Fundraising 101- Speak Their Language

Ready to begin fundraising for your startup?

I came across with this short but useful terminology list very useful for every startup whom is not familiar with the industry. You can not sit on the table with any financier or investor without understanding their language and this lit might help you to learn.

1) Runway

As a startup your runway is how long you’ve got left before you run out of money. At each fundraising round you need to collect enough to fuel you to your next raise. This is typically a constant cycle. Make sure you are raising early enough so you don’t run out of runway.

2) Term Sheet

A term sheet is like a summary of the offer from potential investors. It lays out the terms on which they are willing to invest in your startup. Of course, nothing is set in stone until it is done. These are terms you can shop around and negotiate.

3) Milestone

A milestone is a notable marker or benchmark achievement. You’ll be raising enough money to get you through to your next major milestone. For example; positive revenue. If you miss your milestones it’s going to be harder to attract follow on investment.

4) Burn Rate

This is the rate at which your company is burning through cash. Typically expressed on a monthly basis. For example; if your monthly expenses (burn rate) are $20,000, and you project you’ll hit your next milestone in 12 months, you’ll need to raise at least $240,000, plus some room for error.

5) VCs

Venture Capital funds provide the biggest rounds of funding for startups. Note that you won’t be approaching VCs until you’ve got quite a bit of traction and data. They really only want to fund scaling and essentially the spring to the finish line and big payday.

6) Partners (VC)

You’ll hear a lot of talk about vetting partners when raising capital. These are typically more senior decision makers at VC funds, above associates. Just like any company, the brand is often far less important and impactful than the individual you are dealing with.

7) Family Offices

A family office is essentially the investment arm of wealthy families. Today there are a growing number of multi-family offices as well. These offer more efficiency and group investment power for the slightly less wealthy family. They often differ from angels and VCs in their investment strategy and horizons for recouping their investment and returns.

8) Due Diligence

This is the dirty little secret of the fundraising process. In order to get from your term sheets to money in the bank (or an exit) you’ll have to endure the investors’ due diligence. This is where they dig into your company and life to verify every minute detail they can. It may not be that tough at your pre-seed round. It will be quite different when raising $50 million plus at a Series C round.

9) Exit

When you accept outside capital, you are really committing to eventually exiting your company. This can be cashing out through a merger or acquisition, or going public. If you really can’t let go of your company you might one day be able to buy shares back and cash your investors out that way.

10) Dilution

Every time you raise equity funding you are giving up a portion of your company. This ranges by round and who you are raising from.

11) Board Seats

Big money investors will normally also ask for a seat on your board of directors. They want control over how their money is being used and the decisions the company is making. Be careful about who you give these important roles to.

12) Churn Rate

This applies to how many customers you are churning through. How many users are you gaining versus losing. It can be a big difference. If you are bleeding too many users your next round can be more difficult.

13) Valuation

This is how much your company is valued at. There will be a pre-money and post-money valuation that is typically established by a lead investor.

14) IPO

An Initial Public Offering is a classic exit strategy which makes your company stock available to the general public.

15) Acquihire

Another exit strategy in which the hiring company is effectively buying yours to acquire your talent and team.

16) Executive Summary

This is a brief summary of your business plan. It will be far more viewed than your actual business plan. Especially, important if you’ll be applying for any loans or commercial real estate funding.

17) Elevator Pitch

This is your first introduction to investors. A sentence or two you can reel off and hook interest in your startup. You’ve got to nail this if you are going to get anywhere.

18) Lead Investor

You’ll need a lead investor to begin the real funding in each round. Few like to lead. Most like to follow.

19) Convertible Note

A type of funding that starts as a loan, with the right to convert to equity should the investment pay off. They generally have an interest on the amount invested, a discount on the valuation from your next round, and a cap on the valuation.

20) Angel Investor

Early round investors who show up to fund pre-seed and seed stage startups and get them going. Checks range from $5,000 to $250,000.

21) Super Angel

A Super Angel is a very active angel investor. One who makes more investments and may write much larger checks, or participate in later rounds as well. The checks range from $250,000 to $2 million. In many instances super angels are entrepreneurs that have a successful exit in the past.

22) Investor Updates

Investor updates are a powerful tool for bringing in investors, keeping them engaged, and getting additional help and funding.

23) Storytelling

One of the most important skills an entrepreneur can have. If you want to get funded, get help crafting a good story and get good at telling it.

24) Accredited Investor

In order to raise outside money and publicly solicit investors you may be restricted to accredited investors. These are considered sophisticated investors according to their income and net worth by the SEC. Who you can raise from will be dictated by the type of raising you do and the regulations you file under.

25) Anti-Dilution Protection

A clause in a contract which protects some investors from their equity or shares’ dilution when other investors buy stock in a company. This is often applied when shares in a company are sold at a value less than the amount paid originally by existing investors.

26) Cap Table

A Capitalization table, displayed in table form. A break down of how much equity in a business is owned by relevant individuals or groups. This helps to clarify the percentage of ownership before and after an investment round, as well as any equity dilution and the current value of equity itself.

27) Common Stock

Represents company ownership. Shares allow their owners to vote on corporate policy and to have a say on serving directors. If liquidation should occur, or a sale, common stock owners are only paid an amount after bond, and preferred stock holders.

28) Financial Forecast

Also known as a financial projection, a forecast estimates growth and income for a business over a given time, based on comparison with existing businesses and market research.

29) Liquidation Preference

A clause in a contract which stipulates which investors receive payment first if a company is liquidated or sold, even before a company's founders in many cases. This is a common clause often used by venture capitalists to off-set the risk of investment.

30) Preferred Stock

A form of share which has priority over common stocks. Preferred stock has a higher claim on assets and/or earnings, which often results in preference when any dividends are given out to shareholders. In other word, they get paid first. These dividends can be paid monthly or quarterly and share similar features with debt in that they can appreciate in price. This usually comes with no voting rights, however.n