Startup Glossary

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2 Acqui-hire Anti-dilution protection One company’s acquisition of A provision used to ensure that another for the primary purpose investors are not penalized of hiring its employees, rather when companies are undergoing than for the intrinsic value of the additional fnancing. An anti- business itself. dilution provision protects an investor from dilution resulting Acquisition from later issues of at a lower When one company buys a price than the investor originally controlling stake in another paid. These may give investors company. Can be friendly (agreed preemptive rights to purchase new upon) or hostile (no agreement). stock at the new ofering price. Examples include broad-based Advisory Board Weighted Average Ratchet, Narrow- A group of external advisors to a Based Weighted Average Ratchet, portfolio company. Less formal and Full Ratchet Anti-Dilution. than a Board of Directors. ARR Agile (Annual Recurring Revenue) A philosophy of software The recurring subscription-based development that promotes revenue which software as a incremental development and service/platform as a service, emphasizes adaptability and (SaaS/PaaS) based companies collaboration. receive annually; also known as the run rate. Alpha Test Internal testing, of a pre-production B2B (Business to business) product, typically on a controlled This describes a business that is basis, with the objective of targeting another business with its identifying functional defciencies product or services. B2B technology and design faws. is also sometimes referred to as enterprise technology. An individual who provides a small amount of capital to a startup for B2C (Business to consumer) a stake in the company. Typically This describes a business that is precedes a Seed Round and usually selling products or services directly happens when the startup is in its to individual customers. infancy.

3 Benchmark Budget The process by which a startup An estimation of revenue and company measures its current expenses over a specifed future success in relation to the industry period of time that is compiled and standard. An investor measures a re-evaluated on a periodic basis. company's growth by determining whether or not it has met certain Burn Rate benchmarks. The rate at which a company expends net cash over a certain Board of directors period, usually a month. A group of infuential individuals, elected by stockholders, chosen to CAC (Customer Acquisition Costs) oversee the afairs of a company. A The cost associated with convincing board typically includes investors a customer to buy a product/ and mentors. Investors typically service. This cost is incurred by the require a board seat in exchange organization to convince a potential for an investment in a company. customer. This cost is inclusive of the product cost as well as the cost Bootstrapped involved in research, marketing, A company is bootstrapped when and accessibility costs. it is funded by an entrepreneur's personal resources or the Cap company's own revenue. Evolved Refers to a "cap" placed on from the phrase "pulling oneself investor notes in a bridge loan. up by one's bootstraps." Entrepreneurs and investors agree to place a cap on the of Bridge loan/ Convertible debt the company where notes turn When a company borrows money to equity. This means that the with the intent that the debt valuation of the company during accrued will later be converted to the time where the bridge converts equity in the company at a later to equity will not be higher than the valuation. This allows companies agreed upon valuation (the ”cap”). to delay setting the valuation while raising funds in their early stages. Capital Most bridge loans will have a built- For start-ups, it is mainly in discount and sometimes a cap. monetary assets available for use. SAFE loans are a convertible Entrepreneurs raise capital to start debt with favorable terms for the a company and continue raising founders. capital to grow the company.

4 Capital under management with a site's oferings or services in The amount of capital, or fnancial a given day. assets, that a venture frm is currently managing and investing. Dilution Issuing more shares of a company dilutes the value of holdings of A table depicting the quantity of existing shareholders. Dilution shares or unit ownership which is a reduction in the percentage is held by each investor in a ownership of a given shareholder corporation, typically including in a company caused by the founders' equity, investor equity, issuance of new shares. and advisor/employee stock pools. Disruption Also known as disruptive Common Stock . An innovation or A class of ownership that has lower technology is disruptive when it claims on earnings and assets "disrupts" an existing market by than preferred stock. It is riskier doing things such as: challenging to own common stock because, in the prices in the market, displacing the event of liquidation, common an old technology, or changing the stock shareholders are the last to market audience. claim rights to assets. Down-round Corporate Venture When the valuation of a company An investment from one at the time of an investment round corporation in another, typically is lower than its valuation at the at an early stage for strategic conclusion of a previous round. reasons. Due diligence An analysis an investor makes The process of raising fnancial of all the facts and fgures of a support for a venture via smaller potential investment. Can include amounts from many investors an investigation of fnancial (“the crowd”), rather than the records and a measure of potential alternative pattern of larger ROI. A typical DD will include amounts from a smaller number DD on the founders (reference of supporters. and interviews), market analysis (customer feedback and market DAU (Daily Active Users) sizing), technology deep dive,and Distinct website users who engage legal and fnancial analysis (going

5 over the budget). certain period of time to serve as an incentive for employees to build Elevator Pitch long-term value for the company. An elevator pitch is a brief ESOPs represent the most common presentation, typically 30 – 60 form of equity compensation. seconds in duration, presenting the entrepreneur’s concept/solution, Exit , “go to market” The method by which an investor strategy, and value proposition to and/or entrepreneur intends to potential angel or sell their shares in the company, investors, in order to obtain the thus "exit" their investment in a attention of the investors such that company. Common ways to exit they are compelled to learn more are an IPO or from another about the opportunity. company. Entrepreneurs and VCs often develop an "exit strategy" Enterprise while the company is still growing. Typically refers to a company or business which has at least 1,000 Flat Round employees and more than $1B in An investment round in which the annual revenues. pre-money valuation of a startup’s round is the same as its post- Entrepreneur money valuation from the previous An individual who starts a business round. venture, assuming all potential risk and reward for him or herself. Incubator / Accelerator A private legal entity, for proft, Equity fnancing that supplies its portfolio The act of raising capital by selling companies with the following: of shares of a company. All VC work environment, administrative rounds are equity fnancing. Also, services, technological & business an IPO is technically a form of guidance, and legal & regulatory equity fnancing. assistance, in exchange for equity in the company. ESOP (Employee stock ownership In , the ofce of the chief plan) scientist has a technological A plan established by a company incubator program. The primary whereby a certain number of goal of the program is to transform shares is reserved for purchase innovative technological ideas, that and issuance to key employees. are too risky and in too early a stage Such shares usually vest over a for private investments, into viable

6 startup companies. The incubation term of a project in a technological Milestones incubator is approximately two A set of goals which could be years and the total budget for the fnancial or business that the two-year term ranges from US company targets for a given period $500,000 to US $800,000. of time. Sometimes VCs will use milestones to determine whether IPO - Initial public ofering they will keep fnancing the The frst time shares of stock in a company. company are ofered on a securities exchange or to the general public. MRR At this point, a private company (Monthly Recurring Revenue) turns into a public company (and is Income that a company can reliably no longer a startup). anticipate every month.

Lead investor NDA A venture capital frm or individual (Non-disclosure agreement) investor that organizes a specifc An agreement between two parties round of funding for a company. to protect sensitive or confdential The lead investor usually invests information, such as trade secrets, the most capital in that round. Also from being shared with outside known as "leading the round." parties.

Liquidation preference Oversubscription determines Occurs when demand for shares the payout order in case of a exceeds the supply or number of corporate liquidation. More shares ofered for sale. This occurs specifcally, liquidation preferences when a deal is in great demand are frequently used in venture because of the company’s contracts to specify which prospects. investors get paid frst and how much they get paid in the event PaaS (Platform as a Service) of a liquidation event, such as the A service category sale of the company. which provides a foundation upon which customers can develop, MAU (Monthly Active Users) operate, and manage multiple Distinct website users who engage app functionalities without the with a site's oferings or services in need to develop the underlying a given month. infrastructure.

7 Pay-to-Play Post money valuation Provisions designed to provide a The post-money valuation refers strong incentive for investors to to the pre-money valuation plus participate in future fnancings. the cash added to the company In their simplest form, such during that specifc investment provisions require existing round. investors to invest on a pro rata basis in subsequent fnancing Pre money Valuation rounds or they will lose some or all A pre-money valuation is a term of their preferential rights (such as widely used in venture capital anti-dilution protection, liquidation industries, referring to the preferences, or certain voting valuation of a company prior to a rights). round of investment.

Pivot Preferred stock The act of a startup quickly changing A class of ownership in a direction with its business strategy. corporation that has a higher claim For example, an enterprise server on its assets and earnings than startup pivoting to become an common stock. Preferred shares enterprise cloud company. generally have a dividend that must be paid out before dividends POC (Proof of concept) to common shareholders, and the A demonstration of the feasibility shares usually do not carry voting of a concept or idea that a startup rights. is based on. In the consumer space, Preferred stock combines features POC may mean initial traction and of debt and equity, in that it both growth with consumers. In B2B, it pays fxed dividends and has the may include some initial feedback potential to appreciate in price. from potential customers or a prototype of the product. Many Pro rata rights VCs require proof of concept if you From the Latin 'in proportion.' A wish to pitch to them. VC with pro rata rights gives him or her the option of maintaining Portfolio company his or her ownership of a company A company that a specifc venture in subsequent rounds of funding. capital frm has invested in is Supra pro rata rights will give him considered a "portfolio company" or her the right to increase his of that frm. or her ownership percentage in subsequent rounds.

8 investment” refers to the proceeds Reverse Vesting obtained from the sale of the When founders of a company investment of interest. Because agree that they will give back part ROI is measured as a percentage, of their stock holdings if they leave it can be easily compared with the company before a specifed returns from other investments, date (typically four years). This allowing one to measure a variety is usually required by investors, of types of investments against and a good thing for founders one another. themselves in the case of multiple founders. Round Startups raise capital from VC frms Right of First Refusal in individual rounds, depending A right to enter into a business on the stage of the company. The transaction before others. For frst round is usually a Seed round example, preferred stockholders followed by Series A, B, and C have the right to purchase rounds if necessary. additional shares issued by the company. The right of frst refusal Runway gives the holder the right to How long a startup can survive meet any other ofer before the before it goes broke; that is, proposed contract is accepted. the amount of cash in the bank divided by the burn rate. ROI - (return on investment) This is the much-talked-about SAAS (Software as a Service) "return on investment." ROI is A cloud based software application the measure used to evaluate where users are charged on a the efciency of an investment subscription basis. or to compare the efciency of a number of diferent investments. SAFE (Simple Agreement for ROI measures the amount of Future Equity) return on an investment relative to A new form of funding for early the investment’s cost. To calculate stage companies developed by Y ROI, the beneft (or return) of an Combinator to solve a number of investment is divided by the cost issues with traditional convertible of the investment, and the result note fnancing. is expressed as a percentage or a ratio. Sector The market in which a startup In the above formula, "gain from operates. Examples include:

9 consumer technology, cleantech, small businesses are usually biotech, and enterprise technology. defned as organizations with less Venture capitalists tend to have than $50 million in annual revenue; experience investing in specifc midsize enterprises are defned as related sectors, and thus tend not organizations that make more than to invest outside of their area of $50 million, but less than $1 billion expertise. in annual revenue.

Seed Stage The seed round is the frst ofcial The stage of a startup company’s round of fnancing for a startup. development. There is no explicit At this point, a company is usually rule for what defnes each stage raising funds for proof of concept of a company, but startups tend and/or to build out a prototype, to be categorized as seed stage, and is referred to as a "seed stage" early stage, mid-stage, and late company. stage. Most VC frms only invest in companies in one or two stages. Series Some frms, however, manage Refers to the specifc round of multiple funds geared toward fnancing a company is raising. For diferent stage companies. example, company X is raising their . Startup A company in the early stages of SMB (Small Midsize Business) operation. Startups are usually A business which, due to its size, seeking to solve a problem or has diferent IT requirements—and fll a need, but there is no hard- often faces diferent IT challenges— and-fast rule for what makes a than do large enterprises, and startup. A company is considered a whose IT resources (usually startup until they stop referring to budget and staf) are often highly themselves as a startup. constrained. The attribute used most often to defne business size Term sheet is number of employees; small A non-binding agreement that businesses are usually defned as outlines the major aspects of organizations with fewer than 100 an investment to be made in a employees; midsize enterprises company. A term sheet sets the are those organizations with 100 to groundwork for building out 999 employees. The second most detailed legal documents. popular attribute used to defne the SMB market is annual revenue:

10 Up-round Venture Lending / Debt fnancing When the valuation of a company When a company borrows money at the time of an investment round from investors with the promise is higher than its valuation at the that the debt will be repaid with conclusion of the previous round. interest and/or equity; the interest rate may be quite high. There are Valuation special groups that specialize in The process by which a company's venture lending – VCs will rarely worth or value is determined. give a venture loan.

Venture capital Vesting Venture capital is fnancing that A process in which you “earn” your investors provide to startup stock over time. The purpose of companies and small businesses vesting is to grant stock to people that are believed to have long- over a fxed period of time so they term growth potential. For startups have an incentive to stick around. without access to capital markets, A typical vesting period for an venture capital is an essential employee or founder might be source of money. Risk is typically three to four years, which would high for investors, but the downside mean they would earn 25% of for the startup is that these venture their stock each year over a four capitalists usually get a say in year period. If they leave early, the company decisions. unvested portion returns back to the company. Venture capitalist An individual investor, working for Vesting Schedule a venture capital fund that chooses A timetable and methodology to invest in specifc companies. under which a startup releases Venture capitalists typically have a shares to employees, management, focused market or sector that they founders, advisors, board know well and invest in. members, and other company stakeholders.

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