IMPROVE YOUR FUNDRAISING LITERACY

The annualized value of a company's recurring subscription revenue. A key metric for SaaS and subscription businesses. Investors use ARR to assess growth rate, predict future revenue, and benchmark valuation multiples.

An individual or entity that meets the SEC's financial thresholds — currently $200,000+ in annual income (or $300,000 combined with a spouse) or $1M+ in net worth, excluding a primary residence — and is therefore legally permitted to invest in private securities offerings. Most startup fundraising rounds are limited to accredited investors.

An individual who invests their own money into early-stage startups, typically in exchange for equity or a convertible instrument. Angels often invest at pre-seed or seed stage, before institutional venture capital enters. Many have operating backgrounds and bring mentorship alongside capital.

A clause in an investment agreement that protects investors from having their ownership percentage significantly reduced if the company later raises money at a lower valuation. The two main types are broad-based weighted average (more founder-friendly) and full ratchet (more investor-friendly and less common).

Building and growing a company without external investment, using revenue or personal savings to fund operations. Bootstrapped founders retain full ownership but must reach profitability or break-even without outside capital.

A short-term fundraising round designed to extend a company's runway until a larger, more permanent round closes. Bridge rounds are often structured as convertible notes or SAFEs, and are typically raised from existing investors.

The rate at which a company spends its cash reserves, usually expressed as a monthly figure. Net burn is total spending minus revenue; gross burn is total spending only. A core metric for understanding how long a company can operate before needing more capital.

A spreadsheet or document that maps out a company's full ownership structure — who owns what, in what form (common stock, preferred stock, options, warrants), and at what percentage. Investors review the cap table closely during due diligence.

The portion of a fund's profits that goes to the general partners (the fund managers) as compensation, typically 20%. Carry incentivizes GPs to generate strong returns for their limited partners.

A provision that requires fund managers to return carry if earlier distributions were too high relative to total fund performance. Protects LPs from overpaying GPs before losses in later investments are accounted for.

The point at which a deal is legally finalized and funds are transferred. A round may have a single closing or multiple closings over time, with investors joining in tranches.

When an investor puts capital directly into a specific portfolio company alongside the fund, in addition to or separate from their LP commitment. Often available to LPs as a fee-free opportunity.

A short-term debt instrument that converts into equity at a future financing round, typically the next priced round. Usually includes an interest rate, maturity date, valuation cap, and/or discount rate. Founders favor these for their speed; investors favor them for their downside protection relative to pure equity.

An investor's level of confidence in a deal. High-conviction investments typically receive larger check sizes and more proactive support. When investors say they're building conviction, they're still in the diligence and relationship-building phase.

A secure, organized collection of documents shared with investors during due diligence. Typically includes financial statements, incorporation documents, cap table, key contracts, IP assignments, and team information.

The reduction in an existing shareholder's ownership percentage when new shares are issued. Happens at every new funding round, when options are granted, and when convertible instruments convert. Dilution is a natural part of raising capital, but founders should model it carefully over time.

In the context of convertible notes and SAFEs, the discount rate entitles early investors to purchase equity at a lower price than new investors in the next round — typically 10–25%. This rewards them for taking on earlier risk.

A financing round in which the company raises money at a valuation lower than its previous round. Down rounds are dilutive and can trigger anti-dilution provisions, affect employee morale, and signal trouble to the market.

A provision that allows majority shareholders to compel minority shareholders to agree to a sale of the company. Designed to prevent a small number of shareholders from blocking an acquisition that the majority supports.

The process by which an investor investigates a company before committing capital. Covers financials, legal structure, team background, technology, market, and competitive landscape. Depth and duration vary by stage and check size.

A reserve of equity set aside for future employee grants. Investors typically require a pool of 10–20% to be in place before or alongside a priced round. Creating the pool dilutes founders, not new investors, which is why pool size is a negotiating point.

The event through which investors and founders convert their equity ownership into cash. The most common exits are acquisition (M&A) and IPO. Secondary sales are an increasingly common partial exit mechanism.

Additional capital invested by an existing investor into a portfolio company in a later round. Most institutional investors reserve capital specifically for follow-on investments to maintain their ownership percentage.

Often the first capital a founder raises, coming from personal connections rather than professional investors. Typically small amounts raised informally, before a company has significant traction or infrastructure.

The total number of shares that would be outstanding if all options, warrants, and convertible securities were exercised. Used to calculate true ownership percentages and per-share valuations.

An investment vehicle that pools capital from LPs and invests it in multiple venture funds, rather than directly into companies. Provides diversification across managers and strategies.

The managing partner(s) of a venture fund who make investment decisions, manage relationships with portfolio companies, and receive carried interest. GPs raise capital from LPs and are legally responsible for the fund.

The strategy and plan for how a company will bring its product to market and reach customers. Investors evaluate GTM closely, especially at seed and Series A, as it speaks to commercial viability and team competence.

The rights an investor holds to influence or oversee company decisions. Can include board seats, board observer seats, approval rights over major decisions, and information rights.

Slang for a growth curve that is flat for a period, then rises sharply — resembling the shape of a hockey stick. Founders often project hockey stick growth in their pitch decks; investors are skeptical without underlying logic to support it.

The process through which a private company sells shares to the public for the first time on a stock exchange. An IPO is one of the primary exit paths for venture-backed companies and their investors.

Contractual rights that entitle an investor to receive regular financial updates from the company, typically monthly or quarterly financial statements and an annual audit. Standard in most priced rounds.

The investor who takes primary responsibility for a funding round — typically setting the terms, conducting the most thorough due diligence, and taking a board seat. Having a credible lead investor signals legitimacy to other investors.

The investors in a venture fund — institutions (endowments, pension funds, family offices) and high-net-worth individuals who commit capital but do not manage investments. LPs receive returns from the fund's investments minus fees and carry.

A provision in preferred stock that determines the order and amount of payout if the company is sold or liquidated. A 1x non-participating preference means investors get their money back before common shareholders share proceeds. Participating preferences can give investors a larger share of proceeds.

The predictable, recurring revenue a company generates each month. The monthly equivalent of ARR. A primary growth metric for subscription businesses.

The simplest version of a product that can be released to test a core hypothesis with real users. Investors at pre-seed and seed stage often evaluate whether founders have built a credible MVP and what they've learned from it.

The annual fee charged by a venture fund to its LPs to cover operating expenses — typically 2% of committed capital per year. This is how GPs pay salaries, rent, and operational costs.

Monthly cash spend minus monthly revenue. The truest measure of how much cash a company is consuming.

A legal agreement to keep information confidential. Most early-stage investors do not sign NDAs before an initial pitch — and asking them to can signal inexperience. NDAs are more common in corporate M&A and later-stage processes.

A type of preferred stock that allows investors to both receive their liquidation preference and then participate in remaining proceeds with common shareholders. Less founder-friendly than non-participating preferred; more common in later rounds and distressed situations.

The company's valuation immediately after a new round of investment is closed. Calculated as: pre-money valuation + new capital raised. This is the number most commonly cited when describing a startup's valuation.

The company's valuation immediately before a new investment round is closed. The starting point for negotiating price. Investors calculate their ownership percentage based on the pre-money valuation.

The earliest institutional or semi-institutional funding stage, typically before a company has significant traction or revenue. Often raised from angels, micro-VCs, and accelerators to fund product development and early customer discovery.

A funding round in which a formal share price is set and equity is issued (as opposed to instruments like SAFEs or convertible notes that delay pricing). Priced rounds require more legal work and negotiation but establish a clear valuation.

The right of an existing investor to participate in future funding rounds in proportion to their current ownership stake, preserving their percentage. A standard and expected provision for institutional investors.

Evidence — through a prototype, pilot, or early data — that a product or technology works as intended. Not the same as product-market fit, but often required to unlock early funding.

A non-equity funding model in which a company receives capital in exchange for a percentage of future revenue until a fixed repayment cap is reached. Common in e-commerce and SaaS businesses with predictable revenue.

How long a company can operate before it runs out of cash, at its current burn rate. Calculated as: cash on hand divided by monthly net burn. Investors use runway to assess urgency and how well a company is managing capital.

A founder-friendly instrument created by Y Combinator that converts into equity at a future priced round. Unlike convertible notes, SAFEs are not debt — they have no interest rate or maturity date. They typically include a valuation cap and/or a discount rate. Now the most commonly used early-stage financing instrument.

A legal entity created for the sole purpose of making a single investment. SPVs allow a fund manager or syndicator to pool capital from multiple investors into one cap table line item, reducing complexity for the company.

The sale of existing shares by a founder, early employee, or investor to a new buyer, rather than the company issuing new shares. Secondaries allow early stakeholders to achieve partial liquidity without a full exit event.

The first significant funding round for a startup, typically following pre-seed. Seed rounds are used to build out the team, accelerate product development, and validate early traction. Usually led by seed-stage VCs or angels.

The first major institutional funding round following seed, typically raised once a company has demonstrated product-market fit and early traction. Used to scale the team, accelerate growth, and expand into new markets.

A later-stage funding round following Series A, raised by companies that have proven their growth model and are ready to scale significantly. Typically larger in size and involves growth-focused institutional investors.

A funding round for mature, high-growth companies looking to expand into new markets, make acquisitions, or prepare for an IPO. Series C and beyond typically involve private equity firms and late-stage venture funds alongside earlier backers.

A separate agreement between a fund and a specific LP — or between a company and a specific investor — that provides terms different from the standard agreement, such as reduced fees, co-investment rights, or special information rights.

The right to invest more than one's pro-rata share in a future round — allowing an investor to increase their ownership percentage beyond where it currently sits. Usually negotiated by lead investors at seed stage.

A non-binding document that outlines the key terms and conditions of a proposed investment. Serves as the basis for negotiating the final legal documents. Key terms include valuation, investment amount, liquidation preference, board composition, and anti-dilution provisions.

Evidence that a startup's product or service is gaining real-world adoption. Can be expressed as revenue, users, growth rate, retention, or signed contracts — depending on stage and business model. One of the most important signals investors evaluate.

A portion of an investment that is disbursed at a specific point in time, often tied to hitting agreed milestones. Tranche structures protect investors but can create pressure and uncertainty for founders.

A privately held startup valued at $1 billion or more. Once rare, the term has proliferated as venture activity has scaled. Decacorn refers to a $10B+ valuation; hectocorn to $100B+.

A funding round in which the company raises capital at a valuation higher than its previous round, signaling growth and investor confidence.

In a SAFE or convertible note, the maximum valuation at which the instrument can convert into equity. Protects early investors by ensuring they receive a favorable conversion price if the company's valuation rises significantly before the next priced round.

A form of private equity in which institutional investors provide capital to high-growth startups in exchange for equity. VCs typically raise committed funds from LPs, deploy that capital over 3–5 years, and return proceeds to LPs over a 10-year fund lifecycle.

The process by which founders, employees, and sometimes investors earn their equity over time, contingent on remaining with the company. Standard founder vesting is four years with a one-year cliff, meaning the founder earns 25% of their shares after the first year, then the remainder monthly or quarterly.

The year in which a venture fund makes its first investment. Used to benchmark fund performance against other funds that deployed capital in the same market environment.

The right to purchase shares at a specified price at a future date. Sometimes issued to investors alongside notes or SAFEs as an additional incentive. Less common in early-stage startup financing than in growth or debt deals.

The order in which proceeds from a sale or liquidation are distributed to shareholders. Typically flows from senior debt holders to preferred shareholders (with their liquidation preference) to common shareholders. Understanding the waterfall is essential before signing any term sheet.