Common terminology. Clerky has a similarly helpful glossary.
- 83(b) Election: Filing this document within 30 days of incorporating your company will allow your proceeds from selling your company stock to be taxed as long-term capital gains instead of as income tax. Long-term capital gains command a lower tax rate, saving you money.
- Angel Investor: Someone who invests their own capital into a startup. Dealing with angels can be simpler than with VCs as the diligence process is typically less rigorous.
- Bottoms-up & Top-down Sales: The two approaches to enterprise sales. With bottoms-up sales, your product is initially adopted by individuals within the company who proceed to use it with their team and use plans that are targeted for individual or small-team use. In the event you want to do a company-level sale down the line, starting with bottoms-up can make the sell easier as you can then approach decision-makers afterwards with existing usage at the company. With top-down, you go directly to the manager or decision-maker.
- Convertible Note: A debt instrument used to invest in a startup that later converts into equity in the form of preferred stock. Similarly to a SAFE, a convertible note is useful as it defers the valuation of a company until a subsequent round of financing. A cap or a discount is used when the note converts into equity so that the investor gets a favorable price at the next round.
- Customer Acquisition Cost (CAC): How much it costs to acquire a new customer. A simple calculation, [Total spend in a given period] / [Total new customers in that same period].
- Common Shares/Stock: A form of stock in a company where shareholders have voting rights and receive proceeds after preferred stock shareholders. Common stock holders are typically the founders and employees.
- Employee Stock Option Pool (ESOP): Shares of a company (often at a discounted price) designated for employees. Typically, the pool remains at a fixed percentage between 10% and 25% throughout the life of the company but can be increased later.
- Daily Active Users (DAU) & Weekly Active Users (WAU): The total number of people who open and engage with a mobile app or web product in a given day (week). Beware that “active user” can be defined differently for each product.
- Earnings (“bottom line” or “profits”): A company’s after-tax net income.
- Go-to-Market Strategy: How you plan to sell your product, which includes your intended distribution channels.
- Initial Public Offering (IPO): The process of moving your company from private to public, thus opening up shares of your company to be bought and sold on a public stock exchange. Companies intending to IPO are given a judicial analysis by a third party, which results in an initial share price (the amount a single share of your company trades for on the public stock exchange). For investors, IPO is a goal because it constitutes a liquidity event (exit) from which they’ll be able to cash out on their shares.
- Letter of Intent (LOI): An agreement to agree. Preliminary commitment of one party to do business with another. Often include NDAs, timeline to a deal, etc. Used most prominently in enterprise deals.
- Liquidity Event (“Exit”): An acquisition, merger, initial public offering or other event that allows founders and investors in a company to cash out some or all of their ownership shares.
- Monthly & Annual Recurring Revenue (MRR & ARR): The amount of predictable revenue that a company can expect to receive on a monthly (yearly) basis, achieved through a subscription model.
- Post-Money Valuation: The valuation of your company after the addition of new capital. Today, Post-Money Valuation is the standard for SAFEs due to its simplicity for investors. A $1M investment at a post-money valuation cap of $10M = 10% ownership of the company for the investor (1/10).
- Priced Round: A fundraising round where investors receive equity in a company in exchange for their investment, thereby implying an exact valuation. This is as opposed to convertible instruments (e.g. SAFEs), which are the promise of future equity. Series A, B, C and beyond are all usually priced rounds.
- Pre-Money Valuation: The valuation of a company before the addition of new capital. A $1M investment at a pre-money valuation cap of $10m = 9.09% ownership of the company for the investor (1/11).
- Preferred Shares/Stock: A form of stock in a company where shareholders do not have voting rights and receive proceeds in a liquidity event before common stock shareholders. Typically held by investors.
- Product Market Fit: If the product you've built meets the needs of the market. One way of measuring this is how disappointed your users would be if they could no longer use your product.
- Revenue: Company income before expenses; how much money your company has made in a given period.
- Run rate: Given stable conditions, a projection of the company’s financials in a certain period of time. E.g. if revenue in Q1 is $20M, you can say your run rate for the year is $80M.
- Seed Capital: Money raised in exchange for equity in a startup, typically done in the very early stages of the company. The funding is often meant to support the business until it can generate cash of its own or until it is ready for further investments. Seed funding can come from an angel investor, family and friends, venture capital firms and crowdfunding.
- Series A, B, C: Funding rounds subsequent to seed and angel rounds that are meant to help a company scale. Typically, Series A rounds sit between $10 and $20M, Series B around $20-$50M, and Series C higher.
- Simple Agreement for Future Equity (SAFE): Funds today for equity tomorrow; an agreement that allows an investor to purchase stock in a future priced round. Created by Y Combinator to simplify the process of startups receiving early investment. Behaves similarly to a convertible note but is not treated as debt.
- Total Addressable Market (TAM): How big the potential market for your business is.
- Valuation Cap: The key number in a convertible note or SAFE, which specifies how much equity an investor will receive during the next funding round. Regardless of if the company above raises a Series A at a $100M valuation, the investor will own equity (10%) based on the initial cap specified ($10M). The cap can be defined as either a pre-money or post-money valuation cap.
- Venture Capitalist (VC): An individual who works for a money management firm that invests in high-growth startups in exchange for equity. They make their money in two ways: 1) a percentage of the profit from the firm’s equity positions and 2) a fund management fee. *Important: VCs are not investing their own money. They are investing money accumulated from Limited Partners (LPs).
- Vesting: The period of time it takes an employee or founder to incrementally receive 100% of their shares in a company.
- Vesting schedule: The cadence at which an individual’s stock vests. Typically, employees will begin receiving equity after 1 year (the “cliff”), and over the course of 4 years receive the full allotment outlined in their agreement.