Fundraising terms do sound really scary to understand and implement, more so if you are an aspiring entrepreneur. However, to represent yourself and your business in front of expert eyes of investors and fundraising companies, there needs to be a very clear understanding of basic fundraising terms. We have listed some basic yet most essential fundraising terms which will help you deal effortlessly with any prospective venture capital.
#1 Accredited Investor
Accredited investors are the sophisticated investors with respect to their income and net worth. If entrepreneurs were to seek investors publicly and raise outside money, they would be limited to accredited investors. The type of fundraise you do is going to determine who you can raise from, and by the regulations you file.
#2 Investor Updates
Another strong component entrepreneurs use in bringing in prospective venture capitalists, keeping them engaged, and continuing to gain further funding and help is the investor update.
#3 Anti-Dilution Protection
Anti-dilution protection is a clause that safeguards the position of an investor against a possible decrease in equity or shares should another investor buy stock in the company. This normally happens with a “down-round”. There can be a convert into equity option as well.
One of the most prominent skills that tell the purpose, background, ideology, mission, and vision of a business is in telling the story. Nothing in business is based on pure logic. Storytelling sets your company apart. A great story can get you funded.
#4 Capitalization Table
A capitalization table or cap table refers to how much share in a company is owned by specific individuals or groups. It is portrayed in table format and helps to explain the ownership percentage.
#5 Angel Investor
An angel investor can either be a company or a person who likes investing in pre-seeded or seed-stage businesses or startups. The amount that is invested can be $10,000 to $250,000 or even more at times.
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#6 Super Angel
A Super Angel is an angel investor who is pretty active in the market, making more investments and writing bigger checks. In essence, the funding amount is higher than that of a regular angel investor. It can range from $250,000 to $1 million.
#7 Common Stock
Common stock represents an ownership interest in a company. This allows the owners to have a say in the serving directors and a vote on corporate policy. Common stock holders are paid last in case of sale or liquidation after the preferred ones.
#8 Convertible Note
Convertible note represents a loan with variable features. It’s funding by loan which becomes equity in case of non-payment of investment. In return, against this amount of investment, interest rate also exists along with a cap on valuation.
#9 Financial Forecast
A financial forecast, otherwise known as a financial projection, is an approximate computation or estimate of the potential income and growth of a business over some time. The prediction is derived from market research and the current business model.
#10 Lead Investor
A lead investor is an investor who actually funds every phase of investment. When a few investors have invested in the same round, amongst them there may be a lead investor, he takes responsibility for pitch deck, documentation, due diligence and other paperwork.
#11 Liquidation Preference
Liquidation preference refers to the clause in the contract showing that if the company they were investing in was sold or liquidated, who would get paid first? In many cases, this clause states that VCs are paid off before the owner of the company. It is more of a clause preferred by the VCs in order to reduce their risk of investment.
#12 Elevator Pitch
For any startup or an entrepreneur, the elevator pitch is their first introduction to the investor. It’s how one pitches their business idea to prospective investors. Whether they buy your idea or not depends on how convincingly you are able to sound. You may have to crunch some numbers and provide some financial forecasts also.
#13 Preferred Stock
Preferred stock is an equity security that has higher ranking compared to common stock. To make this simple, the preferred stocks come before common stock where earnings and assets are concerned. Its model works in accordance with preference when dividends get paid out to shareholders. This, in itself, is a very common security applied in early stage start-ups due to this liquidity preference over common stock holders.
#14 Executive Summary
An executive summary is an abstract or a resume of your business plan. Investors prefer going through executive summaries rather than the actual business plan because, firstly, it saves time, and secondly, investors get the idea of whether to invest or not in a particular business.
#15 Runway
Runway is a term coined for startups to refer to how long left before they run out of money. In business fundraising, every round requires entrepreneurs to collect enough so that they can thrive all the rounds, get to the next raise. It is a cycle, and you’re advised to raise early enough so that you don’t run short on runway.
#16 Acquihire
Acquihire is an exit strategy that the investor creates at the time of buying your talent and team.
#17 Term Sheet
The term sheet is a summary of what a potential investor is making—the offer to a startup. It comprises all the terms and conditions based on which he is willing to invest in your company. An entrepreneur is always free to negotiate these terms or shop around.
#18 IPO
IPO stands for Initial Public Offering and is a way out, making the company stock available to the general public. This implies that when your company goes public, people can actually buy your stocks and shares.
#19 Milestone
A milestone could be viewed as an achievement or a marker which entrepreneurs set at the beginning of a business. For instance, if you put a milestone to double your revenue in the next two years and achieve it, then that would be a benchmark achievement. And if you fail to do so, it would prove to be hard to attract more investors and retain the old ones.
#20 Valuation
Valuation is how much your business is worth, or it tells the net worth of your company. The lead investor sets the net worth based on pre-money and post-money valuation.
#21 Burn Rate
Burn rate refers to the monthly expenses of a company. It helps the entrepreneur to judge the right amount to raise in fund-raising. For instance, if the monthly expenses of your company are $10,000 and you’ve estimated that it will take you 12 months to hit your next milestone, then you will want to raise a little over $120,000.
Conclusion
These are the most basic fundraising terms every businessman should know, whether he has an established business or a startup. Getting you familiar with these key fundraising terms will let you have an idea of how things work in this secto
