Fundraising is a critical aspect of any startup or business, and understanding the terminology associated with fundraising can help entrepreneurs navigate the process with greater ease. Knowing these words and lingo gives you an upper hand, so you can pitch and walk into investor meetings sounding like a pro who has done their homework.
We made a list of the most important 15 fundraising terms that you need to know before you step out there seeking financing for your business –
As a startup, your runway is how long you’ve got left before you run out of money. At each fundraising round, you need to collect enough to fuel you to your next raise. This is typically a constant cycle. Make sure you are raising early enough, so you don’t run out of runway.
2) Term Sheet
A term sheet is like a summary of the offer from potential investors. It lays out the terms on which they are willing to invest in your startup. Of course, nothing is set in stone until it is done. These are terms you can shop around and negotiate.
3) Convertible Note
A form of short-term debt that can be converted into equity at a later date.
4) Cap Table
A spreadsheet outlines a company’s ownership structure, including the number of shares and percentage ownership of each shareholder.
5) Family Offices
A family office is essentially the investment arm of wealthy families. Today there are a growing number of multi-family offices as well. These offer more efficiency and group investment power for the slightly less wealthy family. They often differ from angels and VCs in their investment strategy and horizons for recouping their investments and returns.
6) Due Diligence
This is the dirty little secret of the fundraising process. In order to get from your term sheets to money in the bank (or an exit) you’ll have to endure the investors’ due diligence. This is where they dig into your company and life to verify every minute detail they can. It may not be that tough at your pre-seed round. It will be quite different when raising $50 million plus at a Series C round.
7) Pre-Money Valuation
The value of a company before a new investment round takes place.
8) Post-Money Valuation
The value of a company after a new investment round takes place.
9) Churn Rate
This applies to how many customers you are churning through. How many users are you gaining versus losing? It can be a big difference. If you are bleeding too many users, your next round can be more difficult.
10) Bridge Loan
A short-term loan provides a startup with immediate funding while it awaits a larger round of funding.
11) Accredited Investor
In order to raise outside money and publicly solicit investors, you may be restricted to accredited investors. These are considered sophisticated investors according to their income and net worth by the SEC. Who you can raise from will be dictated by the raising you do and the regulations you file under.
12) Anti-Dilution Protection
A clause in a contract that protects some investors from their equity or shares’ dilution when other investors buy stock in a company. This is often applied when shares in a company are sold at a value less than the amount paid originally by existing investors.
Another exit strategy in which the hiring company is effectively buying yours to acquire your talent and team.
14) Executive Summary
This is a brief summary of your business plan. It will be far more viewed than your actual business plan. Especially important if you’ll be applying for any loans or commercial real estate funding.
15) Financial Forecast
Also known as a financial projection, a forecast estimates growth and income for a business over a given time based on a comparison with existing businesses and market research.