Top 30 Financial Terms for Startups
Running a startup is a bit like diving into a new adventure, and you'd rather pack the right gear for the journey. Getting comfortable with the key financial terms for startups can help you steer clear of any bumps along the way and keep your business on track.
While popular startup vocabulary can be found in another glossary, this one is completely devoted to finance. With new financial terms and concepts emerging each year, staying in the loop can be quite challenging. To help you with that, we've compiled a list of commonly used fundraising terms with clear definitions.
30 Terms and Venture Capital Vocabulary All Founders Should Know
If you're willing to flex your financial know-how, test your knowledge of these essential startup investment terms and other words dealing with money. Let's make sure you use them confidently.
Angel Investor
An angel investor is an individual who provides financial support to a startup at a very early stage, for instance, gives seed capital to a company seeking fundraising. Typically, it is their personal money and they get shares or some form of ownership mainly because the startup is at the beginning of its journey and poses a financial risk. Thanks to such contributions, startups can bring their ideas to life, take on employees, and launch products.
Balance Sheet
A balance sheet is a financial document that provides a snapshot of a company's assets, liabilities, and the owner's equity. It's an essential tool for evaluating a startup's profitability and monitoring financial health. This document is typically used to track a company's growth or identify any downturns. Plus, well-maintained balance sheets can serve as solid proof of financial stability, which can be a key factor when pitching to investors or trying to convince potential VCs to back your venture.
Bootstrapping
Bootstrapping is among the popular financial terms for startups, it refers to self-funded startups or companies. They use their own money to bring a product to life, such as personal savings or the money they get from family or friends, and barely use other outside funding sources. Interestingly, the majority opts for bootstrapping at the earliest startup stages of development or at the beginning of their business establishment journey.
Bridge Financing
Bridge financing is a type of temporary funding that helps a company manage its short-term expenses until more permanent, long-term financing is secured. This option can come in handy if long-term funding hasn't been arranged yet or is still being pursued. Hence, it works as a bridge, linking startup and investor capital through short-term investment.
On the flip side, it's vital to approach bridge loans carefully, as they frequently come with high interest rates, sometimes around 20%, making it hard to pay back later. Additionally, lenders might raise the rate if the loan isn't repaid on time, or even demand equity shares in return.
Burn Rate
What's for more commonly used startup funding terms, the burn rate shows how quickly a company is spending the money that forms its initial capital. It can also mean a company's negative cash flow and is usually calculated every month. This rate is a solid indicator of a startup's runway, or how much longer it will last on the money it currently has before it starts to get a stable income.
Buyout
According to the broad startup financing definition, a buyout involves gaining control of a company by either purchasing its entire equity or acquiring at least half of its shares. This usually occurs when an acquiring party recognizes the company's potential and is adamant that changing ownership will bring a good return on investment.
In most cases, buyouts are driven by strategic moves like expanding market reach, boosting operational efficiency, or integrating complementary technologies. An acquiring party is often a private equity firm or a competitor that aims to incorporate changes, optimize resources, and provide financial support to increase the company's revenue and make it a market leader. For rival companies, the buyout of a competitor is a surefire way to eliminate competition in the market.
Cap and Cap Table
A capitalization table is a financial document, typically in the form of a spreadsheet or a table, that outlines a detailed breakdown of a company's equity ownership. It details the total number of shares, including stock, convertible notes, SAFEs, warrants, and equity grants, owned by various stakeholders.
Cap tables provide investors with a clear overview of who owns what percentage of the company and let them measure the topical equity distribution. This way, investors can ensure that their money won't be diluted in the long run and assess how much they should invest.
Capital
The startup capital definition refers to the financial resources that a startup founder secures to cover the initial expenses of launching and running a business until it starts bringing profits. These costs usually include but are not limited to:
- employee salaries;
- outsourced services;
- office equipment and furniture;
- leasing office space;
- covering bills or utilities.
There are diverse ways to raise capital, such as leveraging personal savings, taking out loans, drawing in angel investors, obtaining venture capital, looking for crowdfunding offers, applying for grants, and others.
Cash Flow
Noting other popular financial terms for startups, cash flow means the movement of money into and out of a business over a specific period. A cash flow statement is used to track how much cash is coming in from revenue or investments, as well as how much is going out due to expenses.
Positive cash flow indicates an event when a company's incoming cash exceeds its outgoing cash over a specific period. By monitoring cash flow, owners can assess the financial health of their business and evaluate their cash management strategies.
Cash Position
In simple words, a cash position is the amount of cash that a company has on hand at a given moment in time. Maintaining a stable cash position is crucial for covering all operational expenses and ensuring financial stability.
Stakeholders rely on this information to gauge the company's ability to meet its short-term obligations. In turn, investors also closely examine the cash position to evaluate the business's liquidity and overall financial health, which can influence their investment decisions.
Cliff Vesting
The classic cliff vesting definition revolves around the retirement-plan-related benefits of a company. For instance, employees can get retirement pension account ownership after a certain number of years of service.
Yet, in a more narrow startup sense, cliff vesting often refers to such employee vesting that provides an opportunity for an employee to receive company equity or stocks after a specific period of time. A vesting schedule usually specifies such a period that lasts from 1 to 5 years on average. Ownership of such assets can be used as part of a benefit plan (say, when you're trying to tackle the tough task of hiring developers for a startup) and as a way to motivate people to stick around in the company for longer.
Common Stock
Giving more fundraising terms and definitions, common stock involves units of equity ownership in a business. Holders of common stock have voting rights on primary corporate matters, such as electing the board of directors, approving policy changes, and sometimes deciding on stock splits or mergers and acquisitions. They usually receive dividends, which are portions of the company's profit, normally distributed based on the number of shares held.
In corporate finance, it's a general practice to use balance sheets to determine how revenue is allocated to shareholders, reflecting their stake in the company's assets and earnings. Unlike preferred stock, which often has a higher claim on dividends and no or limited voting rights, common stock allows investors to get significant capital appreciation, albeit with higher risks.
Crowdfunding
Crowdfunding is included in the venture capital terminology referring to the practice of raising capital from a large number of individuals through online platforms like Kickstarter or Indiegogo. These platforms facilitate secure transactions, connecting entrepreneurs with potential investors. In return for their contributions, investors may receive a product or service, an equity stake in the company, a loan, or simply choose to donate without expecting a return.
Customer Acquisition Cost (CAC)
Customer acquisition cost is one of the most important key performance indicators for startups. This metric shows the sum of money the startup spends on winning a single client. It can be a decent marker of crucial business activities and overall performance. CAC is calculated for a given time period. It implies dividing all of your sales and marketing expenses by the number of acquired clients. If CAC is low, this is a good sign.
Debt Fundraising
According to the venture capital glossary, debt fundraising involves securing capital that must be repaid with interest by a predetermined date through regular payments. The common methods of raising funds through debt are:
- bank loans;
- private credit;
- SBA loans;
- bonds and notes.
The primary advantage of debt fundraising over equity fundraising is that it allows you to retain full ownership and control of your business. Moreover, repaying loans on time can improve your creditworthiness, making it easier to secure future financing.
Dilution
Dilution happens when a company issues additional shares, which decreases the ownership percentage of existing shareholders. This can lead to a decrease in the value of their shares and potential earnings.
The most common stock dilution causes include:
- market issuance of new shares (can either increase the company's value or cause a decline in share prices);
- company acquisitions (using stock to acquire another company can dilute the value of existing shares and raise concerns among current investors);
- loan-to-equity conversions (increase the total number of shares and result in diluting the ownership percentage of existing shareholders);
- strategic share issuance (issuing new shares to intentionally dilute an existing shareholder that the company either wants to remove or sway their decisions).
Dividends
Outlining other fundraising terms and definitions, dividends are portions of a company's earnings distributed to shareholders as their share of the profits. These payments are usually made on a quarterly basis and are announced ahead of time, with the amount decided by the board of directors. They can be issued in the form of cash or additional shares.
Companies pay dividends for multiple reasons, primarily to demonstrate financial stability, keep and retain investors, or attract new ones. While not all companies offer dividends, those that do are often more established and stable, using dividends as a signal of their ongoing success and commitment to shareholder returns.
Equity
The shares that a company or startup issues are referred to as startup equity. Such ownership is usually split into percentages or stocks, distributing the profit. Startups commonly give equity to investors and some offer their employees equity shares to gear their interest in promoting and improving the product. As startups usually don't have extensive benefit packages to offer the team, this can serve as influential motivation.
Equity Fundraising
In venture capital lingo, equity fundraising is about giving away shares of your company in return for investment. This funding form is particularly popular among startups and early-stage companies that want to avoid the risks of taking on debt. It's especially useful for businesses with little or poor credit history, making traditional bank loans inaccessible. By opting for such fundraising, startups can secure the necessary capital while also attracting investors who can bring valuable expertise and resources that may help with business or startup scaling.
Exit
An exit refers to the process in which an investor is eager to sell their company's shares to gain a return on their investment. This can occur through various solutions, such as an initial public offering (IPO), when the company goes public and the investor can sell shares on the open market, or through a merger or acquisition, when another company buys the investor's stake.
On the flip side, companies facing financial difficulties and on the brink of bankruptcy may seek an exit strategy through liquidation. In this scenario, the company sells off its assets to pay creditors, and any remaining funds are distributed among shareholders. While liquidation is often seen as a last resort, it provides a way for investors to recover some of their capital, even in unfavorable circumstances.
Fundraising Rounds (Seed Funding, Series A, B, C, D, IPO)
Fundraising rounds refer to the stages of startup funding, including pre-seed and seed funding, along with series A, B, C, D, and IPO. Pre-seed funding is the earliest stage, which provides capital for entrepreneurs who are still in the ideation phase or making their first proof of concept steps.
Next, goes seed funding which is considered the first real funding stage for startups as it is geared towards raising capital from investors to launch the product and hire people. Ordinarily, seed funding investors are offered a stake in exchange as the product might not even exist yet, making it a risky investment.
Series A helps startups enter new markets, provided they have a tangible product and steady cash flow. The primary focus is on increasing the market presence and refining the business model. Following Series A, Series B funding allows startups to expand into even larger markets. At this stage, companies are expected to have solid traction and an established user base.
Once a company has become profitable and is up for bigger challenges, like creating a new product or diving into new markets, Series C can prepare your business for broader market opportunities. Series D, on the other hand, is less common and typically pursued for specific purposes, such as a merger or achieving bigger growth goals.
An initial public offering (IPO) occurs when a company decides to go public and offers its shares for sale to the general public for the first time. This startup pivot event allows a company to attract capital from a wider pool of investors and enhance its visibility in the market.
Hedge Fund
Mentioning other financial terms for startups, a hedge fund is a private investment fund that contains capital from affluent individuals and institutions, including pension funds, trusts, and college endowments. These funds focus on a broader spectrum of assets, such as bonds, public stocks, and occasionally startups. Although they are not typically centered on investing in startups like VC firms are, several actively offer financial support. A shining example of such a hedge fund company can be Tiger Global Management which specializes in investing in early through late-stage companies that drive innovation.
When considering investments in startups, hedge funds conduct rigorous due diligence audits to evaluate the potential and viability of early-stage companies. This meticulous process ensures that the risks are deemed justifiable.
Preferred Stock
In startup funding terminology, preferred stock is a form of equity that provides investors with higher dividend returns and lower risks compared to common stock. Preferred stockholders hold a higher claim on the company's earnings, ensuring they receive dividends before common shareholders.
Preferred stocks are similar to fixed-income investments called bonds, as they come with a par value, usually set at 25 USD per share, which is the price at which they can be redeemed. And like bonds, preferred stocks can be "called" or repurchased by the issuing company after a particular period of time (typically around 5 years).
Profit Margin
Profit margin is one of the common words associated with fundraising. It indicates the percentage of revenue remaining after all business expenses have been paid, offering insight into a company's profitability.
Profit margins come in two key forms:
- gross profit margin (this metric assesses the difference between total revenue and the cost of goods or services sold);
- net profit margin (reflects the revenue remaining after all operating expenses, including taxes, administrative costs, interest, and depreciation).
The rule of thumb is the higher your profit margin, the more money your business retains. If you need to calculate profit margin as a percentage, simply divide your net income by total revenue and multiply the result by 100. The calculated figure is a powerful tool for assessing your company's growth potential and financial health.
Return on Investment (ROI)
Return on investment is the ratio of a company's net income to investment with subtracted expenses. It's a financial metric that's calculated to see the yearly return, and it gives insights into such vitals as the gained profit, how well the budget was distributed, and how the money was invested. In short, ROI shows how much money the company lost or earned and can be used for predicting the potential and justifiability of future investments. If ROI is high, this is a positive signal.
Runway
While speaking of other ubiquitous startup finance terms, it's worth mentioning a runway, which describes the amount of time a company can continue operating before it runs out of cash. It is calculated based on the company's current cash reserves and its monthly burn rate (the rate at which it is spending its available funds).
The standard formula for calculating cash runway is to divide your total cash reserves by your average monthly cash burn rate. For instance, if a startup has 500k USD in cash and its average monthly expenses (burn rate) are 50k USD, the runway would be calculated as follows: 500k USD ÷ 50k USD = 10 months. This means the startup can continue operating for ten months before needing additional funding.
Unicorn
A unicorn in finance terms is used to describe a startup valued at more than 1 billion USD in terms of venture capital. The definition also implies that these are private startups. They are referred to as unicorns because companies that manage to achieve such success are very rare. According to the March 2024 statistics, most startup unicorns around the world are from the software industry, followed by the financial sphere.
A more exceptional category of unicorns is the decacorn. To achieve decacorn status, a company should be valued at more than 10 billion USD. On top of that, there's an even rarer type known as a hectocorn, which applies to a company with a valuation exceeding 100 billion USD.
Valuation
Pointing out other relevant VC terms, startup valuation involves assessing the potential, capabilities, and future prospects of a newly established company. This process helps to determine a startup's worth and secure seed or venture capital. Founders and investors apply different methods, such as the Berkus Method, Scorecard Method, Market Multiple Method, and others to estimate the company's overall value.
Venture Capital
The money invested in a startup or early-stage emerging company is called venture capital. Such private equity funds are used to drive small business growth and are usually obtained from VC investors or firms that get stakes. These partners can also assist the company by providing support and expertise.
Venture Debt
Venture debt is one of the commonly used fundraising words, describing a supplementary financing form that provides early-stage startups with a loan. Unlike traditional equity financing, venture debt allows companies to raise capital without diluting ownership.
The amount raised through debt venture normally ranges from 20% to 30% of the most recent equity round. This type of loan usually comes with a high interest rate and must be paid back within 12 to 24 months. Startups often use venture debt alongside venture capital to extend their runway, fuel growth initiatives, and maintain control over the company.
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Final Thoughts on Fundraising Terminology
And there we go! Once you've mastered the definition of startup capital and other top financial terms, you'll be well-equipped to talk the talk. We hope this article helped you learn more about the fundraising side of business. Keep this VC slang in your toolkit in case you need to impress investors and manage your finances effectively.
And if you're in search of a development team that can bring your ideas to life, Upsilon's experts are here to help. We excel in providing MVP development services for early-stage startups and would be glad to hear about your ideas. Feel free to contact us for a consultation!
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