Investment vocabulary

Anti-dilution provision

The anti-dilution provision safeguards investors from ownership dilution by recognizing the Full Ratchet, which adjusts investors' share conversion rate to a new, lower price, and Weighted Average, recalculating conversion prices through a weighted average of new and old share prices, with variations including Broad-based and Narrow-based Weighted Average for comprehensive or specific share type consideration.

‍

Bootstrapping

Bootstrapping refers to starting a company with minimal capital, using personal finances or the company's revenues instead of external investments.

‍

Burn rate

The burn rate represents how fast an unprofitable company uses its cash reserves. For startups, it's the rate of spending venture capital on overhead before making a positive cash flow. It measures negative cash flow.

‍

Cap table

A cap table is a table that summarizes company ownership (who owns how much and at what valuation). It also keeps track of the company's valuation.

‍

Common shares

Common shares are typically owned by founders and sometimes also by employees or early investors. They carry voting rights. In terms of any liquidity event, they fall behind preferred shares holders.

‍

Convertible loan

A convertible loan is a loan that either converts into equity or gets repaid at a future date. It gives startups quick access to cash without transferring company ownership (yet). Convertible loans are ideal for early-stage startups and startups that are unsure about their valuation.

‍

Convertible note

A convertible note is a form of short-term debt that converts into equity, typically in conjunction with a future financing round; essentially, the investor lends money to a startup and instead of getting a return in cash, they receive equity in the company. The main advantage of a convertible note is that it enables the startup and investor to delay determining the value of the company until it is more mature by converting the invested amount into equity at a later date, usually at a discount to the price paid by future investors.

‍

Debt financing 

Debt financing is a method for startups to borrow money to fund operations, expansion, or other needs. This borrowed capital must be repaid over time, usually with interest. In contrast to equity financing, where funds are generated through the sale of company shares, this approach allows for raising capital without giving up ownership.

‍

Dilution

Equity dilution happens when a company issues new shares. This often happens in connection with new investment rounds. As a result, existing shareholders' ownership percentage goes down. Simply put, if you have 10 % with 100 shares and the company issues 100 more shares, your ownership drops to 5 %.

‍

Disclosure letter

A disclosure letter is a crucial document in funding rounds or M&As. It informs investors about the company's issues, such as debts or intellectual property limitations, before they invest. It helps prevent future disputes by making all important details clear.

‍

Drag-along 

A drag-along right allows a majority (or selected group of) shareholder(s) to force a minority shareholder(s) to participate in a company sale. The minority shareholder must receive the same price, terms, and conditions as all sellers.

‍

Equity financing

In equity financing, investors become the company’s shareholders with all the connected shareholders’ rights. Equity investment is ideal for startups that are raising more significant funds, have more potential investors and more time & resources to set up governance with new stakeholders.

‍

Full ratchet

A full ratchet is an anti-dilution provision ensuring early investors' shares are adjusted to the lowest sale price in future fundraising. With a full ratchet, the conversion rate of the original investors’ preferred shares is adjusted to the new lower price of the newly issued shares. This provision is highly favorable to investors as it fully adjusts their conversion price to match the price of the new shares, regardless of the volume of new investment. 

‍

Letter of intent

A Letter of intent (LOI) signals a party's initial commitment to do business with another, detailing key terms of a potential deal. Often used in large business transactions. LOIs are similar in content to term sheets but take the form of a letter.

‍

Liquidation preference

Liquidation preference tells you how much and in what order investors and other shareholders get paid on exit. Investors use liquidation preference to protect themselves from the downside.

‍

Liquidity event

A liquidity event, like an acquisition, merger, or IPO, lets founders and early investors cash out their shares. It's an exit strategy for investments with limited trading options. Investors, such as VC firms and angel investors, anticipate this event after their initial investment.

‍

NDA

A Non-Disclosure Agreement (NDA) is a legal contract creating a confidential relationship. Parties signing it agree to keep sensitive information private. It's also known as a confidentiality agreement.

‍

Non-compete clause

A non-compete agreement legally binds an employee to avoid competing with their employer after leaving the job. It also prevents sharing proprietary information during or after employment.

‍

Non-solicit clause

A non-solicit clause refers to the obligation not to take the company's customers or employees when a person stops being part of the company (typically working for the company as an employee).

‍

Post-money

Post-money tells you how much your company is worth after a funding round. Imagine that fridge on a Sunday, just full of groceries. Post-money valuation includes the pre-money company value and the new cash.

‍

Pre-emptive right

Pre-emptive right protects current shareholders against dilution of their ownership. When the company issues shares to new investors, current shareholders’ ownership decreases due to dilution. Pre-emptive right lets shareholders maintain their ownership percentage by enabling them to buy new stock before it gets offered to others.

‍

Pre-money

Pre-money valuation is your company's value without the latest round of funding. Think of an almost empty fridge before weekend shopping - that's your startup pre-investment. 

‍

Preferred shares

Preferred shares are typically owned by VC investors to protect their investment and ensure liquidity. They give their owners higher priority for any dividend payouts before other shareholders. They also carry other preferential rights in relation to exit or future fundraising rounds.

‍

Pro-rata rights

Pro-rata, meaning "in proportion" in Latin, refers to the equal distribution of something being distributed in equal portions. In practical terms, if such a right is granted to a shareholder group, each shareholder from such group is entitled to exercise such right in proportion to their mutual shareholding.

‍

Right of first refusal

Right of first refusal (ROFR) give its holders (investors) “first dibs” on any share sale. So, if the existing shareholders want to sell shares to a third party, investors can beat them to it by matching their offer.

‍

SAFE

A Simple Agreement for Future Equity (SAFE) is popular among early-stage startups. SAFE doesn’t represent an immediate equity stake but becomes one once a specific amount of funding or another future condition is met.

‍

Tag-along

Tag-along or co-sale rights protect minority shareholders in venture capital deals. They allow these shareholders to sell their stake if a majority shareholder (or founder(s)) sell(s) theirs. This ensures that the majority shareholder (or founder(s)) include(s) the minority's interests in any sale negotiations.

‍

Term sheet

A term sheet is a crucial document for investment deals. It outlines the basic investment conditions but isn't legally binding. It serves as a blueprint for legal documentation and sets the tone for the investor-founder relationship.