Essential Glossary of Must-Know Terms for Startup Founders
Navigating the startup world can be complex, especially with the myriad of terms and jargon that are often used. Here’s a glossary of essential terms that every startup founder should know to effectively manage their business and communicate with investors, partners, and stakeholders.
1. Accelerator
Definition: A program that supports early-stage startups through mentorship, funding, and resources, typically culminating in a demo day where startups pitch to investors.
Example: Y Combinator, Techstars.
2. Acquisition
Definition: The process of one company purchasing most or all of another company's shares to gain control of that company.
Example: Facebook acquiring Instagram.
3. Angel Investor
Definition: An individual who provides capital to startups in exchange for ownership equity or convertible debt, often in the early stages of the company.
Example: Jeff Bezos investing in Google during its early days.
4. Bootstrapping
Definition: The process of building a company from the ground up with personal savings and revenues from the business, without external funding.
Example: Basecamp, which grew without taking external funding initially.
5. Burn Rate
Definition: The rate at which a startup is spending its capital before generating positive cash flow.
Example: A burn rate of $50,000 per month means the company spends $50,000 more than it earns each month.
6. Cap Table
Definition: A capitalization table, or cap table, is a spreadsheet or table that shows the ownership stakes in a company, detailing each investor's equity position.
Example: The cap table lists all shareholders, their percentage of ownership, and their equity type (common or preferred shares).
7. Convertible Note
Definition: A short-term debt that converts into equity, typically in conjunction with a future financing round.
Example: A startup raises $100,000 in convertible notes that will convert to equity at the next funding round at a discount.
8. Customer Acquisition Cost (CAC)
Definition: The total cost of acquiring a new customer, including marketing and sales expenses.
Example: If a company spends $100,000 on marketing and acquires 1,000 customers, the CAC is $100.
9. Due Diligence
Definition: The investigation or audit of a potential investment or product to confirm all facts, such as reviewing financial records and market conditions.
Example: Investors perform due diligence before investing in a startup to verify its financial health and business model.
10. Equity
Definition: The ownership of shares in a company, representing a claim on part of the company’s assets and earnings.
Example: Founders typically retain a significant portion of equity in their company to maintain control and benefit from future growth.
11. Exit Strategy
Definition: A plan for how an investor or founder will exit their investment in a company, usually through an acquisition, merger, or IPO.
Example: A startup plans an IPO as an exit strategy to provide liquidity to its investors.
12. Initial Coin Offering (ICO)
Definition: A fundraising method in which a company issues tokens on a blockchain to raise capital from investors.
Example: Ethereum raised funds through an ICO to develop its blockchain platform.
13. Initial Public Offering (IPO)
Definition: The process of offering shares of a private corporation to the public in a new stock issuance.
Example: Airbnb went public through an IPO, allowing retail and institutional investors to purchase shares.
14. Minimum Viable Product (MVP)
Definition: A version of a product with the minimum features necessary to validate the product idea and gather feedback from early adopters.
Example: Dropbox initially launched an MVP with a simple video explaining the concept to gauge interest.
15. Runway
Definition: The amount of time a startup can operate before it runs out of cash, based on its burn rate and available capital.
Example: With a burn rate of $20,000 per month and $200,000 in the bank, a startup has a runway of 10 months.
16. Seed Funding
Definition: The initial capital raised by a startup to begin operations, often from angel investors or early-stage venture capital firms.
Example: A startup raises $500,000 in seed funding to develop its prototype and conduct market research.
17. Series A, B, C Funding
Definition: Subsequent rounds of funding that a startup raises after seed funding, each round typically larger and at a higher valuation.
Example: Series A funding might raise $2 million, Series B $10 million, and Series C $30 million to scale the business.
18. Term Sheet
Definition: A non-binding agreement that outlines the basic terms and conditions under which an investment will be made.
Example: A term sheet includes details on valuation, investment amount, and investor rights.
19. Valuation
Definition: The process of determining the current worth of a company.
Example: A startup’s valuation is determined based on factors such as revenue, market potential, and investor interest.
20. Venture Capital (VC)
Definition: A form of private equity financing provided by venture capital firms to startups and small businesses with high growth potential.
Example: A VC firm invests $5 million in a promising startup in exchange for equity.
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Compiled by the Financial Strategy Team
