guaranty.³
• This is an amount of money that a borrower owes to an individual, investor, or lending institution. In the finance world, the word “debt” is often associated with interest payments. For example, when an individual has a credit card limit of $5,000, the lender, usually a bank, is willing to lend the credit card holder $5,000 of credit. If the lender uses $500 of that total amount, they are now considered to be in $500 debt until the total amount is paid. Partial payment of an owed amount always encompasses interest.⁴

Debt Financing –  Debt Financing means when a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise to repay principal and interest on the debt.⁵

Debt Instrument –  Any instrument evidencing the obligation of the maker to pay the holder of the debt instrument. Includes Bonds, Debentures and Notes of all kinds.³

Debt Table –  A debt table is a table providing a summary and analysis of a startup’s debt, by type. It includes details related to the interest rates for each instrument as well as debt service requirements.⁶

Deficiency Letter –  A letter sent by the SEC to the issuer of a new issue regarding omissions of material fact in the registration statement.³

Demand Registration –  Resale registration that gives the investor the right to require the Company to file a Registration Statement registering the resale of the securities issued to the investor in a private offering.³

Demand Rights –  Contemplate that the company must initiate and pursue the registration of a public offering including, although not necessarily limited to, the shares proffered by the requesting shareholder(s).³

Demo Day –  Where the graduating class of Incubators and Accelerators is given a chance to pitch to investors. ²

Depreciation – 

• An expense recorded to reduce the value of a long-term tangible asset. Since it is a non-cash expense, it increases free cash flow while decreasing the amount of a company’s reported earnings.³
• This term refers to the gradual loss in value of currency, stocks, and material goods. For example, biotechnology can “depreciate” over the course of 4 years.⁴

Dilution –  Issuing more shares of a company dilutes the value of holdings of existing shareholders.² A reduction in the percentage ownership of a given shareholder in a company caused by the issuance of new shares.³

Dilution Protection –  Mainly applies to convertible securities. Standard provision whereby the conversion ratio is changed accordingly in the case of a stock dividend or extraordinary distribution to avoid dilution of a convertible bondholder’s potential equity position. Adjustment usually requires a split or stock dividend in excess of 5% or issuance of stock below book value. Share Purchase Agreements also typically contain anti-dilution provisions to protect investors in the event that a future round of financing occurs at a valuation that is below the valuation of the current round.³

Director –  Person elected by shareholders to serve on the board of directors. The directors appoint the president, vice president and all other operating officers, and decide when dividends should be paid (among other matters).³

Disclosure Document –  A booklet outlining the risk factors associated with an investment.³

Discounted Convertible Note –  A loan that converts into the same equity security being purchased in a future investment round, but at a discounted price representing a risk premium for early investment.⁷

Diversification –  The process of spreading investments among various types of securities and various companies in different fields.³

Dividend –  The payments designated by the Board of Directors to be distributed pro-rata among the shares outstanding. On preferred shares, it is generally a fixed amount. On common shares, the dividend varies with the fortune of the company and the amount of cash on hand and may be omitted if business is poor or if the Directors determine to withhold earnings to invest in capital expenditures or research and development.³

Dividend Preference –  Preferred stockholders receive dividends before common stockholders. Dividend can be cumulative or non-cumulative.²

Double Bottom Line –  In Impact Investing, the goal of measuring a company by its positive societal impact in addition to its financial returns.⁷

Double Dip –  Participating preferred stock which entitles a holder to a liquidation preference and also to participate in the residual value.⁹

Down-round –  When the valuation of a company at the time of an investment round is lower than its valuation at the conclusion of a previous round.⁷

Drag-along Rights – 

• Majority shareholders can force minority shareholders to join in the sale of a company. Minority shareholders will receive same price, terms, and conditions.²
• A majority shareholder’s right, obligating shareholders whose shares are bound into the shareholders’ agreement to sell their shares into an offer the majority wishes to execute.³

Drip Feed –  When investors fund a startup a little bit at a time instead of in a lump sum.⁷

Drive-by Deal –  A drive-by deal is slang term often used when referring to a deal in which a venture capitalist invests in a startup with the goal of a quick exit strategy. The VC takes little to no role in the management and monitoring of the startup. ⁹

Dry Powder –  Money held in reserve by a venture fund or angel investor in order to be able to make additional investments in a company.⁷

Due Diligence – 

• A process undertaken by potential investors — individuals or institutions — to analyze and assess the desirability, value, and potential of an investment opportunity.³
• This is the process whereby individuals or groups of people conduct independent investigations regarding a particular matter. In the business world, investors conduct timely due diligence when inquiring about prospective investment endeavors. This may entail a background search of the company’s founders, review of the entrepreneur’s credit scores, and routine follow-up with references and associates, etc. New business owners, on the other hand, are encouraged to also conduct due diligence when finding a potential investor. Through due diligence, both the investor and entrepreneur has the opportunity to diligently analyze and assess each other for the potential of an investment opportunity and partnership.⁴
• Due diligence is the process of investigation and evaluation, performed by investors, into the details of a potential investment, such as an examination of operations and management and the verification of material facts.⁵

Early Exit –  An approach to angel investing popularized by author Basil Peters, in which the goal of an investment is the sale of a company within a few years without requiring additional large investments from VCs, thereby providing high relative returns without requiring companies to be home runs.⁷

Early Stage – 

• The key characteristic is market development. The business is focused on sales and marketing and proving business viability.²
• A state of a company that typically has completed its seed stage and has a founding or core senior management team, has proven its concept or completed its beta test, has minimal revenues, and no positive earnings or cash flows.³
• This term generally refers to a young enterprise that is three years old or younger. During this phase, a company is still in its novel stages of development. They could be in the process of experimenting with new products or services that they intend to market in the near future and/or may have viable products that are already available to the public.⁴

Earnings Before Interest, Taxes, Depreciation, and Amortization – 

A measure of cash flow calculated as:= Revenue – Expenses (excluding tax, interest, depreciation, and amortization). EBITDA looks at the cash flow of a company. By not including interest, taxes, depreciation, and amortization, we can clearly see the amount of money a company brings in. This is especially useful when one company is considering a takeover of another because the EBITDA would cover any loan payments needed to finance the takeover.³

Economies of Scale –  Economic principle that, as the volume of production increases, the cost of producing each unit decreases.³

Elevator Pitch –  An elevator pitch is a brief presentation, typically 30 – 60 seconds in duration, presenting the entrepreneur’s concept / solution, business model, “go to market” strategy and value proposition to potential angel or venture capital investors, in order to obtain the attention of the investors, such that they are compelled to learn more about the opportunity.⁶

Employee Agreements –  Include as a foundation Non-Disclosure Agreements, (NDAs), also known as Confidentiality Agreements, and are formal legal agreements between an employer and an employee.  The NDAs’ purpose is to provide a process under which employees maintain the company’s confidential or sensitive information, such that it is not shared or accessible by third parties.  Depending on the level of their position within the company, an employee’s agreement may also include Non-compete clauses, which, depending on the jurisdiction may prevent an employee from directly competing against the employer should they cease their employment. Similarly, Non-solicitation clauses which prevent employees from soliciting employees or customers, should they cease their employment, may be included.  Intellectual Property Assignment clauses assigning rights of discoveries during an employee’s tenure to the company and Freedom from  Conflict of Interests clauses validating the employee is free from conflicting relationships with third parties are also typical in the employment agreements of certain employees.⁶

Employee Retirement Income Security Act – 

ERISA shall mean the United States Employee Retirement Income Security Act of 1974, as amended, including the regulations promulgated thereunder.³

Employee Stock Option Plan –  (ESOP) A plan established by a company whereby a certain number of shares is reserved for purchase and issuance to key employees. Such shares usually vest over a certain period of time to serve as an incentive for employees to build long-term value for the company.³

Employee Stock Ownership Plan –  A trust fund established by a company to purchase stock on behalf of employees.³

Employer Identification Number –  An EIN or employer identification number is a unique, nine-digit identification number utilized by the Internal Revenue Service, (IRS) and assigned to business entities to identify employers as part of the tax reporting process. In order to obtain an EIN, business entities must file or apply to the IRS.⁶

Entrepreneur –  A person who organizes and operates a business or businesses, taking on greater than normal financial risks to do so.  Entrepreneurs are the founders of startups and are the people angel investors support.⁷

Equity – 

• Ownership in the capital of a Company. In corporations, it is called “stock”; in limited partnerships or LLCs, it is called “interests” or  “units.”³
• This designation is given to a stockholder’s ownership in a company. The amount of ownership is obtained when an individual or corporation purchases one or more shares of stock (equity shares).  The more equity purchased, the greater the ownership.⁴

Equity Financing –  Equity financing is a term used for company’s issuance of shares of common or preferred stock to raise money. Equity financing is commonly done when its per share prices are high-the most money that can be raised for the smallest number of shares.⁵

Equity Kicker –  Option for private equity investors to purchase shares at a discount. Typically associated with mezzanine financings where a small number of shares or warrants are added to what is primarily a debt financing.³

Equity Offerings –  Equity Offerings is raising funds by offering ownership in a corporation through the issuing of shares of a corporation’s common or preferred stock.⁵

Equity Seed Round –  When an entrepreneur first sells a part of his or her business – and therefore a proportional part of the good things (like profits) and the not-so-good things (like losses) – to an investor. Equity investments, unlike loans, do not need to be paid back.⁷

Escrow –  When a third party holds value during a transaction, releasing it only when a specified condition has been fulfilled.⁷

European Business Angels Network –  (EBAN) The European equivalent of America’s Angel Capital Association.  See http://www.eban.org for more information.¹

Exchange Act –  [“34 Act”] Regulates periodic reporting by companies with publicly traded securities, companies with more than 500 shareholders, and brokers and dealers in securities.³

Executive Summary –  An executive summary is a one to two page document which provides an overview of a startup entrepreneur’s business opportunity. It summarizes the key points of the startup’s business plan with a focus on obtaining investor interest, for potential investment. The goal of the executive summary is to grab the attention of the investor, such that they desire to learn more about the opportunity.⁶

Exercise Price –  The price at which an option or warrant can be exercised.³

Exit –  Exit is the sale or exchange of a significant amount of company ownership for cash, debt, or equity of another company.⁵

Exit Route –  An exit route is the method by which an investor would realize an investment.⁹

Exit Strategy – 

• A fund’s intended method for liquidating its holdings while achieving the maximum possible return. These strategies depend on the exit climates, including market conditions and industry trends. Exit strategies can include selling or distributing the portfolio company’s shares after an initial public offering (IPO), a sale of the portfolio company, or a recapitalization.³
• This is a company’s negotiated approach whereby investors are given an event or time within the development of their company to receive their return on investment (ROI). This can be achieved through a liquidity event, where their equity is converted into cash.⁴
• Exit Strategy is the way in which a venture capitalist or business owner intends to use to get out of an investment that he/she has made. Exit Strategy is also called liquidity event.⁵

Expansion Stage Company –  This term generally refers to a company that is three years old or more. During this period of development, a company may already have been successful commercializing many of their products and services but may not generate desired profit.  An enterprise that is in its expansion stage may resort to seeking additional sources of capital to minimize the risk of failure. Many venture capitalists invest during this stage of a company’s development.⁴

Expenses –  The cost a business incurs during operations in order to generate revenue. In normal circumstances, most of these are cash expenses; examples include wages, payments to vendors, and rent. Other expenses are non-cash, like depreciation, which decreases net revenue, but is not a cash outlay. These are governed by FASB and IRS accounting standards.⁶

Family Lifestyle Business –  A business established and operated by its founders for the purpose of developing and maintaining a particular lifestyle or level of income.  Such businesses typically have limited scalability because of issues such as limited access to capital, owner decisions relating to business operating models and staffing and reinvestment objectives.  Many are sole practitioners or small groups like husband / wife teams. They are typically highly dependent on the experience, skills, drive and engagement of the owners.⁶

Fiduciary Responsibility –  Refers to trust responsibility to make good investments that will earn a high rate of return.²

Final Regulation –  An ERISA term, it is the United States Department of Labor’s Final Regulation relating to the definition of “plan assets” in (29 C.F.R. §2510.3-101).³

Financier –  Financier is a person or financial institution engaged in the lending and management of money and makes a living participating in commercial financing activities.⁵

Finder –  A person who helps to arrange a transaction.³

First Stage Capital –  First stage capital is the money provided to entrepreneur who has a proven product, to start commercial production and marketing, not covering market expansion, de-risking, acquisition costs.⁹

First-round Financing –  First-round financing is the first investment in a company made by external investors.⁹

Flat Round –  An investment round in which the pre-money valuation of a startups’ round is the same as its post-money valuation from the previous round.⁶

Flipping –  The act of buying shares in an IPO and selling them immediately for a profit. Brokerage firms underwriting new stock issues tend to discourage flipping and will often try to allocate shares to investors who intend to hold on to the shares for some time. However, the temptation to flip a new issue once it has risen in price sharply is too irresistible for many investors who have been allocated shares in a hot issue.³

Follow-on Investing – 

• (follow-up investing)This word refers to the event whereby investors reinvest in a company sometime during its development. Often times, follow-on investments occur when a company is not performing successfully as planned. Angel capitalists tend to avoid follow-on investments within the same company because of the high risk of additional monetary loss.⁴
• A subsequent investment made by an investor who has made a previous investment in the company, generally a later stage investment in comparison to the initial investment.⁵

Form 10-K –  This is the annual report that most reporting companies file with the Commission. It provides a comprehensive overview of the registrant’s business.³

Form 10-KSB –  This is the annual report filed by reporting “small business issuers.” It provides a comprehensive overview of the company’s business, although its requirements call for slightly less detailed information than required by Form 10-K.³

Form S-1 –  The form can be used to register securities for which no other form is authorized or prescribed, except securities of foreign governments or political sub-divisions thereof.³

Form S-4 –  Type of Registration Statement under which public company mergers and security exchange offers may be registered with the SEC.³

Form SB-2 –  This form may be used by “small business issuers” to register securities to be sold for cash. This form requires less detailed information about the issuer’s business than Form S-1. ³

Founder’s Agreement –  A formal written agreement among the founders of a startup which documents the founder’s accord on ownership, roles and responsibilities, company governance / decision-making and operations. Issues such as founder contributions, vesting and exit / departure are also typically included in these Agreements. Founder’s agreements are typically shorter, less technical agreements between the founders that are to be developed further into operating agreements or corporate by-laws, as the concept and structure of the company develops. Operating agreements and corporate by-laws generally contain all of the same provisions typically included in a founder’s agreement.⁶

Founder’s Stock –  The common stock owned by one or more of the company’s founders, typically received when the company was incorporated and not purchased for cash.⁷
– Synonyms: Founder’s Equity

Founders’ Shares –  Shares owned by a company’s founders upon its establishment.³

Free cash flow –  The cash flow of a company available to service the capital structure of the firm. Typically measured as operating cash flow less capital expenditures and tax obligations.³

Friends & Family Round –  An investment in a company that often follows the founder’s own investment, from people who are investing primarily because of their relationship with the founder rather than their knowledge  of the business.⁷

Friends and Family –  A common way for a startup to fund their initial round of capital. A 20-25% discount from the next round is appropriate. The valuation cap is going to vary depending on the size of the raise and the size of the opportunity.²

Full Ratchet Antidilution – 

• The sale of a single share at a price less than the favored investors paid reduces the conversion price of the favored investors’ convertible preferred stock “to the penny.” For example, from $1.00 to 50 cents, regardless of the number of lower-priced shares sold.³
• Full ratchet is an investor protection provision which specifies that options and convertible securities may be exercised relative to the lowest price at which securities were issued since the issuance of the option or convertible security. The full ratchet guarantee prevents dilution, since the proportionate ownership would stay the same as when the investment was initially made.⁵

Fully Diluted Earnings Per Share –  Earnings per share expressed as if all outstanding convertible securities and warrants have been exercised.³

Fully Diluted Outstanding Shares –  The number of shares representing total company ownership, including common shares and current conversion or exercised value of the preferred shares, options, warrants, and other convertible securities.³

Fund Size –  The total amount of capital committed by the investors of a venture capital fund.³

Funding –  This term is used synonymously with the words “financing” and “capital.” It refers to the amount of money that is needed for a business endeavor. For example, a new business owner may seek a certain amount of funding for their startup company. This “raised” capital can be used to launch their endeavor as well as to sustain their company until monetary profit can be generated.⁴

Funding Platform –  Any online website used to facilitate investments in private companies.  As a defined term, a specific type of platform defined by the JOBS Act of 2012 that will allow non-Accredited investors to invest in private offerings.⁷

Fundless Equity Sponsors –  Fundless equity sponsors are sourcing and vetting deals without any committed capital, lining up financial sponsors on a deal-by-deal basis.⁹

General Partner –  (GP)The partner in a limited partnership responsible for all management decisions of the partnership. The GP has a fiduciary responsibility to act for the benefit of the limited partners (LPs) and is fully liable for its actions.³

General Solicitation –  When a private company publicly seeks investors in connection with an equity offering.  Previously prohibited by US securities law, now permissible under certain conditions according to the JOBS Act of 2012.⁷

Generally Accepted Accounting Principles –  The common set of accounting principles, standards, and procedures. GAAP is a combination of authoritative standards set by standard-setting bodies as well as accepted ways of doing accounting.³

Golden Handcuffs –  This occurs when an employee is required to relinquish unvested stock when terminating his employment contract early.³

Golden Parachute –  Employment contract of upper management that provides a large payout upon the occurrence of certain control transactions, such as a certain percentage share purchase by an outside entity or when there is a tender offer for a certain percentage of a company’s shares. This is discussed in more detail at the Executive Employment Agreement.³

Golden Rule –  The investor with the gold, makes the rules.  (The same meaning as “those who bring the money drive the bus”; i.e., forget whatever any previous contracts say, if you need money and only one source is willing to supply it, you’ll take the money on their terms, period.)⁷

Grant –  Money provided by a government agency or other organization that does not need to be repaid and does not purchase equity.⁷

Holding Company –  A corporation that owns the securities of another, in most cases with voting control.³

Holding Period –  The amount of time an investor has held an investment. The period begins on the date of purchase and ends on the date of sale, and determines whether a gain or loss is considered short term or long term, for capital-gains-tax purposes.³

Home Run –  When a company has an exit that returns 20 or more times investors’ initial capital.⁷

Honeypot –  A highly attractive offering used to entice a specific, targeted audience.⁶

Hot Issue –  A newly issued stock that is in great public demand. Technically, it is when the secondary market price on the effective date is above the new issue offering price. Hot issues usually experience a dramatic rise in price at their initial public offering because the market demand outweighs the supply.³

Hurdle Rate –  The internal rate of return that a fund must achieve before its general partners or managers may receive an increased interest in the proceeds of the fund. Often, if the expected rate of return on an investment is below the hurdle rate, the project is not undertaken.³

Illiquid –  An investment that cannot be readily sold or transferred into cash.  Unlike public stocks for which there is a ready market, angel investments are typically held for 5 to 10 years.⁷

Impact Investing –  Financial investments that also aim to have a benefit for society.⁷

In-Licensing Agreement –  Agreements with external or third parties under which the startup has been granted permission to utilize certain technologies owned by those third parties, under defined terms and conditions.⁶

Income Statement –  A financial statement that shows a company’s financial performance over a specific time period. It delineates the Revenue and Expenses. It also delineates Net Income, which is Total Revenue – Total Expenses. Because this statement includes both cash and non-cash items, it does not reflect net cash flow.⁶
– Synonyms: P&L;

Incubator –  An organization established to support the development of startup companies with intermediate term access, (1 – 3 years) to facilities, (office and lab space), resources and development programs, potentially including mentoring. Incubators differ from accelerators in that the latter typically focus on  acceleration of growth in a shorter defined period whereas the former is focused on the development of the company and its product over a longer time period.⁶

Information Rights –  A provision, typically found in Investors Rights Agreements which requires startup companies to provide board updates and financial information to minority shareholders on a periodic, (such as quarterly or yearly) basis.⁶

Initial Public Offering – 

• (IPO) The sale or distribution of a stock of a portfolio company to the public for the first time. IPOs are often an opportunity for the existing investors (often venture capitalists) to receive significant returns on their original investment. During periods of market downturns or corrections, the opposite is true.³
• (IPO)This is a private corporation’s first-time sale or allocation of a stock that is made available to the public. IPOs can be distributed to both young and established companies who seek to expand or warrant public trading.⁴

– Synonyms: IPO

Initial Public Offering – 

Initial Public Offering or IPO is the first sale of stock by a private company to the public. IPOs are often smaller, younger companies seeking capital to expand their business.⁵

Institutional Investors – 

• Organizations that professionally invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds.³
• Institutional Investors refers mainly to insurance companies, pension funds and investment companies collecting savings and supplying funds to markets but also to other types of institutional wealth like endowment funds, foundations, etc.⁵

Intermediary –  Either a “Broker-Dealer” or a “Portal”, both allowed by the JOBS Act to consummate a securities-based crowdfunding transaction.¹

Internal Rate of Return – 

A typical measure of how VC Funds measure performance. IRR is technically a discount rate: the rate at which the present value of a series of investments is equal to the present value of the returns on those investments.³

Often used in capital budgeting, it’s the interest rate that makes net present value of all cash flow equal zero. Essentially, IRR is the return that a company would earn if they expanded or invested in themselves, rather than investing that money abroad.⁵

Invention Assignment Agreement –  An agreement under which founders, employees, contractors, developers and others assign intellectual property rights to a company. Typically, these stakeholders or related parties of the company acknowledge that any and all intellectual property developed by them while working for or with the company, whether individually or jointly with other stakeholders, are the property of the company, not the individual. It can also apply to intellectual property that founders and others may contribute to a startup company at the time of its establishment.⁶

Investment Banks –  Investment Bank is a financial intermediary that performs a variety of services which includes underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients.⁵

Investment Company Act of 1940 –  Investment Company Act shall mean the Investment Company Act of 1940, as amended, including the rules and regulations promulgated thereunder.³

Investment Letter  –  A letter signed by an investor purchasing unregistered long securities under Regulation D, in which the investor attests to the long-term investment nature of the purchase. These securities must be held for a minimum of one year before they can be sold.³

Investment Round –  A set of one or more investments made in a particular company by one or more investors on essentially similar terms at essentially the same time.⁷

IRA Rollover –  The reinvestment of assets received as a lump-sum distribution from a qualified tax-deferred retirement plan. Reinvestment may be the entire lump sum or a portion thereof. If reinvestment is done within 60 days, there are no tax consequences.³

Issued Shares –  The amount of common shares that a corporation has sold (issued).³

Issuer – 

• A company raising funds through a “Portal” or “Broker-Dealer” via securities-based crowdfunding, and issuing a security (equity or debt) to each investor in return for his or her funds.¹
• Refers to the organization issuing or proposing to issue a security.³

J-curve –  The appearance of a graph showing the typical value progression of early stage investment portfolios.  Values often drop soon after the initial investment during the startup and early stage period, but rebound significantly in later years after companies reach profitability.⁷

JOBS Act  –  The “Jumpstart Our Business Startups” (“JOBS”) Act, passed by overwhelming bipartisan congressional majorities in both chambers and signed into law by President Obama in April, 2012.  The JOBS Act contains seven sections, or “titles” aimed at facilitating different aspects of the development and success of the all-important business startups and growth companies that create the vast majority of new employment in our country.  Title III legalizes and regulates securities-based crowdfunding.  Actual implementation of the securities-based crowdfunding authorized in the JOBS Act awaits rule-making by the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), called for within 270 days of passage of the JOBS Act but realistically hoped for sometime in 2013.¹

Kentucky Windag –  In hunting, the modified aim required to compensate for wind or target movement. Used herein to describe the process by which an investor must increase the percentage he needs today so that he will end up with a desired target percentage ownership in the future, after adjusting for future dilutive financing rounds.³

Key Employees –  Professional management attracted by the founder to run the company. Key employees are typically retained with warrants and ownership of the company.³

Later Stage –  A stage of company growth characterized by viable products, a developed market, significant customers, sustained revenue growth, and both profits and positive cash flow from operations. Later-stage companies would generally be candidates for an IPO. Investments in the C round or after qualify as later stage.³

Later-stage Company –  This is a company that is considered to be in its mature stages of development. Unlike early and expansion-stage companies, later-stage companies already have successful commercialized products and services that are publically available as well as a significant generated cash flow. Many venture capitalists tend to invest in mature companies since they are less risky, are already established, have proven to be a financial success.⁴

Law of Large Numbers –  A theorem that suggests that the average of results obtained from a large number of trials should be close to the expected value, assuring stable long-term results for the averages of random events. When applied to angel investing, it suggests that large portfolios of investments, made consistently over time, will return significantly positive results.⁷

Lead Investor –  The primary investor of a syndicated round of financing.  This investor is typically the largest investor of the syndicated round and ususally structures and leads the negotiation of terms related to the investment’s documentation.⁶

Leveraged Buyout – 

• (LBO)A takeover of a company, using a combination of equity and borrowed funds. Generally, the target company’s assets act as the collateral for the loans taken out by the acquiring group. The acquiring group then repays the loan from the cash flow of the acquired company. For example, a group of investors may borrow  funds, using the assets of the company as collateral, in order to take over a company. Or the management of the company may use this vehicle as a means to regain control of the company by converting a company from public to private. In most LBOs, public shareholders receive a premium to the market price of the shares.³
• (LBO)This is a type of aggressive business practice whereby investors or a larger corporation utilizes borrowed funds (junk bonds, traditional bank loans, etc.) or debt to finance its acquisition. The high debt-to-equity ratio enables the investors to “buyout” a smaller company with very little cash. Leveraged buy-outs can be either friendly or hostile, depending on the negotiations made.⁴

– Synonyms: LBO

Limited Partner –  (LP) An investor in a limited partnership who has no voice in the management of the partnership. LPs have limited liability and usually have priority over GPs upon liquidation of the partnership.³
– Synonyms: LP

Limited Partnerships – 

• An organization comprised of a general partner, who manages a fund, and limited partners, who invest money but have limited liability and are not involved with the day-to-day management of the fund. In the typical venture capital fund, the general partner receives a management fee and a percentage of the profits (or carried interest). The limited partners receive income, capital gains, and tax benefits.³
• Limited partnership is a business organization with one or more general partners, who manage the business and assume legal debts and obligations and one or more limited partners, who are liable only to the extent of their investments. Limited partnership is the legal structure used by most venture and private equity funds. Limited partners also enjoy rights to the partnership’s cash flow, but are not liable for company obligations.⁵

LinkedIn –  A business oriented social media platform which can be found online at www.linkedin.com.⁶

Liquidation – 

• When a business is bankrupt or terminated, its assets are sold and the proceeds pay creditors. Anything left over is distributed to shareholders.²
• 1) The process of converting securities into cash. 2) The sale of the assets of a company to one or more acquirers in order to pay off debts. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock.³
• This is an event that represents the complete or partial closing of a company. In a liquidation event, a company’s assets and material goods (securities) are converted into cash and/or distributed for sale to pay off existing corporate debt.⁴
• Liquidation is the sale of the assets of a portfolio company to one or more acquirers when venture capital investors receive some of the proceeds of the sale.⁵

Liquidation Preference –  Liquidity preference is the right to receive a specific value for the stock if the business is liquidated.⁵

Liquidation Waterfall –  The sequence in which all parties, including investors, employees, creditors, and others receive payments in the event of a company’s liquidation through acquisition or bankruptcy.⁷

Liquidity Event – 

• An event that allows a VC to realize a gain or loss on an investment. The ending of a private equity provider’s involvement in a business venture with a view to realizing an internal return on investment. Most common exit routes include Initial Public Offerings [IPOs], buy backs, trade sales, and secondary buyouts. (See also: Exit Strategy.)³
• This occasion represents the common exit strategy of most entrepreneurs and investors. When a corporation is purchased (through a merger or acquisition) or when an IPO is made, equity is converted to cash.⁴
• Liquidity event is the way in which an investor plans to close out an investment. Liquidity event is also known as exit strategy.⁵

Litigation –  To take legal action or defend a legal right, also known as a lawsuit. A litigation may be settled between two opposing parties but often are settled in a court.

Loan to Value –  Loan Amount / Value of the Collateral. This ratio is most often used in evaluating the risk of real estate loans, where the appraised value of the property can be more objectively ascertained. The higher the LTV, the riskier the loan. The bank may specify a maximum LTV in order to make a loan.⁶
– Synonyms: LTV

Lock-up Period – 

• The period of time that certain stockholders have agreed to waive their right to sell their shares of a public company. Investment banks that underwrite initial public offerings generally insist upon lockups for a set period of time, typically 180 days from large shareholders (such as 1% ownership or more) in order to allow an orderly market to develop in the shares. The shareholders that are subject to lockup usually include the management and directors of the company, strategic partners, and such large investors. These shareholders have typically invested prior to the IPO at a significantly lower price to that offered to the public and therefore stand to gain considerable profits. If a shareholder attempts to sell shares that are subject to lockup during the lockup period, the transfer agent will not permit the sale to be completed.³
• Lock-Up Period is the period an investor must wait before selling or trading company shares subsequent to an exit, usually in an initial public offering the lock-up period is determined by the underwriters.⁵

Logo –  Symbols which identify and represent a company or its’ product or services. It may also be a motto or identifying statement related to a company, its’ product or services.⁶

Mafia –  In the context of angel funding and startups, a colloquial term used to describe the loose association of people previously involved with a highly successful technology company, such as Google, Facebook, Paypal or LinkedIn, as founders, early employees or investors.⁶

Main Street Business –  A term utilized to reference small traditional family lifestyle businesses such as local retail and service providers. These businesses are typically operated by family for the benefit of the family without the objective of a liquidation event such as the strategic sale or IPO of the company.  As a result, these businesses are not typically funded by angel investment groups or VCs.⁶  

Major Investor –  As used in investment term sheets, any investor who puts in more than a defined amount into a given round and is therefore entitled to specific information and / or voting rights.⁷

Majority –  The percentage defining the level of shareholders that must approve significant company actions such as borrowing money, or acquiring or merging with another business; typically defined to be  50.1% or greater.⁶

Management Buy-in –  Management buy-in is the purchase of a business by an outside team of managers who have found financial backers and plan to manage the business actively themselves.⁹
– Synonyms: MBI

Management Buy-out –  Management buy-out is the term used for the funds provided to enable operating management to acquire a product line or business, which may be at any stage of development, from either a public or private company.⁹
– Synonyms: MBO

Management Fee –  Compensation typically paid annually from an investment fund to the general partner or investment advisor of the fund to cover administration costs, expenses related to investor relations and to compensate them for their services and expertise.⁶

Management Team –  The individuals who oversee and manage the operations and activities of a startup company or angel / venture capital fund.⁶

Market –  Based on supply and demand, this term refers to the societal arrangement whereby consumers purchase goods and services from businesses and individual sellers in exchange for currency. In economic relevance, the “market” can be divided into different industries, such as biotechnology, food, etc. The exchange between the consumer and seller contribute to a society’s market economy which greatly depends on these transactions for economic viability.⁴

Market Capitalization –  The total dollar value of all outstanding shares. Computed as shares multiplied by current price per share. Prior to an IPO, market capitalization is arrived at by estimating a company’s future growth and by comparing a company with similar public or private corporations. (See also: Pre-Money Valuation.)³

Market Channel –  The resources and processes necessary to facilitate the transfer of ownership of goods and / or services from the point of production to the point of acquisition by the consumer. ⁶

Meetup –  A website which enables the facilitation of online in-person meetings of groups with similar interests. Local Meet-ups groups focus on a wide variety of interests, including technology, entrepreneurship, investments and startups from the entrepreneurial world.⁶

Merger –  A combination of business entities under which efficiency improvements are expected to be achieved from potential synergies by eliminating duplicate factors of production such as plant, equipment  and labor and by the more efficient use of capital driving increases in revenues and profits in the resulting company.⁶

Mezzanine Debt –  Mezzanine debts are debts that incorporates equity-based options, such as warrants, with a lower-priority debt. Mezzanine debt is actually closer to equity than debt, in that the debt is usually only of importance in the event of bankruptcy. Mezzanine debt is often used to finance acquisitions and buyouts, where it can be used to prioritize new owners ahead of existing owners in the event that a bankruptcy occurs.⁵

Mezzanine Financing – 

• A blend of debt and equity financing, requiring no collateral and does not necessarily involve giving up interest in the company. This capital is typically used to fund growth or to enable management to buy out company owners for succession purposes. The interest rate is high, ranging from 20-30% and lenders can convert their stake to equity or ownership in the event of default.²
• Refers to the stage of venture financing for a company immediately prior to its IPO. Investors entering in this round have lower risk of loss than those investors who have invested in an earlier round. Mezzanine-level financing can take the structure of preferred stock, convertible bonds, or subordinated debt.³
• Mezzanine Financing is a late-stage venture capital, usually the final round of financing prior to an IPO. Mezzanine Financing is for a company expecting to go public usually within 6 to 12 months, usually so structured to be repaid from proceeds of a public offerings, or to establish floor price for public offer.⁵

Mezzanine Level –  Mezzanine level is a term used to describe a company which is somewhere between startup and IPO. Venture capital committed at mezzanine level usually has less risk but less potential appreciation than at the startup level, and more risk but more potential appreciation than in an IPO.⁹

Micro-VC –  The correct term for organizations often referred to as super angels.  Structured similar to a traditional venture fund, a Micro-VC is typically much smaller in size, with fewer partners, and invests less money but at an earlier stage.⁷

Minority Enterprise Small Business Investment Companies –  Minority Enterprise Small Business Investment Companies or MESBICs are government-chartered venture firms that can invest only in companies that are at least 51 percent owned by members of a minority group.⁵
– Synonyms: MESBICs, MESBIC

Month over Month –  A financial comparison which examines a specified performance factor for a specified month with the same performance factor for the previous month.  Month over Month comparisons can can be direct comparing the actual performance factors, or differences between the factors in either absolute or percentage terms.⁶
– Synonyms: MoM

Monthly Active Users –  Distinct website users who engage with a site’s offerings or services in a given month.⁶

Mutual Fund –  A mutual fund, or an open-end fund, sells as many shares as investor demand requires. As money  flows in, the fund grows. If money flows out of the fund, the number of the fund’s outstanding shares drops. Open- end funds are sometimes closed to new investors, but existing investors can still continue to invest money in the fund.  In order to sell shares, an investor usually sells the shares back to the fund. If an investor wishes to buy additional   shares in a mutual fund, the investor must buy newly issued shares directly from the fund. (See also: Closed-end Funds.)³

NASDAQ –  An automated information network which provides brokers and dealers with price quotations on securities traded over the counter.³

National Angel Capital Organization –  (NACO)Canada’s analogue of the American Angel Capital Association (ACA), and a close affiliate and partner of the ACA.  See http://www.nacocanada.com for more information. ¹
– Synonyms: NACO

National Association of Securities Dealers –  A mandatory association of brokers and dealers in the over- the-counter securities business. Created by the Maloney Act of 1938, an amendment to the Securities Act of 1934.³

Negative Control Provisions –  Terms agreed to as part of an investment round that protect investors from major adverse actions (such as dissolving the company, or selling it to someone for $1), but do not provide the right to affirmatively control the company.⁷

Net Asset Value –  (NAV) Calculated by adding the value of all of the investments in the fund and dividing by the number of shares of the fund that are outstanding. NAV calculations are required for all mutual funds (or open-end funds) and closed-end funds. The price per share of a closed-end fund will trade at either a premium or a discount to the NAV of that fund, based on market demand. Closed-end funds generally trade at a discount to NAV.³
– Synonyms: NAV

Net Financing Cost –  Also called the cost of carry or, simply, carry, the difference between the cost of financing the purchase of an asset and the asset’s cash yield. Positive carry means that the yield earned is greater than the financing cost; negative carry means that the financing cost exceeds the yield earned.³

Net Income –  The resulting earnings of a company after deducting all costs and expenses, including operations, general and administrative, selling, depreciation, interest expense, and taxes.⁶

Net Present Value –  An approach used in capital budgeting where the present value of cash inflow is subtracted from the present value of cash outflows. NPV compares the value of a dollar today versus the value of that same dollar in the future after taking inflation and return into account.³
– Synonyms: NPV

Net Worth –  The value of total assets minus total liabilities.⁶

New Issue –  A stock or bond offered to the public for the first time. New issues may be initial public offerings by previously private companies or additional stock or bond issues by companies already public. New public offerings are registered with the Securities and Exchange Commission. (See Securities and Exchange Commission and Registration.)³

New York Stock Exchange – 

Founded in 1792, the largest organized securities market in the United States. The Exchange itself does not buy, sell, own, or set prices of stocks traded there. The prices are determined by public supply and demand. Also known as the Big Board.³

Newco –  The typical label for any newly organized company, particularly in the context of a leveraged buyout.³

No Shop, No Solicitation Clauses  –  A no shop, no solicitation, or exclusivity, clause requires the company to negotiate exclusively with the investor, and not solicit an investment proposal from anyone else for a set period of time after the term sheet is signed. The key provision is the length of time set for the exclusivity period.³

Non Solicitation Agreement –  An agreement under which an employee or principal agrees not to solicit their existing employer’s or company’s employees, clients or customers after departing the company either for their own benefit or that of a competitor.⁶

Non-Compete Agreement –  An agreement between two parties under which one party agrees not to become employed by, enter into or establish a similar business, trade or profession in competition with the other party. Such agreements typically restrict competition on a geographic basis for a certain period of time.⁶
– Synonyms: Restrictive Covenants

Non-Dilutive Shares –  Shares with protective rights, such that when the number of shares outstanding increase, the existing shareholders positions are protected and remain constant in terms of their percentage ownership of the company. Shares for which a financing round does not cause dilution of the existing shareholders.⁶

Non-Disclosure Agreement –  An NDA is a formal legal agreement between two or more parties undertaken by the parties to keep information shared or provided by one party to another confidential. NDAs are utilized where parties become privy to confidential and / or sensitive information, which the disclosing party desires not be made available to third parties or the general public. Such agreements may also include the confidentiality of the relationship in existence between the parties.⁶
– Synonyms: Confidentiality Agreement

Nonaccredited –  An investor not considered accredited for a Regulation D offering. (See “Accredited Investor.”)³

NVCA Model Documents –  A standard set of investment documents for a Series A equity investment round developed by a group of most of the major venture law firms for the National Venture Capital Association.⁷

Offering Documents –  Documents evidencing a private-placement transaction. Include some combination of a purchase agreement and/or subscription agreement, notes or stock certificates, warrants, registration-rights agreement, stockholder or investment agreement, investor questionnaire, and other documents required by the particular deal.³

One Liner (Cocktail party) –  A cocktail party one liner is a clear, crisp, engaging sentence which provides potential investors a succinct overview of your startup concept and business model. It challenges the investor to become intrigued by both the implied problem and your proposed solution.⁶

Open-end Fund –  An open-end fund, or a mutual fund, generally sells as many shares as investor demand requires. As money flows in, the fund grows. If money flows out of the fund, the number of the fund’s outstanding shares drops. Open-end funds are sometimes closed to new investors, but existing investors can still continue to invest money in the fund. In order to sell shares, an investor generally sells the shares back to the fund. If an investor wishes to buy additional shares in a mutual fund, the investor generally buys newly issued shares directly from the fund.³

Operating Agreement –  An agreement between the members of a Limited Liability Company, (LLC) which governs the LLC’s business including member powers, rights, duties and obligations, and outlining the decision making process related to operational, functional and financial issues in a structured manner. The operating agreement of LLC companies is similar to bylaws utilized by corporations.⁶

Operating Budget –  A budget consisting of estimates of income and expenses from a company’s operations typically prepared on an annual basis. Expenses typically include operating costs related to producing the company’s product or service, labor, administration and marketing but exclude long term and non-operational items such as capital debt. Operating income would typically exclude items such as investment income.⁶
– Synonyms: Annual Budget

Option –  A security granting the holder the right to purchase a specified number of a Company’s securities at a designated price at some point in the future. The term is generally used in connection with employee benefit plans as Incentive Stock Options (“ISOs” or “statutory options”) and Non-qualified stock options (“NSOs” or “Nonquals”).However “stand-alone options” may be issued outside of any plan. Generally non-transferable, in distinction to warrants.³

Option Pool –  The number of shares set aside for future issuance to employees of a private company.³

Outstanding Stock –  The amount of common shares of a corporation which are in the hands of investors. It is equal to the amount of issued shares less treasury stock.³

Over-the-Counter – 

A market for securities made up of dealers who may or may not be members of a formal securities exchange. The over-the-counter market is conducted over the telephone and is a negotiated market rather than an auction market such as the NYSE.³

Oversubscription –  Occurs when demand for shares exceeds the supply or number of shares offered for sale. As a result, the underwriters or investment bankers must allocate the shares among investors. In private placements, this occurs when a deal is in great demand because of the company’s growth prospects.³

Oversubscription Privilege –  In a rights issue, arrangement by which shareholders are given the right to apply for any shares that are not purchased.³

PageRank –  An algorithm which provides a measure of the relative importance of internet web pages and returned search results.⁶

Pari  Passu –  At an equal rate or pace, without preference.³

Participating Preferred –  A preferred stock in which the holder is entitled to the stated dividend and also to additional dividends on a specified basis upon payment of dividends to the common stockholders.³

Participating Preferred Stock –  Preferred stock that has the right to share on a pro-rata basis with any distributions to the common stock upon liquidation, after already receiving the preferred-liquidation preference.³

Partnership –  A nontaxable entity in which each partner shares in the profits, losses, and liabilities of the partnership. Each partner is responsible for the taxes on its share of profits and losses.³

Partnership Agreement –  The contract that specifies the compensation and conditions governing the relationship between investors (LPs) and the venture capitalists (GPs) for the duration of a private equity fund’s life.³

Pay to Play –  A term in VC financing that requires investors to participate in future down-valuation financings of the company, or else suffer punitive consequences (such as getting their Preferred stock converted into Common stock).  One reason why investors keep some dry powder on hand.⁷

Peer to Peer Lending –  A relatively new type of online financing solution through which individuals lend money to other individuals or small businesses.⁷

Penny Stocks –  Highly speculative, lower priced offerings which sell at less than $5/share.⁶

Performance Based Vesting –  Under performance-based vesting, options Vest only if specified performance criteria are met. For example, options may vest if annual earnings per share exceed a certain target by a specified date.⁹

Piggyback Registration –  A situation when a securities underwriter allows existing holdings of shares in a corporation to be sold in combination with an offering of new public shares.³

PIK Debt Securities –  (Payment in Kind) PIK Debt are bonds that may pay bondholders compensation in a form other than cash.³
– Synonyms: Payment in Kind, Payment In-Kind

Pipeline –  The continuing flow of upcoming business or underwriting deal opportunities .⁶

Pitch –  A presentation in which a startup founder attempts to persuade an investor of the viability of their company.  The presentation spectrum varies based on the specific purpose of the pitch.  Brief presentations in which an entrepreneur provides a 30 – 60 second overview of their idea, business model and marketing strategy, with the purpose of attaining a followup audience with an investor are described as elevator pitches.  Formal, detailed presentations utilizing power point type slide decks, with the specific objective of seeking investment from angel groups or VCs, are known as investment presentation pitches.⁶

Pitch Deck –  A presentation created by entrepreneurs that details the attributes of a startup opportunity in order to help the entrepreneurs communicate it with investors, in their efforts to raise money to fund their venture. The presentation, which typically includes approximately a dozen slides, provides a summary of the startup’s business plan, and helps investors determine if they have a continued interest in evaluating the company.⁶

Placement Agent –  The investment bank, broker, or other person that locates investors to purchase securities from the Company in a private offering, in exchange for a commission.³

Plain English Handbook –  The Securities and Exchange Commission online version of “Plain English Handbook: How to Create Clear SEC Disclosure Documents.”⁶

Platform as a Service –  A cloud computing service category which provides a foundation upon which customers can develop, operate and manage multiple app functionalities without the need to develop the underlying infrastructure.⁶
– Synonyms: PaaS

Poison Pill –  A right issued by a corporation as a preventative to a takeover measure. It allows right holders to purchase shares in either their company or in the combined target and bidder entity at a substantial discount, usually 50%. This discount may make the takeover prohibitively expensive.³

Pooled Investment Vehicle – 

A legal entity that pools various investors’ capital and deploys it according to a specific investment strategy.⁸

Portal –  The second type of “Intermediary” authorized by the JOBS Act to facilitate securities-based crowdfunding, providing legally-mandated information to potential investors, and then managing transfer of the offered funds to the issuing companies in return for an equity ownership stake in or debt instrument from the issuing company.¹

Portfolio –  A strategic collection of startup companies invested in by an angel, angel group or Venture Capital Fund.⁶

Portfolio Companies –  Startups and other  companies in which an angel group, venture capital fund or private equity firm have invested.⁶

Post-money Cap Table –  A cap table depicting the ownership of the founders and investors in terms of absolute quantities of shares or units, depending upon entity type, and percentages of total ownership they represent. These ownership stakes and the related analyses, typically represent the stakeholders of a startup venture and also provides analysis of equity dilution. The table depicting the value of the entity and equity holdings by each of the stakeholders after an investment by new investors is a post-money cap table.⁶

Post-money Valuation –  The valuation of a startup company immediately following it’s most recent round of financing calculated by taking the product from multiplying the startup’s total number of shares or units outstanding by the share or unit price of this latest financing round.⁶

Pre-money Cap Table –  A cap table depicting the ownership of the founders and investors in terms of absolute quantities of shares or units, depending upon entity type, and percentages of total ownership they represent. These ownership stakes and the related analyses, typically represent the stakeholders of a startup venture and also provides analysis of equity dilution. The table depicting the value of the entity and equity holdings by each of the stakeholders prior to an investment by new investors is a pre-money cap table.⁶

Pre-money Valuation – 

• The company’s value immediately before funding. If Post-Money Valuation = $2.5M and the company raised $500K, then the pre-money valuation = $2M.²
• The valuation of a company prior to a round of investment. This amount is determined by using various calculation models, such as discounted P/E ratios multiplied by periodic earnings or a multiple times a future cash flow discounted to a present cash value and a comparative analysis to comparable public and private companies.³

Preemptive Right –  A shareholder’s right to acquire an amount of shares in a future offering at current prices per share paid by new investors, whereby his/her percentage ownership remains the same as before the offering.³

Preferred Dividend –  A dividend ordinarily accruing on preferred shares payable where declared and superior in right of payment to common dividends.³

Preferred Stock – 

• A class of ownership that has a higher claim on assets than Common Stock. In the event of Liquidation, preferred stock shareholders have priority over earnings and assets and generally earn dividends, but forego voting rights.²
• A class of capital stock that may pay dividends at a specified rate and that has priority over common stock in the payment of dividends and the liquidation of assets. Many venture capital investments use preferred stock as their investment vehicle. This preferred stock is convertible into common stock at the time of an IPO.³
• This is a type of corporate share where the holders can exercise more rights, preferences, and privileges than those with common stocks. It is often issued by private corporations or enterprises that have not gone public yet. Both angel investors and venture capitalists prefer to invest with preferred stock because of the superior rights and protective provisions associated with these shares.⁴

Prepaid Warrant –  A prepaid warrant is a warrant issued by an issuer entitling the holder to exercise into a specified number of different securities, for no additional financial consideration, during a specified time period.⁹

Private Companies –  Companies that are not publicly traded on the stock market.⁷

Private Equity – 

• A company ownership position that is not listed and cannot be traded on a public securities exchange.  Issuance, ownership and exchange of private securities are regulated differently from those of public securities under federal and state law.¹
• Equity securities of companies that have not “gone public” (are not listed on a public exchange). Private equities are generally illiquid and thought of as a long-term investment. As they are not listed on an exchange, any investor wishing to sell securities in private companies must find a buyer in the absence of a marketplace. In addition, there are many transfer restrictions on private securities. Investors in private securities generally receive their return through one of three ways: an initial public offering, a sale or merger, or a recapitalization.³
• Private equities are equity securities of unlisted companies. Private equities are generally illiquid and thought of as a long-term investment. Private equity investments are not subject to the same high level of government regulation as stock offerings to the general public. Private equity is also far less liquid than publicly traded stock.⁵

Private Investment for Public Equity – 

Private offering followed by a resale registration.³

Private Offering/Private Placement –  Sale of unregistered, restricted securities by the company.³

Private Placement – 

• Also known as a Reg. D offering. The sale of a security directly to a limited number of investors in a private transaction.³
• Private placement is a term used specifically to denote a private investment in a company that is publicly held. Private equity firms that invest in publicly traded companies sometimes use the acronym PIPEs to describe the activity. Private placements do not have to be registered with organizations such as the SEC because no public offering is involved.⁵

Private Placement Memorandum –  Also known as an Offering Memorandum. A document that outlines the terms of securities to be offered in a private placement. Resembles a business plan in content and structure.³

Private Securities –  Private securities are securities that are not registered and do not trade on an exchange. The price per share is set through negotiation between the buyer and the seller or issuer.³

Pro Forma –  A pro forma is a description of financial statements that have one or more assumptions or hypothetical conditions built into the data. A financial projection based on assumptions. Also, refers to a statement of income and balance sheets that exclude non-recurring items.⁹

Product Market Fit –  Product Market Fit

Professional Partner –  Services and professional partners of the startup entity typically including, but not limited to their commercial attorney, intellectual property attorney, accountant / CPA, consultants and contract development partners.⁶

Promissory Note –  A legal document under which the borrower, (maker of the note) commits to re-pay the lender, (holder of the note) the principal amount owed as represented by the note.  This legal document,  or contract between the maker and the holder typically includes terms depicting agreed details related to the arrangement, including among other items, interest rates, reporting requirements and maturity dates.⁶

Proprietary Deal Flow –  When an investor has an opportunity to review a deal before other potential investors.⁷

Prospectus –  A formal written offer to sell securities that provides an investor with the necessary information to make an informed decision. A prospectus explains a proposed or existing business enterprise and must disclose any material risks and information according to the securities laws. A prospectus must be filed with the SEC and be given to all potential investors. Companies offering securities, mutual funds, and offerings of other investment companies including Business Development Companies are required to issue prospectuses describing their history, investment philosophy or objectives, risk factors, and financial statements. Investors should carefully read them prior to investing.³

Public Company – 

• A company that has securities that have been sold in a registered offering and that are traded on a stock exchange or NASDAQ. Must be a Reporting Company under SEC rules. Often used incorrectly to describe companies that are only Reporting Companies and that have not conducted a registered offering under Securities Act.³
• Under SEC rules, a company that decides to go “public” offers their securities (stock, bonds, liabilities) to be sold in a registered public offering. Through the sale of such assets, a corporation can raise capital for their company, employees, or executive staff. These public offerings are often traded on a stock exchange.⁴

Put –  A contractual term/condition which provides the investor the option to compel the company to purchase their shares.⁶

Put option –  The right to sell a security at a given price (or range) within a given time period.³

Qualified Purchaser –  An individual with more than $5 Million in investments.⁷

Quarter over Quarter –  A financial comparison which examines a specified performance factor for a specified quarter with the same performance factor for the previous quarter.  Quarter over Quarter comparisons can can be direct comparing the actual performance factors, or differences between the factors in either absolute or percentage terms.⁶
– Synonyms: QoQ

Quora –  A leading question-and-answer website where many industry experts in early stage investing answer questions.⁷

Raising Capital –  Raising capital refers to obtaining capital from investors or venture capital sources.⁹

Recapitalization –  The reorganization of a company’s capital structure. A company may seek to save on taxes by replacing preferred stock with bonds in order to gain interest deductibility. Recapitalization can be an alternative exit strategy for venture capitalists and leveraged-buyout sponsors. (See also: Exit Strategy and Leveraged Buyout.)³

Reconfirmation –  The act a broker/dealer makes with an investor to confirm a transaction.³

Red Herring –  The common name for a preliminary prospectus, due to the red SEC required legend on the cover. (See also: Prospectus.)³

Redeemable Preferred Stock –  Redeemable preferred stock, also known as exploding preferred, at the holder’s option after (typically) five years, which in turn gives the holders (potentially converting to creditors) leverage to induce the company to arrange a liquidity event. The threat of creditor status can move the founders off the dime if a liquidity event is not occurring with sufficient rapidity.³

Registered Offering –  [“Public Offering”] A transaction in which a Company sells specified securities to the public under a Registration Statement which has been declared effective by the SEC.³
– Synonyms: Public Offering

Registration –  The SEC’s review process of all securities intended to be sold to the public. The SEC requires that a registration statement be filed in conjunction with any public securities offering. This document includes operational and financial information about the company, the management, and the purpose of the offering. The registration statement and the prospectus are often referred to interchangeably. Technically, the SEC does not “approve” the disclosures in prospectuses.³

Registration Obligation –  The obligation of Company to register the shares issued to an investor in a private offering for resale to the public through a Registration Statement which the SEC has declared effective.³

Registration Rights –  The right to require that a company register restricted shares. Demand Registered Rights enable the shareholder to request registration at any time, while Piggy Back Registration Rights enable the shareholder to request that the company register his or her shares when the company files a registration statement (for a public offering with the SEC).³

Registration Rights Agreement –  Separate agreement in which the investor’s registration rights are evidenced.³

Registration Statement –  The document filed by a Company with the SEC under the Securities Act in order to obtain approval to sell the securities described in the Registration Statement to the public. [S-1, S-2, S-3, S-4, SB-1, SB-2, S-8, etc.] Includes the Prospectus.³

Regulation A –  SEC provision for simplified registration for small issues of securities. A Reg. A issue may require a shorter prospectus and carries lesser liability for directors and officers for misleading statements.³

Regulation C –  The regulation that outlines registration requirements for Securities Act of 1933.³

Regulation D –  Regulation D is the rule (Reg. D is a “regulation” comprising a series of “rules”) that allow for the issuance and sale of securities.³

Regulation D Offering –  (See Private Placement.)³

Regulation S –  The rules relating to Offers and Sales made outside the US without SEC Registration.

Regulation S-B –  Reg. S-B of the Securities Act of 1933 governs the Integrated Disclosure System for Small Business Issuers.³

Regulation S-K –  The Standard Instructions for Filing Forms Under Securities Act of 1933, Securities Exchange Act of 1934, and Energy Policy and Conservation Act of 1975.³

Regulation S-X  –  The regulation that governs the requirements for financial statements under the Securities Act of 1933 and the Securities Exchange Act of 1934.³

Reporting Company –  A company that is registered with the SEC under the Exchange Act.³

Representations and Warranties –  A list of material statements or facts that are included in the investment documentation and to which the entrepreneur unequivocally commits.⁷

Resale Registration –  Registration by a Company of the investor’s sale of the shares purchased by the investor in a private offering.³

Restricted Securities –  Public securities that are not freely tradable due to SEC regulations. (See also: Securities and Exchange Commission.)³

Restricted Shares –  Shares acquired in a private placement are considered restricted shares and may not be sold in a public offering absent registration or after an appropriate holding period has expired. Non-affiliates must wait one year after purchasing the shares, after which time they may sell less than 1% of their outstanding shares each quarter. For affiliates, there is a two-year holding period.³

Retained Earnings –  Retained earnings are the corporate profits that are neither paid out in cash dividends to stockholders nor used to increase capital stock, but are reinvested in the company. It is calculated by adding company’s net income to beginning retained earnings and subtracting any dividends paid to shareholders.⁹

Return on Investment – 

• (ROI) This term is also referred to as the rate on return (ROR) or rate of profit. It is the amount of money that is gained in a past or existing investment. For example, angel investors tend to invest in startups and early stage companies. Because such investment is considered to be risky, they expect a large ROI to compensate for such risk.⁴
• Return On Investment or ROI is the profit or loss resulting from an investment transaction, usually expressed as an annual percentage return. ROI is a return ratio that compares the net benefits of a project versus its total costs.⁵

– Synonyms: ROI

Reverse Vesting –  When founders of a company agree that they will give back part of their stock holdings if they leave the company before a specified date (typically four years).  This is usually required by investors, and a good thing for founders themselves in the case of multiple founders.⁷

Right of First Refusal –  A right is given to enter into a business transaction before others. For example, preferred stockholders have the right to purchase additional shares issued by the company.² The right of first refusal gives the holder the right to meet any other offer before the proposed contract is accepted.³

Rights Offering –  Issuance of “rights” to current shareholders allowing them to purchase additional shares, usually at a discount to market price. Shareholders who do not exercise these rights are usually diluted by the offering.  Rights are often transferable, allowing the holder to sell them on the open market to others who may wish to exercise them. Rights offerings are particularly common to closed-end funds, which cannot otherwise issue additional ordinary shares.³

Risk –  The probability that part or all of an original investment will be lost or that investment returns will be lower than anticipated.  Numerous factors may impact these potential investment and return losses, including but not limited to demand risk, economic risk, environmental risk, funding risk, legislative risk, maintenance risk, operational risk, procurement risk, technology risk and timing risk.⁶

Royalty Based Financing –  Royalty based financing presumes a fundamental trade-off between the investor and the business owner. In lieu of an equity ownership stake given to the investor, business owners agree to return to the investor the original principal plus either a predetermined multiple of the original investment (fixed dollar payback) or payment of the royalty until a fixed period of time has elapsed (fixed time payback). In some cases the royalty is based on a percentage of sales of a specific product or set of products.⁹

Rule 144 –  Rule 144 provides for the sale of restricted stock and control stock. Filing with the SEC is required prior to selling restricted and control stock, and the number of shares that may be sold is limited.⁴

Rule 144A –  A safe-harbor exemption from the registration requirements of Section 5 of the 1933 Act for resales of certain restricted securities to qualified institutional buyers, which are commonly referred to as “QIBs.” In particular, Rule 144A affords safe-harbor treatment for reoffers or resales to QIBs — by persons other than issuers — of securities of domestic and foreign issuers that are not listed on a U.S. securities exchange or quoted on a U.S. automated inter-dealer quotation system. Rule 144A provides that reoffers and resales in compliance with the rule are not “distributions” and that the reseller is therefore not an “underwriter” within the meaning of Section 2(a)(11) of the 1933 Act. If the reseller is not the issuer or a dealer, it can rely on the exemption provided by Section 4(1) of the 1933 Act. If the reseller is a dealer, it can rely on the exemption provided by Section 4(3) of the 1933 Act.³

Rule 144A Exchange Offer –  A transaction in which one class of securities that were issued in a private placement are exchanged for another, unusually almost identical, class of securities, in a transaction registered with the SEC on a Form S-4 Registration Statement.³

Rule 501 –  Rule 501 of Regulation D defines Accredited Investor, among other definitions and regulations.³

Rule 505 –  Rule 505 of Regulation D is an exemption for limited offers and sales of securities.³

Rule 506 –  Rule 506 of Regulation D is considered a “safe harbor” for the private-offering exemption of Section 4(2) of the Securities Act of 1933. Companies using the Rule 506 exemption can raise an unlimited amount of money if they meet certain exemptions.³

Runway –  How long a startup can survive before it goes broke; that is, the amount of cash in the bank divided by the burn rate.⁷

S Corporation –  A closely held business corporation which has the ability to make an election to pass corporate income, deductions and losses to shareholders for federal income tax purposes.  S Corporations may not have more than 100 shareholders, a shareholder who is not an individual, (special exemptions may apply) or more than one class of stock.  As a result, they are not generally viewed as good structures for entrepreneurs seeking to finance their companies with  funding from angels, angel groups or venture capital firms.⁶
– Synonyms: S Corp, Subchapter S

Scalability –  The ability of a startup or small business to leverage its’ existing resources to grow and operate at a larger scale without being encumbered by factors such as capital investment, human resources and legacy structures, etc.⁶

Screening –  A process utilized by individual investors, angel groups and VC funds to determine their interest in investment opportunities.  The screening may be informal or formal in nature and typically includes an assessment of the opportunity against the investors previously determined criteria for investment.⁶

Search Engine Marketing –  An online type of marketing designed to drive traffic to a company or an organizations’ website to optimize its ranking, including but not limited to paying for the site to appear in search engine results.⁶
– Synonyms: SEM

Search Engine Optimization –  Processes and methods used to increase or boost site rankings or the frequency in which a websites search results are returned by an internet search engine as part of a process to maximize user traffic to the site.⁶
– Synonyms: SEO

SEC –  The United States Securities and Exchange Commission charged with regulating all sales of corporate securities.⁷
– Synonyms: Securities and Exchange Commission

Secondary Purchase –  Secondary Purchase is purchase of stock in a company from a shareholder rather than purchasing stock directly from the company.⁵

Secondary Sale –  The sale of private or restricted holdings in a portfolio company to other investors.³

Sector –  Segments of the economy in which business markets share similar operating characteristics, or similar products and services are known as sectors.  The three major classifications of sectors are the primary sector, which includes raw materials such as minerals and mined materials, and natural products such as agriculture and forestry products, the secondary sector which includes manufacturing, processing and construction and the tertiary sector which is comprised of companies which provide services.⁶

Securities –  Includes all types of equity and debt instruments and rights in and to them.³

Securities Act of 1933 –  The federal law covering new issues of securities. It provides for full disclosure of pertinent information relating to the new issue and also contains antifraud provisions.³

Securities Act of 1934 –  The federal law that established the Securities and Exchange Commission. The act outlaws misrepresentation, manipulation, and other abusive practices in the issuance of securities.  Securities and Exchange Commission: The SEC is an independent, nonpartisan, quasi-judicial regulatory agency that is responsible for administering the federal securities laws. These laws protect investors in securities markets and ensure that investors have access to all material information concerning publicly traded securities. Additionally, the  SEC regulates firms that trade securities, people who provide investment advice, and investment companies.³

Seed Capital –  Seed Capital is the money used to purchase equity-based interest in a new or existing company. This seed capital is usually quite small because the venture is still in the idea or conceptual stage.⁵
– Synonyms: Seed Money

Seed Fund –  A venture capital fund specializing in very-early-stage startups.⁷

Seed Money –  The initial round of capital for start-up companies, typically provided by angel investors through preferred stock or convertible bond type instruments.⁶
– Synonyms: Seed Capital

Seed Round –  The first investments made into a company by someone other than the founder.  The term comes from planting a seed for the first time.⁷

Seed Stage –  The stage of a scalable startup immediately following the concept stage. In this stage, the entrepreneurs typically validate their product or service to the marketplace, develop their MVP, commence initial market testing and development, and begin development of their business model / go to market strategy.   The first formal round of investment beyond friends and family typically occurs in this round with investment from super angels, angel groups and micro VCs.⁶
– Synonyms: Start-up Stage

Seed Stage Financing –  An initial state of a company’s growth characterized by a founding management team, business-plan development, prototype development, and beta testing.³

Senior Securities –  Securities that have a preferential claim over common stock on a company’s earnings and in the case of liquidation. Generally, preferred stock and bonds are considered senior securities.³

Serial Entrepreneur –  An entrepreneur who has previously founded and run one or more ventures.⁷

Series A –  A company’s first significant round of venture funding (though angels often participate in this round).²

Series A Crunch –  A putative problem that has, or may occur if more companies get early stage funding from angels and seed funds than are eventually able to obtain later stage funding from venture capital funds.⁷

Series A Preferred Stock – 

• The first round of stock offered during the seed or early-stage round by a portfolio company to the venture investor or fund. This stock is convertible into common stock in certain cases such as an IPO or the sale of the company. Later rounds of preferred stock in a private company are called Series B, Series C, and so on.³
• Series A Preferred Stock is the first round of stock offered during the seed or early stage round by a portfolio company to the venture capitalist. Series A preferred stock is convertible into common stock in certain cases such as an IPO or the sale of the company. Later rounds of preferred stock in a private company are called Series B, Series C and so on.⁵

Series B, C, D… –  Investment rounds from venture capital funds subsequent to the first Series A round.⁷

Series Seed –  Used generally to refer to the first equity round from serious seed or angel investors in a company, following its Friends & Family round but prior to a Series A.⁷

Servicemark –  An identifying word, phrase, design or symbol that permits third parties to distinguish and differentiate the sources of differing parties services. Servicemarks are registered with the appropriate governmental offices such as the United States Patent and Trademark Office, (USPTO).⁶
– Synonyms: SM

Shareholders Agreement –  An agreement signed during a financing transaction by all of a company’s shareholders in which they agree in advance to certain provisions.  These will typically include indicating which parties are entitled to designate members of the board of directors, and thus control the company.⁷

Shell Corporation –  A corporation with no assets and no business. Typically, shell corporations are designed for the purpose of going public and later acquiring existing businesses. Also known as Specified Purpose Acquisition Companies (SPACs).³

Sherpa –  In the startup world, an advisor who helps guide and support a new company.⁷

Signature Loan –  This type of loan is secured by the “signature” or promise to pay by the borrower. There may or may not be restrictions on its use. Also known as a “character loan” or “good-faith loan”. ⁶

Significant Participation Test – 

A test that is satisfied if the General Partner determines in its reasonable discretion that Persons that are “benefit plan investors” within the meaning of Section (f)(2) of the Final Regulation constitute or are expected to constitute at least 25 percent of the interests of the Limited Partners.  Note that the test is 25% of the interests of all the limited partners, which means 20% (+/-) in the partnership as a whole, taking into account the general partner’s interest.³

Silent Partner –  A silent partner is an investor who does not have any management responsibilities but provides capital and shares liability for any losses experienced by the entity. Silent partners are liable for in any losses up to the amount of their invested capital and participate in any tax and cash flow benefits.⁵

Simple Agreement for Future Equity –  A new form of funding for early stage companies developed by YCombinator to solve a number of issues with traditional convertible note financing.⁷

Simple Agreement for Future Equity – 

A new form of funding for early stage companies developed by YCombinator to solve a number of issues with traditional convertible note financing.⁷

Small Business Administration (SBA) –  Provides loans to small-business investment companies (SBICs) that supply venture capital and financing to small businesses.³
– Synonyms: SBA

Small Business Innovation Development Act of 1982 –  The Small Business Innovation Research (SBIR) program is a set-aside program for domestic small-business concerns to engage in Research/Research and Development (R/R&D) that has the potential for commercialization. The SBIR program was established under the Small Business Innovation Development Act of 1982, reauthorized until September 30, 2000 by the Small Business Research and Development Enhancement Act, and reauthorized again until September 30, 2008 by the Small Business Reauthorization Act of 2000.³

Small Business Innovation Research Program –  See Small Business Innovation Development Act of 1982.³
– Synonyms: Small Business Innovation Research

Small Business Investment Companies –  (SBIC) Small Business Investment Companies or SBIC are lending and investment firms that are licensed and regulated by the Small Business Administration . The licensing enables them to borrow from the federal government to supplement the private funds of their investors. SBICs prefer investments between $100,000 to $250,000 and have much more generous underwriting guidelines than a venture capital firm.⁵
– Synonyms: SBIC

Small Business Technology Transfer program – 

The Small Business Technology Transfer program, from the US government; intended to assist educational institutions in transferring new technology to the private sector.⁷

Sniff Test –  A colloquial expression referring to a quick assessment of a situation to see whether it appears legitimate.⁷

Social Media –  The use of electronic online communities to share information, communicate ideas and personal messages and engage with others through comments, discussion and various media such as blog articles and video.  Examples of platforms on which social media communities exist include FaceBook, Instagram, LinkedIn, Pinterest, Quora and Twitter.⁶

Social Proof –  An investment approach leaning heavily on the identity of other, well-known people who are supporting the company.⁷

Social Venture –  A startup enterprise established to benefit society utilizing entrepreneurial methods. Social ventures may be either a “for-profit” or a “non-profit” entity.⁶
– Synonyms: Social Enterprise

Society for Corporate Compliance and Ethics –  (SCCE) A non-profit professional organization dedicated to fostering law-compliant and ethical corporate behavior.  See http://www.corporatecompliance.org for more information.¹
– Synonyms: SCCE

Soft Landing –  A face-saving acquisition of an unsuccessful startup, usually for little or no compensation.⁷

Software as a Service – 

SaaS refers to Software as a Service, a cloud based software application where users are charged on a subscription basis.⁶

Spray and Pray –  Investing in an array of companies in the hopes that one of them will become a unicorn.⁶

Sprint –  In the tech and startup communities, a sprint is a process in which entire teams pitch in and work together to complete a defined objective in a short period of time.⁶

Staggered Board –  This is an anti-takeover measure in which the election of the directors is split in separate periods so that only a percentage (e.g., one-third) of the total number of directors come up for election in a given year. It is designed to make taking control of the board of directors more difficult.³

Startup –  A startup is a new business venture / enterprise in its initial or early stages of development. These stages include the concept, seed, early, growth and mezzanine stages.⁶

Statutory  Voting –  A method of voting for members of the Board of Directors of a corporation. Under this method, a shareholder receives one vote for each share and may cast those votes for each of the directorships. For example: An individual owning 100 shares of stock of a corporation that is electing six directors could cast 100 votes for each of the six candidates. This method tends to favor the larger shareholders.³

Stock Option Pool –  Shares of stock reserved for employees of a company. The option pool is a way of attracting talented employees to a startup company – if the employees help the company do well enough to go public, they will be compensated with stock. Employees who get into the startup early will usually receive a greater percentage of the option pool than employees who arrive later.²

Stock Options –  1) The right to purchase or sell a stock at a specified price within a stated period. Options are a popular investment medium, offering an opportunity to hedge positions in other securities, to speculate on stocks with relatively little investment, and to capitalize on changes in the market value of options contracts themselves through a variety of options strategies. 2) A widely used form of employee incentive and compensation. The employee is given an option to purchase its shares at a certain price (at or below the market price at the time the option is granted) for a specified period of years.³

Strategic Investors –  Corporate or individual investors that add value to investments they make through industry and personal ties that can assist companies in raising additional capital as well as provide assistance in the marketing and sales process.³

Subordinated Debt –  A note or loan which can only be paid after other, more senior or higher ranking obligations can be paid, in the event of a liquidation. This type of obligation, also known as “junior debt” is riskier than unsubordinated, debt which has preferential claims on company assets.⁶

Subscription Agreement – 

• The application submitted by an investor wishing to join a limited partnership. All prospective investors must be approved by the General Partner prior to admission as a partner.³
• An application under which an investor applies to acquire a specific number of shares or units of a company at a specific price, at a later date, assuming the investor can be determined to be qualified under SEC guidelines and the company’s meeting certain conditions. The agreement establishes the terms and conditions under which the investor will be bound if accepted.⁶

Success Fee –  A percentage commission paid to an intermediary or other individual as an incentive on the closing of a large financing transaction.⁷

Sunsetting –  The process of phasing out a product, service or line of business is known as sunsetting.⁶

Super Angel –  A misnomer describing micro VCs.  True super angels are active angels who make many significant investments, find and negotiate investments, and can bring other investors along with them.⁷

Supermajority –  The percentage defining the level of shareholders that must approve significant company actions such as borrowing money, or acquiring or merging with another business; typically defined in the 60.0% to 66.67% range.⁶

Sweat Equity –  Sweat equity is the equity or ownership interest created in a startup by it’s founders as a result of their contributions in the form of hard work, labor and toil.⁶

Syndicate –  Underwriters or broker/dealers who sell a security as a group.³

Syndication –  The process whereby a group of venture capitalists will each put in a portion of the amount of money needed to finance a small business.⁵

Synergy –  Synergy is the interaction and leveraging of resources provided by different individuals or organizations to obtain a combination greater than the sum of the individual parts.⁶

Tag Along/Drag Along –  Provisions in a Shareholders Agreement that permit investors under certain defined circumstances to sell their shares if you sell yours (tag), or force you to sell your shares if they sell theirs (drag).⁷

Tag-Along Rights / Rights of Co-Sale –  A minority-shareholder protection affording the right to include their shares in any sale of control and at the offered price.³

Takedown Schedule –  A takedown schedule means the timing and size of the capital contributions from the limited partners of a venture fund.³

Tax-free Reorganizations –  Types of business combinations in which shareholders do not incur tax liabilities. There are four types — A, B, C, and D reorganizations. They differ in various ways in the amount of stock/cash that can be offered.³

Tender offer –  An offer to purchase stock made directly to the shareholders. One of the more common ways hostile takeovers are implemented.³

Term Loan –  A loan that is paid off in a set period of time, usually in equal monthly installments throughout the duration (or term) of the loan. Term Loans can be a secured or unsecured loans.⁶

Terms Sheet –  A non-binding agreement or template that outlines an overview of the terms and conditions between the entrepreneur and investor, which will ultimately be incorporated in the definitive investment agreements between the parties.⁶

Time Value of Money –  The basic principle that money can earn interest; therefore, something that is worth $1 today will be worth more in the future if invested. This is also referred to as future value.³

Trademark –  An identifying word, phrase, design or symbol that permits third parties to distinguish and differentiate the goods of differing parties. Trademarks are registered with the appropriate governmental offices such as the United States Patent and Trademark Office, (USPTO).⁶
– Synonyms: TM

Treasury Stock –  Stock issued by a company but later reacquired. It may be held in the company’s treasury indefinitely, reissued to the public, or retired. Treasury stock receives no dividends and does not carry voting power while held by the company.³

Trust Indenture –  Agreement between the Company, the debt holders, and the trustee for the debt holders. Required for registered offerings of debt securities. (See Trust Indenture Act of 1939.)³

Turnaround –  Turnaround is the term used when the poor performance of a company or the business experiences a positive reversal.⁹

UI Designer –  A designer in the tech world who has a principal focus on how the product is laid out.⁶
– Synonyms: User Interface Designer

Underwriter –  An investment banking firm leading the float of a public issue, with the commitment and willingness to take the securities being offered into its own book should the distribution fail. ⁶

Underwritten Offering –  Registered offering that is sold through a consortium of investment banks assembled by one or more lead investment banks.³

Unicorn –  In the startup world, a unicorn is a company with a valuation in excess of $1 Billion. These startups are statistically rare.⁶

Uniform Limited Partnership Act – 

Uniform Limited Partnership Act, see also the RULPA, Revised Uniform Limited Partnership Act U.L.P.A. § 101 et seq. (1976), as amended in 1985 (R.U.L.P.A.).³

Unique Visitor –  A web analytics term related to the individual that visits an internet website  at least one time during a specified reporting period.⁶
– Synonyms: UV

Unit Offering –  Private or public offering of securities in groups of more than one security. Most often a share of stock and warrant to purchase some number of shares of stock, but could be two shares of stock, a note and a share of stock, etc. Also used in some cases to refer to the sale of LP and LLC interests, since those interests are composed of more than one right.³

Universal Resource Locator – 

A protocol for delineating addresses on the internet.⁶

Up-round –  When the valuation of a company at the time of an investment round is higher than its valuation at the conclusion of the previous round.⁷

User –  An individual or enterprise that utilizes a product or service.  Such use can be on a paid or unpaid basis.⁶

UX Designer –  A designer in the tech world who has a principal focus on how the product feels.⁶
– Synonyms: User Experience Designer

Valley of Death –  The period between the initial funding and the end of the runway.  If you get through here, you should be okay. If not…⁷

Valuation –  The process of establishing the value or worth of an asset or a company. Factors impacting company valuation include it’s market, management, technology, assets, capital structure and prospective future cash flows. ⁶

Value Proposition –  A statement a company utilizes to express why customers should purchase their product or service, as compared to that of a competitor. The objective of the statement is to convince potential customers that their product or service adds more value than that of alternative offerings.⁶

Vanity Metrics –  Information and data collected by and about a company, its management or its users that serve little purpose beyond internal emotional validation of the company.  Such information and data lack the quality and depth to support business decisions.⁶

Vaporware –  A public announcement of new hardware or software prior to the products actual development. Often the product is never released and announcements are not rescinded; hence the reference to “vapor”.⁶

Venture –  Venture is often used for referring to a risky start-up or enterprise company.⁵

Venture Capital –  Investment capital made available to high growth, scalable startups, typically beginning at the early stage, from a fund supported by accredited investors.⁶

Venture Capital Financing –  A type of private equity investment provided to early stage high growth startup companies in the latter stages of development, which have the potential for exceptional financial returns. Such venture capital investments typically range from $250,000 to $10 Million.⁶

Venture Capital Firm –  Venture Capital Firm is an investment company that invests its shareholders’ money in startups and other risky but potentially very profitable ventures.⁵

Venture Capital Funds –  Venture capital funds pool and manage money from investors seeking private equity stakes in small and medium-size enterprises with strong growth potential.⁵

Venture Capital Limited Partnership –  Venture Capital Limited Partnership is a limited partnership which is formed to invest in small startup businesses with exceptional growth potential.⁵

Venture Capitalist –  A group of high net worth investors who pool their money to invest in later stage startup companies.⁶

Venture Debt –  A type of debt financing provided to venture-backed companies from specialized banks or non-bank lenders.⁷

Vesting –  A process in which you “earn” your stock overtime. The purpose of vesting is to grant stock to people over a fixed period of time so they have an incentive to stick around. A typical vesting period for an employee or Founder might be 3 – 4 years, which would mean they would earn 25% of their stock each year over a 4 year period. If they leave early, the unvested portion returns back to the company.²

Vesting Schedule –  A  timetable and methodology under which a startup releases shares to employees, management, founders, advisors, board members and other company stakeholders.⁶

Voicemail Script –  A short, clear, crisp engaging message which provides a succinct overview of your startup concept and business model and can be shared via either email or telephone as a reply to potential investors who have expressed an interest in your opportunity.⁶

Voting Right –  The common stockholders’ right to vote their stock in the affairs of the company. Preferred stock usually has the right to vote when preferred dividends are in default for a specified amount of time. The right to vote may be delegated by the stockholder to another person.³

Vulture Capitalist –  A VC whose operating method is to diliberetely take advantage of an entrepreneur’s troubles.⁷

Walking Dead –  A company that isn’t bankrupt, but will never succeed, and thus can’t be sold or otherwise exited.⁷

Wantrepreneur –  An individual who continuously ponders, desires or wants to start a business, acts as if they are an entrepreneur but fails to take the steps necessary to establish and operate a business.⁶

Warrant –  A type of security that entitles the holder to buy a proportionate amount of common stock or preferred stock at a specified price for a period of years. Warrants are usually issued together with a loan, a bond, or preferred stock and act as sweeteners, to enhance the marketability of the accompanying securities. They are also known as stock-purchase warrants and subscription warrants.³

Waterfall –  The order in which investors (and everyone else) get their money out on an exit.  Almost always this is “last in, first out.”⁷

Website –  An organized property made up of a group of connected pages on the World Wide Web, (Internet) that are considered a single entity.⁶
– Synonyms: Internet

Week over Week –  A financial comparison which examines a specified performance factor for a specified week with the same performance factor for the previous week.  Week over Week comparisons can can be direct comparing the actual performance factors, or differences between the factors in either absolute or percentage terms.⁶
– Synonyms: WoW

Weighted Average Antidilution –  The investor’s conversion price is reduced, and thus the number of common shares received on conversion increased, in the case of a down round; it takes into account both: (a) the reduced price and, (b) how many shares (or rights) are issued in the dilutive financing.³

White Paper –  A white paper is a proposal, report, or other informational document created by a company or non-profit with an emphasis on a product, service, or solution.

Williams Act of 1968 –  An amendment of the Securities and Exchange Act of 1934 that regulates tender offers and other takeover-related actions such as larger share purchases.³

Wireframe –  A visual depiction in the form of a schematic or blueprint that represents the framework of a website and related web pages. Typically low tech, it lacks in “look and feel” characteristics, focusing more on the layout of the pages and arrangement of the content including potential navigational processes.⁶

Working Capital –  In accounting terms, it is the difference between current assets and current liabilities that can be turned into cash. Positive Working Capital means that the company has sufficient liquid assets to cover its short term liabilities (expenses).⁶

Workout –  A negotiated agreement between the debtor and its creditors outside the bankruptcy process.³

World Business Angel Association –  (WBAA) A non-government organization whose direct members are national federations, which in turn represent business angel groups and networks in their respective countries.  Neither business angel groups themselves, nor individual business angel investors, are members of WBAA, although they may be involved with the organization in other ways and participate actively in its programs.  Countries whose national business angel federations are represented in the organization include Australia, Chile, China, France, Germany, India, Italy, New Zealand, Panama, Portugal, Scotland, Spain, United Arab Emirates, United Kingdom, and the United States, as well as the European Union.¹

Write-off –  The act of changing the value of an asset to an expense or a loss. A write-off is used to reduce or eliminate the value of an asset and reduce profits.³

Write-up/Write-down –  An upward or downward adjustment of the value of an asset for accounting and reporting purposes. These adjustments are estimates and tend to be subjective, although they are usually based on events affecting the investee company or its securities beneficially or detrimentally.³

Year over Year – 

A financial comparison which examines a specified performance factor for a specified year with the same performance factor for the previous year.  Year over Year comparisons can can be direct comparing the actual performance factors, or differences between the factors in either absolute or percentage terms. It has the advantage over shorter term comparisons of eliminating seasonality and potentially revealing longer term trends. 6

Zombie Fund –  A VC firm that is unable raise a new fund, and thus is unable make investments in new opportunities.⁶