A simple guide to fundraising terminology
Every industry has buzz words and syntax, here’s a quick guide to understanding some fundraising verbiage.
If you’re just entering the world of fundraising, you might have heard a lot of new words being discussed and feel overwhelmed, confused, or annoyed. That’s common and don’t worry - it’s not that complicated, just some new vocabulary. Use this a resource to come back.
Most of these are simple, but a Google search may not provide the depth of understanding necessary for your venture. Let’s start with some simple, yet complex sounding terms.
Pre-Money Valuation - the valuation of the venture BEFORE investment
Post-Money Valuation - the valuation of the venture AFTER investment (yes, post-money = pre-money + newly-invested capital)
For example, if your company raises $1M for 20% of equity, your pre-money valuation is $5M, and your post-money valuation is that $5M plus the $1M now in your bank account, giving you a $6M post-money valuation. Next, everyone knows what a VC is, but what about other investor types?
Accredited Investor - this is subject to change, but is currently an individual with gross income >$200K for the last two years OR $1,000,000 of liquid assets, not including primary residence.
Angel Investor - an accredited investor that invests independently
Angel Syndicate - a group of angel investors that invest as a single entity (important for cap table management)
It is important to understand that you can usually only take investments from accredited investors or investment funds. Be sure to have each investor attest that they are an accredited investor to avoid potentially very complicated issues in the future.
Now comes the technical part, what agreements and terms are there? Well, that’s a long list, but here’s enough to get you going.
Term Sheet - the formal legal investment agreement that dictates ownership amount, board seats, and any provisions for the investment
Convertible Notes - short-term debt that will convert into equity at a future fundraising round. There are many intricacies with this that we will cover later, but the major components are interest rate, discount rate, and valuation cap.
SAFEs - Acronym for Simple Agreement for Future Equity. This is a similar but simpler investment vehicle than a convertible note which will be covered in detail later.
Valuation Cap - the ceiling that a convertible note or SAFE will convert into equity (e.g., $100k investment with a $5M valuation cap will have no less than 2% equity at conversion)
To better understand these terms, consider a venture that is closing a seed round that is pre-revenue. The investors and founders agreed on a $500K investment as a convertible note with an 8% interest rate, 20% discount, and a $4M valuation cap. These convertible note terms would be captured within the Term Sheet. The 8% interest rate is the annual interest the investment will earn until the debt is converted to equity. The 20% discount and $4M valuation cap are two parameters that set how the debt will convert into equity. If the valuation at the next funding round is less than $4M, the debt will convert at a 20% discount on the valuation (say $3.5M). If the valuation is greater than $4M, the investment will convert at $4M. Basically, the investment converts at whichever parameter is more beneficial for the investor at that time.
Last, there’s some useful startup terminology that you may hear at pitch events or investor meetings.
Capitalization (Cap) Table - a document (usually a spreadsheet) that shows the current breakdown of equity ownership of the company
Customer Acquisition Cost (CAC) - the incremental cost it takes for your company to acquire a new customer. There is a calculation associated with this, but this is a key metric for understanding scalability and growth projections.
Customer Lifetime Value (CLV or CLTV) - this is the total value that a customer will give you over the lifetime of their experience with your company. This is usually calculated as a net value (think gross or contribution profit). This is another metric to advise on the value that your solution provides to the market.
Runway - This is how much time you have until the venture runs out of money without new investment.
Burn rate - how much cash your venture is burning per month/quarter
When is comes to integrating these terms into your conversations, don’t worry about sounding professional. Sound like you. Be clear, be confident and don’t overthink it.
