Startup Investment terms

startup terms explained

The most important terms for Startup Investments


Accelerator

are fixed-term, cohort-based programs that include seed investment, connections, sales, mentorship, educational components, and culminate in a public pitch event or demo day to accelerate growth.


Advisory / Supervisory Board

A group of people elected by the company's shareholders (often to the terms of the negotiated Shareholders Agreement) that either gives input or even makes decisions on major company issues, including hiring/firing the Chief Executive Officer.


Angel Investor / Business Angel

An angel investor (also known as a private investor, seed investor or angel funder) is an individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company

Articles of Incorporation / Association (Gesellschaftsvertrag)

A document that contains the purpose of the company, as well as the duties and responsibilities of its members, defined and recorded clearly. It is an important document which needs to be filed with the Registrar of Companies.


Annual Recurring Revenue (ARR)

is a measure of revenue components that are recurring in nature. It should exclude one-time (non-recurring) fees and professional service fees.

B2B, B2C

Business to business or business to consumer. B2B describes a business that is targeting another business with its product or services. B2B technology is also sometimes referred to as enterprise technology. B2C describes a business that is targeting consumers with its product or services.

Burn rate

Is the rate at which cash is decreasing. Especially in early stage startups, it’s important to know and monitor burn rate as companies fail when they are running out of cash and don’t have enough time left to raise funds or reduce expenses.

Business Model

A business model is a company's plan for making a profit. It identifies the products or services the business will sell, the target market it has identified, and the expenses it anticipates.

Captable

A table depicting the quantity of shares or unit ownership which is held by each investor in a company, typically including founders' equity, investor equity, and advisor / employee Stock Option Pools.


Cliff

A moment in time when the stock of a company becomes vested. Usually applies to vesting schedules of shares or the stock options. Cliffs are used to prevent a person from leaving the company within a limited period of time (usually 1 year), i.e. before cliff.

Cleantech

is an investment philosophy used by investors who wish to profit from environmentally friendly companies. The term stems from "clean technologies." Cleantech firms seek to increase performance, productivity and efficiency by minimizing negative effects on the environment.


Compound monthly Growth Rate (CMGR )

Describes a growth rate over a given period, assuming that the growth happens at a constant rate every month during that time.


Convertible or Convertible Loan

An alternative form of financing from equity financing: rather than a purchase of shares, the investor’s investment initially works as a loan to the company, with an agreed upon interest rate, which will then convert into shares at a future equity round. Convertible loans are often used for early stage investments, to spare the young company from having to declare a set valuation. Convertible loans may also be bridge loans – to give a company money in between formal rounds of financing.

Cost of Goods Sold (COGS)

Is the measure of costs incurred by a company to manufacture or resell a product.

Customer Acquisition Cost (CAC)

Is the cost a business incurs to acquire a new customer. This includes the fully loaded costs associated with sales and marketing to attract a potential customer and to convince them to purchase.

Dealflow

the number of investment opportunities available at a given time to a particular company or investor or within a particular region or market sector.

Due Diligence

An analysis of all the facts and figures of a potential investment. Includes an investigation of financial records.

Equity Financing

The act of raising capital by selling off shares of a company. Company's issuance of equity securities (typically shares of common or preferred stock) to raise capital. Capital raised in exchange of equity securities of the company does not need to be paid back (unlike debt).

Employee Stock Option Pool (ESOP)

refers to the pool of available stock options (Either real shares or “virtual” - virtual stock option pool) which a company reserves for its employees as an incentive for loyalty with the company. A company will therefore make sure that the employees’ stock options will not be exercisable immediately but rather will “vest” over several years of employment. Investors will examine a company’s ESOP percentage and policy for two reasons:

  • to see how much of the company’s capital is reserved for the employee’s shares, and therefore to get a complete picture of the company’s valuation. 

  • to ensure that the company is responsible maintaining its capital without giving away too much.

Expert

primeCROWD trusted and valued industry experts, who help with due diligence, market research etc..

Exit

The method by which an investor and/or entrepreneur intends to "exit" their investment in a company. Commons options are an IPO or buyout from another company. Entrepreneurs and VCs often develop an "exit strategy" while the company is still growing.

First Mover Advantage

is the advantage gained by being the initial ("first-moving") occupant of a market segment. A market participant has first-mover advantage if it is the first entrant and gains a competitive advantage through control of resources.

Fintech

Financial technology - often refers to startups in the financial industry

Friends, Family and Fools (FFF)

An investment round in a start-up that often follows the founder's own investment, from people who are investing primarily because of their relationship with the founder rather than their knowledge of the business


GMV (gross merchandise volume)

is the total sales dollar volume of merchandise transacting through the marketplace in a specific period. It’s the real top line, what the consumer side of the marketplace is spending.


Impact investing

an investment strategy that not only generates financial returns but also aims to generate specific beneficial social or environmental effects. It is not an extension of philanthropy nor SRI (socially responsible investing), the majority of investors look for market-rate returns in sectors like healthcare, education, renewable energy or agriculture.


Incubator

An organization that helps develop early stage companies, usually in exchange for equity in the company. Companies in incubators get help for things like building their management teams, strategizing their growth, etc.


Investment Committee (IC)

Team that oversees, advises and consults with respect to the Company's investment strategy, acquisition of Assets, sourcing, financing and leveraging strategies and compliance with the Company's Guidelines.


Intellectual Property (IP)

Category of property that includes intangible creations of the human intellect: artistic works like music and literature, as well as discoveries, inventions, words, phrases, symbols, and designs. 


Initial public offering (IPO)

The first time shares of stock in a company are offered on a securities exchange or to the general public. At this point, a private company turns into a public company (and is no longer a startup).

Leadinvestor

A venture capital firm or individual investor that organizes a specific round of funding for a company. The lead investor usually invests the most capital in that round. Also known as "leading the round." The investor or investment organization is also taking primary responsibility for organizing an investment round in a start-up. The deal lead typically negotiates the terms of the investment and serves as the primary liaison between the company and the other investors.

The Customer Lifetime Value (LTV)

Metric indicates the total revenue a business can reasonably expect from a single customer account.

Liquidation Preference

Liquidation preference gives a preferred shareholder priority in line for distribution of the company’s assets in the event the company has a liquidation event.

Minimum Viable Product (MVP)

The basic version of a product required to test it in the market in order to achieve proof of concept. The term is usually applied to the software which is still in development

Monthly Recurring Revenue (MRR)

recurring revenue of a firm on a monthly basis (often a monthly service fee, licenses, etc..)

Multiple

The value calculated by dividing the investment’s fair value by the amount invested. Any changes of 10% or higher in the multiple since the last quarter will be indicated in corresponding colors (green/red).

 

NDA

Non-disclosure agreement. An agreement between two parties to protect sensitive or confidential information, such as trade secrets, from being shared with outside parties.

Pivot

The act of a startup quickly changing direction with its business strategy. For example, an enterprise server startup pivoting to become an enterprise cloud company.

Pitchdeck

A presentation (usually to investors) that covers the main aspects of a business in a concise and compelling way.

Proof of Concept (POC)

A demonstration of the feasibility of a concept or idea that a startup is based on. Many VCs require proof of concept if you wish to pitch to them.

Pre-Money / Post-Money Valuation

Valuation is how much the company is worth as determined by several factors. Pre-money valuation refers to a company’s value before receiving funding. Post-money valuation is the company’s valuation after receiving the financing. For example, if an investor agrees to a pre-money valuation of 10M for a company and they decide to invest 5M, the company’s post-money valuation is 15M.

Preemptive Rights

A preemptive right is the right of existing shareholders to maintain their percentage ownership interest in the company if the company proposes to offer new equity securities to a third party.

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Proptech

Property technology - Proptech is one small part of a wider digital transformation in the property industry. It considers both the technological and mentality change of the real estate industry.

Regtech

Regulation technology - Classifies startups who are active in the management of regulatory processes through technology.

ROI

Return on investment. This is the money an investor gets back as a percentage of the money he or she has invested in a venture.

Round

Startups raise capital. The first round is usually a Seed round followed by Series A, B, and C rounds if necessary.


Scorecard

A tool to depict the most important KPIs, facts and relevant figures of a startup, classify and evaluate them. Mostly used to calculate valuations and score the startups.

Scalability

A “scalable startup” takes an innovative idea and searches for a scalable and repeatable business model that will turn it into a high growth, profitable company


Security Type

Type of equity / debt securities purchased by an investor

Shareholder

also referred to as a stockholder, is a person, company, or institution that owns at least one share of a company's stock, which is known as equity.

Software as a Service (SaaS)

A software product that is hosted remotely, usually over the internet (a.k.a. "in the cloud").

Special Purpose Vehicle (SPV)

primeCROWD managed company (Trustee), that has been specifically founded for the sole purpose of holding investors shares in an invested company. 


Socially responsible investing (SRI)

also referred to as sustainable or socially conscious investing: this investment strategy encompasses avoidance of harm, it does not actively seek to make a positive impact via its investments. Investors rather choose NOT to invest in companies that are engaged in industries such as coal mining due to the negative environmental impact of their business practices.

Stage

You can learn more about Startup Stages here.

Sweat Equity

Sweat equity is the equity received as a result of a persons contributions in the form of work, labor and toil.

Tag Along / Drag Along

Provisions in a Shareholders’ Agreement that permit investors under certain defined circumstances to sell their shares if the founder sell its shares (tag), or force the founder to sell its shares if the investor sells its shares (drag).

Total Addressable Market (TAM)

demonstrates the entire revenue opportunity that exists within a market for a product or service.

Term Sheet

An agreement that outlines the major aspects of an investment to be made in a company. A term sheet sets the groundwork for building out detailed legal documents.


Unit Economics

defined as the “direct revenues and costs associated with a particular business model, and are specifically expressed on a per unit basis”.

Unique Selling Propostion (USP)

is a factor that differentiates a product from its competitors, such as the lowest cost, the highest quality or the first-ever product of its kind. 


Valuation

The process by which a company's worth or value is determined. We look look amongst other things at capital structure, management team, and revenue or potential revenue, among other things. The outcome is the Enterprise Valuation or Equity Value (EV).

Valuation Cap

The maximum company valuation at which a convertible instrument will convert into a company's equity securities

Vesting / Reverse Vesting

A process in which startup company releases its shares to employees, management, founders, advisors, board members and other company stakeholders over time. The purpose of vesting is to grant stock to persons over a fixed period of time so to provide an incentive for them to stay with the startup company.

Warranties/Guarantees

Before a transaction, founders generally provide investors with marketable and customary warranties and guarantees, such as encumbrance free shares, etc.