Navigating the Venture Capital Lingo, Key Terms Defined Follow Jan 29, 2023 · 4 mins read
Navigating the Venture Capital Lingo, Key Terms Defined
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If you’re seeking venture capital investments for your high-growth startup, prepare to immerse yourself in some peculiar vernacular. From “unicorns” to “tombstone”, “capitalization tables” to “circle rounds”, and “down rounds” to “shark repellent”, the VC sphere has its own unique language. Familiarity with the key terms helps you effectively communicate to secure, negotiate, and manage venture investments. Here’s a primer of 10 key VC financing definitions every fledgling entrepreneur should know:

Angel Investors: After maxing out savings, credit cards, and “friends and family” money, angel investors are often entrepreneurs’ first source of outside financing. These ultra high-net-worth individuals make higher-risk seed stage and series A investments seeking a 20-30% return, motivated to nurture innovative ideas and young founders in sectors they know well. While investing their own money, angels focus on early traction over projections to mitigate risk when betting on startups.

Cap Table: The capitalization (or cap) table is a startup’s internal ledger listing all equity ownership interests and investor stakes in the company. Every funding round shapes updates reflecting who owns company stock, stock options or other equity securities. Cap tables evolve as founders, employees and investors buy/sell ownership stakes. Since cap tables outline shareholder rights and asset distribution, maintaining an accurate register as rounds and ownership changes occur is vital.

Debt Financing: Startups needing capital can pursue loans with set repayment terms from banks, government programs, or private funds rather than exchanging equity ownership for investments. While debt instruments like bank credit lines, bonds, term loans, and venture debt don’t dilute founder equity, the borrower must repay lenders at set intervals regardless of financial status. Hence entrepreneurs must ensure predictable cash flow. Debt financing evaluates a venture’s current revenues over projected growth.

Down Round: When a startup raises a funding round priced below the valuation per share of earlier rounds, this “down round” indicates a decline in company value since last capital infusion. Later investors see risk in paying above levels previous backers felt the startup deserved. Existing shareholders can become diluted unless participating to maintain stakes as ownership gets redistributed at the down round’s lower valuations amidst more shares created.

Exit: A startup’s end goal is to exit - either getting acquired, merging with another company, or completing an initial public offering (IPO). Exits provide founders, employees holding equity compensation, and investors liquidity and often significant returns on the risk-adjusted capital they contributed to birthing the venture. VCs bet on startups poised for high value exits in 5-7 years while avoiding those seeming stuck heading towards dismal shutdowns instead of IPO glory.

Shark Repellent: No, this isn’t gear to ward off circling sharks from seafaring startup folk! Shark repellent provisions deter hostile takeovers of vulnerable companies by corporate predators. Fixed price share issuances, staggered board terms, supermajority voting requirements and golden parachutes for ousted managers help repel advances. Startups install these protective provisions when growth slowdowns make them more appetizing M&A targets giving vulture investors leverage to sabotage then consume them.

Term Sheet: Before investment closing with binding final contracts, VCs issue a non-binding term sheet outlining proposed deal structure and conditions requiring founder agreement. These preliminary term sheets specify investment size, pre and post-money valuations, investor rights, voting control, liquidation preferences, negative covenants and other legal and financial particulars needing resolution before funding finalization. Term sheet complexity escalates as series stage advances given larger sums infused by multiple investors.

Tombstone: Once a VC financing round concludes, legally binding contracts inked, and funds change hands, announcements go public proclaiming the deal. The startup may figuratively etch deal details into a published tombstone advertisement outlining how much got raised, participating investors, share price etc. These public deal tombstones validate startups’ viability credentials attracting future investor, employee and partner interest as market excitement brews.

Unicorn: Startups that achieve the mystical $1 billion company valuation mark enter the hallowed “unicorn club”. Just 0.07% of fledgling ventures ever reach this feat! Entrepreneurs chasing billion dollar babies devote endless blood, sweat, and tears trying. While largely privately held still, rockstar unicorn alumni who later went public read like a tech titans list including AirBnB, Dropbox, Facebook, Groupon and Spotify.

Valuation: During investment negotiations, venture capitalists scrutinize startup founders’ desired company valuations before agreeing on deal terms. Using financial modelling, revenue growth and other projections, VCs analyze what realistically reasonable valuation levels and ownership percentages to purchase are based on forecasts. Debates determining pre-money valuations and targeted post-money valuations after financing can be highly contentious and deal breaking. Mastering valuation communication helps founders bridge differences.

Whew, who knew so many peculiar terms floated around the VC and startup financing realm! But embracing the lingo helps new entrepreneurs talk the same language as prospective investors. Hopefully reviewing these 10 vital VC concepts provides a foundational fluency boost when seeking startup capital and exponential growth. Just don’t get lost in translation mixing up your cap table, down round and unicorn aspirations! Onward to billion dollar glory armed with newly honed VC vocabulary.

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