Question 1

Angel Investor

Accepted Answer

An angel investor is a high-net-worth individual who provides financial backing for startups or entrepreneurs, usually in exchange for ownership equity.

Question 2

Angel Network

Accepted Answer

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.

Question 3

Angel Round

Accepted Answer

An angel round refers to an initial investment round where angel investors fund a startup. In exchange, they receive equity or convertible debt.

Question 4

Bridge Financing

Accepted Answer

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.

Question 5

Bridge Loan

Accepted Answer

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.

Question 6

Cap Table

Accepted Answer

A capitalization table, or cap table, is a spreadsheet or table that displays the equity ownership stakes in a company.

Question 7

Convertible Equity

Accepted Answer

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.

Question 8

Convertible Note

Accepted Answer

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.

Question 9

Corporate Venture Capital (CVC)

Accepted Answer

This refers to a subsidiary that a large corporation creates to invest in promising startups.

Question 10

Cramdown

Accepted Answer

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.

Question 11

Crowdfunding

Accepted Answer

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.

Question 12

Deal Flow

Accepted Answer

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.

Question 13

Dilution

Accepted Answer

Dilution occurs when a company issues additional shares, which reduces the existing shareholders’ ownership percentage in the company.

Question 14

Down Round

Accepted Answer

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.

Question 15

Due Diligence

Accepted Answer

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.

Question 16

Elevator Pitch

Accepted Answer

An elevator pitch is a brief, persuasive speech that communicates your business idea in a concise and appealing manner.

Question 17

Enterprise Value (EV)

Accepted Answer

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

Question 18

Equity

Accepted Answer

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.

Question 19

Equity Crowdfunding

Accepted Answer

This is a form of crowdfunding where investors receive a stake in the company, usually in the form of equity shares.

Question 20

Equity Value

Accepted Answer

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

Question 21

Exit Strategy

Accepted Answer

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.

Question 22

Funding Gap

Accepted Answer

The funding gap is the shortfall between the funds needed to complete a project or business plan and the amount of funds currently available.

Question 23

Funding Round

Accepted Answer

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.

Question 24

Growth Capital

Accepted Answer

This refers to capital invested in a mature company to aid in the expansion, acquisitions, or restructuring of the company’s operations.

Question 25

Growth Equity

Accepted Answer

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.

Question 26

Initial Public Offering (IPO)

Accepted Answer

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.

Question 27

Intrinsic Value

Accepted Answer

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.

Question 28

Lead Investor

Accepted Answer

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.

Question 29

Market Value

Accepted Answer

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.

Question 30

Mezzanine Financing

Accepted Answer

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.

Question 31

Non-Dilutive Funding

Accepted Answer

Non-dilutive funding refers to financing that doesn’t require surrendering company ownership in exchange for capital.

Question 32

Option Pool

Accepted Answer

An option pool is a portion of a startup’s equity reserved for future employee compensation, often distributed as stock options.

Question 33

Pari Passu

Accepted Answer

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.

Question 34

Post-Money Valuation

Accepted Answer

This refers to the estimated value of a company after outside financing and/or capital injections are added to its balance sheet.

Question 35

Pre-Money Valuation

Accepted Answer

The pre-money valuation is the value of a company before it goes public or receives external funding or financing.

Question 36

Pre-Seed Funding

Accepted Answer

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.

Question 37

Preferred Stock

Accepted Answer

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.

Question 38

Pro-Rata Rights

Accepted Answer

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.

Question 39

Return on Investment (ROI)

Accepted Answer

ROI measures the gain or loss made on an investment relative to the amount of money invested.

Question 40

Risk Capital

Accepted Answer

Risk capital denotes funds earmarked for high-risk investments, which, while susceptible to complete loss, can yield considerable returns if successful.

Question 41

Runway

Accepted Answer

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.

Question 42

SAFE

Accepted Answer

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.

Question 43

Secondary Market

Accepted Answer

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.

Question 44

Seed Funding

Accepted Answer

Seed funding refers to the initial investment to kickstart a business, often used for product development and market research.

Question 45

Silent Investor

Accepted Answer

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.

Question 46

Startup Valuation

Accepted Answer

Startup valuation is the estimated worth or value of a startup company as derived from its present and potential future performance.

Question 47

Syndicate

Accepted Answer

A syndicate is a group of investors who pool their resources together to invest in large transactions.

Question 48

Term Sheet

Accepted Answer

A term sheet is a non-binding document detailing the preliminary terms and conditions for an investment.

Question 49

Terminal Value

Accepted Answer

Terminal value is the estimated value of a business beyond the explicit forecast period. It is a critical part of the financial model, 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.

Question 50

Tranche

Accepted Answer

A tranche is a portion of money or investments that are divided into specified amounts released once certain agreed-upon milestones have been met.

Question 51

Unicorn

Accepted Answer

A unicorn is a privately held startup company valued at over $1 billion.

Question 52

Up Round

Accepted Answer

Refers to a round of financing in which a company's value increased since its prior valuation.

Question 53

Valuation Approach

Accepted Answer

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).

Question 54

Valuation Cap

Accepted Answer

A valuation cap is a predetermined maximum company valuation, post which convertible note holders can opt for equity conversion.

Question 55

Venture Capital

Accepted Answer

Venture Capital is a subset of private equity, specifically targeting startups and early-stage companies with a high growth trajectory.

Question 56

Vesting Schedule

Accepted Answer

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.

Question 57

Warrant

Accepted Answer

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.

Question 58

Washout Round

Accepted Answer

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.

FUNDING & INVESTMENT TERMINOLOGY