The Startup Glossary: Bootstrapping and Fundraising
This Article below originally published on Founder Institute
The bootstrapping and fundraising stage is where startups attract investment and begin to scale. Successful startups approach investors with a well-organized pitch and a thorough understanding of the investment process. These startups understand what makes their product remarkable and use their raised funds in pragmatic and thoughtful ways.
Startup Bootstrapping and Fundraising
Accelerator – Fixed-term programs that provide mentorship, valuable advice, and training for entrepreneurs. Oftentimes, these programs culminate in a pitch event.
Accredited Investor – An individual who meets the legal requirements for investment in a business venture.
Accrued Interest – The interest accrued on a debt or asset since the most recent interest payment was made.
Advisory Board – A group of external advisors who provide strategic advice.
Amortization – The scheduled process of gradually paying off a debt.
Angel Fund – A group of angel investors who work together and coordinate in the investment process.
Angel Investor – Individual who provides capital for startups in exchange for either debt or equity.
Angel Round – Funding round dedicated to attracting angel investors.
Anti-Dilution Agreement – A legal agreement ensuring that if further investments are made into a company or a sale occurs, the investor’s shares are not diluted. This is primarily performed to protect the interests of early investors.
Bridge Financing – Short-term financing that is expected to be repaid quickly.
Board of Directors – A group of individuals who have been elected by stockholders and chosen to oversee a company’s affairs. Oftentimes, investors request a board seat in exchange for a startup investment.
Bootstrapping – Starting a business without external help or investment.
Buyout – A common exit strategy in which a company’s shares are purchased, granting the purchaser a controlling interest in the company.
Capitalization Table – A table displaying the total amount of securities issued by a company, along with details of the ownership of these securities.
Capital Gain – The difference between the purchase price and selling price of a given asset.
Capital Under Management – The amount of capital available to a management team for venture capital investment.
Carried Interest or “Carry” – The portion of investment gains to which fund managers are entitled without contributing their own capital.
Capped Notes – This refers to the practice during investment rounds where a cap is placed on a company’s valuation.
Closing – The final stage in the investment process, where legal documents are signed and an investment becomes official.
Convertible Debt/Equity – Investments designed to turn into equity at a future point in time, when a company is first valued. This is a useful method for young companies to attract investment prior to valuation.
Crowdfunding – The process of generating money to fund a business via many individual donors across an online platform.
Deal Flow – The rate at which investment opportunities are introduced to a funding institution.
Deal Room – Central location where investment pitches and negotiations take place.
Debt Financing – Money-raising tactic in which a company sells bonds or notes to an investor with the assumption that they will be re-purchased with interest.
Due Diligence – An analysis made by an investor based on the facts and information about a company or product prior to investment.
Early Stage – The earliest stage of the three main startup phases. These are fledgling companies that are often pre-valuation.
Entrepreneur in Residence (EIR) – An experienced entrepreneur who is employed by a venture capital firm and plays an advisory role.
Equity Financing – Money-raising tactic where investment is provided in exchange for a portion of ownership over the company.
Exploding Offer – An investment offer that is retracted if it not accepted after a short time period.
First Refusal – Clause that requires investors and founders to offer their shares to an existing early investor before selling to a third party.
Full-Ratchet – A provision intended to protect investors, preventing extreme dilution of equity/shares.
Fund of Funds – A mutual fund that invests into other mutual funds.
Golden Handcuffs – Benefits or delayed payments offered by a company in order to prevent an employee’s departure.
Golden Parachute – A large compensation or lump payment for the dismissal of an executive, often occurring in the aftermath of a takeover.
Incubator – A company or facility designed to aid entrepreneurs via shared resources, education, expertise, and intellectual capital.
Late Stage – A startup company that has been in existence for a noteworthy period of time and has proven to have a viable product and business model.
Lead Investor – Member of an investment syndicate who holds the largest stake in a given company. Oftentimes, the lead investor is a startup’s principal provider of capital.
Leveraged Buyout – When a person or group of people take on debt in order to buy out the remaining shares of a company and achieve ownership.
Liquidation – The process of turning securities into cash, often as part of an exit strategy.
Liquidity Event – An event that allows venture capital firms realize their gains or losses by liquidating equity in a company.
Limited Partner (LP) – An investor with little control over the management of a partnership or a portfolio company, in exchange for less restrictions on liquidation.
Liquidation Preference – The right to receive a specific monetary value in exchange for equity, especially in the event of a company dissolving.
Management Buyout (MBO) – Funds provided for a management team to acquire a product or business.
Pre-Emptive Right – A clause in an investment agreement that grants investors the right to maintain the same percentage of equity after restructuring.
Post-Money Valuation – The value of a company, determined after an investment has been made.
Pre-Accelerator – Program that offers advice for companies that have not yet entered an accelerator.
Pre-Money Valuation – The value of a company, determined before an investment has been made.
Pre-Sales – A product for which customers have dedicated money and made purchases before the product has actually been shipped. Sometimes, pre-sales take place before products have been produced or finalized.
Preferred Stock – A stock that carries a fixed dividend and takes sale-order priority over other forms of stock.
Principal – The total value of the original sum invested.
Promissory Note – A legal document detailing the amount of debt owed along with an obligatory repayment plan.
Pro-Rata – Division of stocks or equity based on equal proportions.
Recapitalization – A corporate reorganization of capital structure by changing the mix of equity and debt.
Secondary Public Offering – When a company presents stock for sale to the public after an IPO.
Secondary Purchase – The act of purchasing stock from a shareholder rather than from the company itself.
Securities – All types of equity or debt.
Seed Round – The first round of financing for a startup. Usually funds raised in the seed round are intended to be spent on producing a prototype or proof of concept.
Seed Stage – The stage of a startup where profitability is extremely unlikely and seed funds are required to gain customer insights.
Series A – The first major round of venture capital funding wherein preferred stock is issued.
Series B/C/D/E – Later rounds where preferred stock is issued.
Share Consent – A legal clause requiring an investor’s consent in order for a business to sell shares at a later date.
Statutory Voting – A voting method for a Board of Directors in which a board member receives 1 vote for each share they own.
Stock Options – The right to sell or purchase stock for a set price during a pre-defined period of time.
Strategic Investors – Investors who add value to their investments via industry ties or experience.
Syndication – The venture capital practice of each individual investor contributing a small portion of money required to fund a company.
Tag-Along Rights – Agreed stipulation stating that if a founder decides to sell their shares to a buyer, an existing investor can offer their shares to the buyer for the same amount.
Term Sheet – A non-binding agree designed to provide a layout of the basic terms and conditions of an investment. Term sheets are often used as templates for later legal documents.
Uncapped Notes – A funding practice designed to protect founders. Uncapped notes provide no guarantee that investors will be granted a specific amount of equity per dollar invested.
Underwriter – An investment bank with a contractual obligation to take any securities into their own books if the company in which they are vested has failed.
Valuation – The process by which a company’s value is determined.
Venture Capitalist – An individual investor who works at a venture capital firm and makes investment decisions.
Vesting – The act of a company granting stock options to an employee.
Voting Right – A stockholder’s right to vote on matters of corporate management.
Warrant – The right to buy or sell a given security at a certain price during a specified period.
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