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Essential Fundraising Terms for Startups and Scalable Businesses

Essential Fundraising Terms for Startups and Scalable Businesses


Essential Fundraising Terms for Startups and Scalable Businesses

For start-ups and scalable businesses engaged in fundraising or planning an immediate fundraising initiative, understanding basic investment terms is crucial when seeking funds from organized investor circles. here we aim to provide a list of general terms commonly used in the fundraising ecosystem, along with their definitions. Developing a well-structured approach that incorporates these terms is a critical factor during the investment-raising process.

It's important to note that there is no universally accepted standard or globally recognized practices for fundraising. The terms and conditions vary based on factors such as the company's status, investor preferences, growth forecasting, and founder interests. Every fundraising initiative will involve distinct terms, demanding a customized structure and strategy.

Successful fundraising relies on understanding insights from existing practices and presenting a customized proposal with the guidance of expertise. A realistic founder understands that there is no one-size-fits-all solution, and developing a strategy that aligns with the unique circumstances of the company is important for the successful conclusion of the fundraising process. Here, I have compiled a list of essential terms commonly utilized in the investment-raising process for easy understanding.

  1. Term Sheet: A document outlining the material terms and conditions of a business agreement. In venture capital, this would outline the terms of an investment.
  2. Cap Table (Capitalization Table): A table providing an analysis of a company's percentages of ownership, equity dilution, and value of equity in each round of investment by founders, investors, and other owners.
  3. Due Diligence: The process investors undertake to evaluate a potential investment opportunity. This includes reviewing financial records, business model, management team, and other factors.
  4. Exit Strategy: The way in which an investor plans to get out of an investment. This could be through a merger, acquisition, or an IPO (Initial Public Offering).
  5. Portfolio Company: A company that a venture capital firm has invested in. VC firms usually have multiple portfolio companies.
  6. Carried Interest (or "carry"): This is a share of the profits of an investment paid to the investment manager in excess of the amount that the manager contributes to the partnership.
  7. Deal Flow: The rate at which business proposals and investment pitches are being received by financiers such as venture capitalists.
  8. Liquidation Preference: The terms that dictate the payout order in case of corporate liquidation. Typically, preferred equity holders (like VC investors) get paid before common equity holders (like founders or employees).
  9. Pro-rata Rights: The right of an investor to participate in a future round of funding to maintain their percentage ownership in a company.
  10. Series A, B, C, etc. Rounds: These are names for specific rounds of funding. Series A typically comes after seed funding, and each subsequent round (Series B, Series C, etc.) involves more funding, usually at higher valuations.
  11. Convertible Note: This is a form of short-term debt that converts into equity, usually in conjunction with a future financing round.
  12. Down Round: A financing round where investors purchase stock from a company at a lower valuation than the valuation placed upon the company by earlier investors.
  13. Burn Rate: The rate at which a new company is spending its venture capital to finance overhead before generating positive cash flow from operations.
  14. Pre-Money and Post-Money Valuation: Pre-money valuation is how much a company is worth before it goes public or receives other financing. Post-money valuation includes the new capital added by the latest round of funding.
  15. Syndicate: A group of investors who pool their resources to invest in larger deals. An individual or firm usually acts as the syndicate lead, taking on the most risk.
  16. SAFE (Simple Agreement for Future Equity): This is a contract between an investor and a company that provides rights to the investor for future equity in the company similar to a warrant, except without determining a specific price per share at the time of the initial investment. SAFEs are intended to provide a simpler mechanism for startups to seek initial funding than convertible notes.