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FUNDING & INVESTMENT TERMINOLOGY
An angel investor is a high-net-worth individual who provides financial backing for startups or entrepreneurs, usually in exchange for ownership equity.
An angel network or angel group is a collection of angel investors who come together to invest collectively, share research, and pool their investment capital. This approach helps mitigate risk and enables participation in larger funding rounds.
An angel round refers to an initial investment round where angel investors fund a startup. In exchange, they receive equity or convertible debt.
When startups need to get from one financial round to the next, they cross the funding ‘river’ using a ‘bridge’ financing. It’s a short-term loan to bridge the gap between major financing rounds.
A cousin of bridge financing, this short-term loan helps companies maintain their operations during a financial ‘drought’, until a longer-term financing option can be secured. It’s like a temporary life jacket keeping the startup afloat.
A capitalization table, or cap table, is a spreadsheet or table that displays the equity ownership stakes in a company.
Convertible equity is a financial instrument that provides investors with the option to convert their investment into equity ownership at a later stage, offering flexibility and shared potential in startup financing.
A debt instrument commonly used in early-stage startup financing, where investors provide a loan that can be converted into an equity at a later stage, typically during a future financing round or upon specific predetermined conditions being met.
Similar to convertible equity, a convertible note starts off as a loan but has the potential to transform into equity during a future funding round.
This refers to a subsidiary that a large corporation creates to invest in promising startups.
Refers to an investor or creditor being forced to accept undesirable terms. Crammed down is mainly used to describe either a dilutive venture capital (VC) financing round or the imposition of a bankruptcy reorganization plan by the court.
Crowdfunding is a way of raising funds by asking a large number of people each for a small amount of money. This is usually done via online platforms.
Deal flow refers to the rate at which business proposals and investment pitches are presented to financiers. For example, a venture capitalist might refer to the number of business plans or pitches they review over a certain period as their deal flow.
Dilution occurs when a company issues additional shares, which reduces the existing shareholders’ ownership percentage in the company.
A down round is a round of funding where investors purchase stock from a company at a lower valuation than the previous round, which usually indicates the company is struggling.
This refers to the comprehensive appraisal of a business undertaken by a prospective buyer to establish its assets and liabilities, typically before an acquisition or investment.
An elevator pitch is a brief, persuasive speech that communicates your business idea in a concise and appealing manner.
It is the measure of a company’s total value. It looks at the entire market value rather than just the equity value, so all ownership interests and asset claims from both debt and equity are included. EV can be thought of as the effective cost of buying a company or the theoretical price of a target company (before a takeover premium is considered).
The simple formula for enterprise value is:
EV = Market Capitalization + Market Value of Debt – Cash and Equivalents
The extended formula is:
EV = Common Shares + Preferred Shares + Market Value of Debt + Noncontrolling Interest – Cash and Equivalents
Equity is a form of ownership interest in a company, representing the residual value after deducting liabilities. It provides shareholders with a stake in the company’s assets, earnings, and decision-making processes.
This is a form of crowdfunding where investors receive a stake in the company, usually in the form of equity shares.
Equity value, commonly referred to as the market value of equity or market capitalization, can be defined as the total value of the company that is attributable to equity investors. It is calculated by multiplying a company's share price by its number of shares outstanding.
Alternatively, it can be derived by starting with the company’s Enterprise Value, as shown below.
Equity Value = Share Price x Number of Shares Outstanding
OR
Equity Value = Enterprise Value - Debt and Debt Equivalents - Non-controlling Interest - Preferred Stock+ Cash and Cash Equivalents
An exit strategy is a plan for a business owner or investor to sell their stake in a company or for the company to cease operations while limiting financial damage.
The funding gap is the shortfall between the funds needed to complete a project or business plan and the amount of funds currently available.
A funding round is a discrete round of investment where a company raises capital from investors. Common rounds include seed, Series A, Series B, and Series C funding rounds.
This refers to capital invested in a mature company to aid in the expansion, acquisitions, or restructuring of the company’s operations.
Growth equity is a type of private equity investment, usually a minority investment, in relatively mature companies that are looking for capital to expand or restructure operations.
An IPO is the first sale of stock by a company to the public. Before an IPO, a company is considered private, and its shares are not available to the general public.
Is the price a rational investor would be willing to pay for investment. The concept is most commonly represented by the Net Present Value (NPV) of all future cash flows the investment will produce.
A lead investor is an individual or firm that commits the most capital in a financing round and plays a significant role in negotiating the investment terms.
Market value (also known as OMV, or "open market valuation") is the price an asset would fetch in the marketplace, or the value that the investment community gives to a particular equity or business.
Market value can be expressed in the forms of mathematical ratios such as P/E ratio, EPS, market value per share, book value per share, etc.
Mezzanine financing is a hybrid of debt and equity financing that gives the lender the right to convert to an ownership or equity interest in the company if the loan is not paid back on time and in full. Private equity investors commonly use this to reduce the amount of equity capital required to finance a leveraged buyout or major expansion.
Non-dilutive funding refers to financing that doesn’t require surrendering company ownership in exchange for capital.
An option pool is a portion of a startup’s equity reserved for future employee compensation, often distributed as stock options.
Pari-passu is a Latin phrase meaning "equal footing". In finance, "equal footing" means that two or more parties to a financial contract or claim are all treated the same. Pari-passu is common in bankruptcy proceedings as well as debts such as parity bonds in which each party gets the same amount.
This refers to the estimated value of a company after outside financing and/or capital injections are added to its balance sheet.
The pre-money valuation is the value of a company before it goes public or receives external funding or financing.
Pre-seed funding is the initial capital sourced by founders or close associates, typically used for market research, product development, or drafting a business plan.
Preferred stock represents shares that confer certain priority rights to holders, such as precedence in dividend payouts and asset claims in case of company liquidation.
It is a legal term that describes the right, but not the obligation, that can be given to an investor to maintain their initial level of percentage ownership in a company during subsequent rounds of financing.
ROI measures the gain or loss made on an investment relative to the amount of money invested.
Risk capital denotes funds earmarked for high-risk investments, which, while susceptible to complete loss, can yield considerable returns if successful.
Runway refers to the amount of time a startup can continue to operate before it runs out of cash, calculated by dividing the current cash position by the monthly burn rate.
A SAFE (Simple Agreement for Future Equity) is a contractual arrangement offering an investor the right to acquire future equity in a company, typically at a discount.
The secondary market is a platform facilitating investors to transact in securities they already possess. Examples of secondary markets include the NYSE and Nasdaq in the U.S., as well as the London Stock Exchange (LSE), the Hong Kong Stock Exchange, the Bombay Stock Exchange, and the Frankfurt Stock Exchange.
Seed funding refers to the initial investment to kickstart a business, often used for product development and market research.
This type of investor provides capital but does not have any involvement in the management of the business. It’s like having a silent partner in a group project, they contribute, but you never hear from them.
Startup valuation is the estimated worth or value of a startup company as derived from its present and potential future performance.
A syndicate is a group of investors who pool their resources together to invest in large transactions.
A term sheet is a non-binding document detailing the preliminary terms and conditions for an investment.
Terminal value is the estimated value of a business beyond the explicit forecast period. It is a critical part of the financial model, (https://corporatefinanceinstitute.com/resources/financial-modeling/types-of-financial-models/)as it typically makes up a large percentage of the total value of a business. There are two approaches to the DCF terminal value formula: (1) perpetual growth, and (2) exit multiple.
A tranche is a portion of money or investments that are divided into specified amounts released once certain agreed-upon milestones have been met.
A unicorn is a privately held startup company valued at over $1 billion.
Refers to a round of financing in which a company's value increased since its prior valuation.
The three widely used valuation methods used in business valuation include the Asset Approach, the Market Approach, and the Income Approach.
The Asset Approach
-is a valuation methodology that concludes to value based on a business’s balance sheet as of the valuation date. The Asset Approach uses the fundamental equation associated with the balance sheet of Assets = Liabilities + Equity.
The Market Approach
-is a valuation method that concludes value by comparing a company to its peers, either in public companies or precedent transactions. The Market Approach applies the logic that a business will sell for roughly a similar multiple (of earnings) to other companies in a similar industry and size.
The Income Approach
-concludes value by analyzing a company’s free cash flow and discounting, or capitalizing, depending on which method is chosen. Free cash flow is an earnings metric that accounts for taxes, tax breaks, capital expenditures, and networking capital change.
Alongside free cash flow, the second key component of the Income Approach is the discount rate, which is a measure of risk, and return. A discount rate can either be the Weighted Average Cost of Capital (WACC) or the Cost of Equity (COE).
A valuation cap is a predetermined maximum company valuation, post which convertible note holders can opt for equity conversion.
Venture Capital is a subset of private equity, specifically targeting startups and early-stage companies with a high growth trajectory.
A Vesting Schedule is a legal document that stipulates the periods and terms in which an investor or employee acquires full ownership of their equity stake or stock options.
A warrant is a financial instrument granting its holder the option to purchase a company’s stock at a predetermined price during a specified period.
A washout round, also known as “burn-out” or “cram-down,” is a funding round where new investors acquire a substantial or controlling interest, causing substantial dilution for existing investors.
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