Accelerator: In an accelerator, a seed investment, usually between $15K and $50K, is made in return for equity. Startups are admitted in classes and work in groups. They are generally given a deadline to complete intensive training and iteration (typically one week to six months). Startups end an accelerator program with a Demo Day in which they pitch to investors.
Angel Investing: Investing one’s own money in early stage companies in exchange for ownership equity or debt. An angel investor typically invests $25-$100K per deal.
Bridge Loan: A short-term loan (up to one year) that a company uses in between times when financing is needed. For startups, this type of loan is intended to fund the company to an anticipated future event, e.g. long-term financing.
Cap (Capitalization) Table: A table of how much stock ownership is held by each entity/person. Typically includes founder/investor equity and the employee stock option pool.
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.
Convertible Note: A type of bond that can be converted into shares of common stock.
Demo Day: An event at which the graduating class of incubators and accelerators is given a chance to pitch to investors.
Dilution: A diminution in the value of holdings of existing shareholders resulting from the issuing of additional company shares.
Dividend Preference: Preferred stock holders receive dividends before common stock holders. Dividend can be cumulative or non-cumulative.
Drag-along Rights: The right of majority shareholders to force minority shareholders to join in the sale of a company. Minority shareholders will receive the same price, terms, and conditions.
Early Stage: The period in a company’s growth defined by the evolution of its market development; early stage companies are focused on sales and marketing and on proving business viability.
Friends and Family: A common way for a startup to fund their initial round of capital. A twenty to twenty-five percent 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.
Fiduciary Duty or Responsibility: The duty to act solely in the interests of another; in the case of investing, the responsibility of an investor to make good investments that will earn a high rate of return.
Incubators: Entities designed to support the development of startups through resources (mainly office space) and mentorship. Startups often stay in an incubator for longer (one to three years) than they would stay in an accelerator, though the lines between the two are blurring.
Liquidation: The process of selling a business’s assets and using the proceeds to pay creditors when the business is bankrupt or terminated. Any funds left over are distributed to share holders.
Mezzanine Financing: A blend of debt and equity financing requiring no collateral and not necessarily involving 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 twenty to thirty percent, and lenders can convert their stake to equity or ownership in the event of default.
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.
Pre-money Valuation: The company’s value immediately before funding. (For example, if the post-money valuation is $2.5 million and the company raised $500K, then the pre-money valuation is $2 million.
Post-money Valuation: The company’s value immediately after funding. If the pre-money valuation is $2 million and the company raises $500K, then the post-money valuation is $2.5 million.
Right of First Refusal: The right to enter into a business transaction before others. For example, preferred stockholders have the right of first refusal to purchase additional shares issued by the company.
Seed Stage: The phase of a company’s growth characterized primarily by product product development. A venture in this stage is not likely to be generating revenue, but customers are interacting with the product. The business model is not yet fully developed, and seed capital is needed for research and development. This stage generates the first round of capital for the venture.
Series A: A company’s first significant round of venture funding (though angels often participate in this round).
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.
Subordinated Debt: A loan that ranks below other loans in the event of liquidation. This type of loan is riskier than unsubordinated debt because loan holders have claims to assets or earnings after senior debt holders are paid.
Terms Sheet: A non-binding document that outlines the terms of the deal. Once the parties agree, more detailed legal documents are drafted consistent with the terms laid out in the terms sheet.
Venture Capital: Capital provided to early-stage, high potential, high risk, growth startups. Generally, venture capital investments are made after the seed stage.
Vesting: A process by which share holders (most often employees) earn stock over time. 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 three or four years, meaning they would earn twenty five percent of their stock each year over a four-year period. If they leave early, the unvested portion returns to the company.
The four stages of startup funding
Stage 1: Seed Round – The first investment used for market research and development. Typically funded by friends & family and angel investors
Stage 2: Series A, B, C Round – Rounds of financing from venture capital in exchange for preferred stock
Stage 3: Mezzanine Financing and Bridge Loans – Can happen in between rounds
Stage 4: Exit – Companies can get acquired or issue an IPO by selling stock to the public.
*Thanks to 37 Angels, http://37angels.com/glossary