If you associate dilution with chemistry class, cliffs with mountain walks, pitching with baseball and liquidation with your morning smoothie - you may need some help speaking the language of your investors.
As ever Sifted is here to help with our VC glossary, helping you understand how to talk to the money-people. For any other terms you want explained, please email us at email@example.com.
A high-net worth individual investing in a personal capacity, likely to be your first source of external funding after friends and family (if you’re lucky to have rich — and possibly foolish — enough friends). Read more.
Interim financing often taken between funding rounds to keep the business ticking over, or to sustain a business close to reaching profitability. Usually comes with relatively onerous terms such as high interest rates and short repayment periods. Can also be referred to as venture debt. Read more.
A capitalisation table (frequently abbreviated to cap table), is the document detailing the breakdown of the company’s ownership structure and current valuation. They can become extremely complicated. Make sure you have one written down (your VCs will expect this)! Learn more.
Employee or founder equity options often have a so-called cliff, which means that they cannot be converted into shares for a set period of time. So, for example, an employee might get 100 share options vesting over four years. But having a one-year cliff means that none of the options will vest until the employee has been working for 12 months. Often used to ensure early stage employees don’t gain access to all of their agreed equity immediately upon starting, in case they leave after a short period of time. In the case of founders, the cliff is used to ensure they earn their equity back and stay focused post fundraise. Read more.
Corporate Venture Capital (CVC)
Financing from the investment arm of a corporate player, usually with the primary purpose of advancing the company’s strategic aims, which may include hedging against future disruption, acquiring intellectual property or talent, gaining exposure to and awareness of emergent trends, etc. Read more.
A decrease in relative ownership of the company for existing shareholders due to new shares being issued, usually to be sold for fundraising purposes. The impact of this can be offset by an increase in valuation from the new funding round. For example, if the shareholder being diluted now owns a smaller % of the pie, but the value of the pie increases disproportionately, the diluted stake will still be worth more than before. Anti-dilution provisions, for example guaranteeing the awarding of additional shares to existing shareholders following the creation of new shares, may also exist to protect against this. Read more.
Allows a majority shareholder to drag a minority shareholder along in a decision to sell the company. This means the minority shareholder (e.g. a founder) is forced to agree to all aspects of the sale, including valuation, if the majority shareholder (e.g. a VC fund) so wishes. Can also be referred to as a bring-along clause. Read more.
Often referred to as a liquidity event or payday, when the investment is sold turning an equity stake into cash. Read more.
A private fund investing on behalf of a single high-net worth individual, family, or group of families. Often able to be more flexible than institutional VCs given they are investing their own money and do not have to answer to their investors. Read more.
Graduation — once this happens you’re officially no longer a startup! Your Initial Public Offering turns your private venture into one listed on a stock exchange, where shares can be publicly traded by anyone. This step entails greater market scrutiny as well as regulatory obligations. Likely to result in shareholder dilution. Read more.
A clause guaranteeing preferential treatment for an investor in the event of the company’s sale. In practice, it is a way for an investor to get their money back (or sometimes more), even if the sale is not for as much as had been hoped. It is often expressed as a multiple. So a preference of 1x would ensure the investor receives the total amount of money invested in the event of an exit before the holders of common stock receive anything (regardless of the equity stake and valuation), 2x that they would receive twice the initial investment and so on. Read more.
Big picture idea on why you exist as a company. Important for selling the vision to potential investors, getting the right team onboard, and reminding yourself why you embarked on this crazy voyage in the first place. Read more.
Pay to play
The provision that investors participate in future financing rounds in order to retain their privileges or not suffer penalties (e.g. converting preferential stock to common stock). Read more.
Presenting the vision and business plan of your startup to VCs with the aim of receiving an investment, usually involves the creation of an accompanying deck (slideshow). Read more.
Pre / post money valuations
Pre money is the value of the company before an investment is made and a post-money valuation is the pre-money valuation plus the value of the investment made. So if the company has a pre money valuation of £1m and receives £2m in funding, the post money valuation is £3m. Read more.
Stock with additional rights, preferences, and privileges relative to common stock. For example anti dilution, liquidation preferences, voting rights and ROFA may all be linked to preferred shares in the company. Read more.
Right of First Refusal (ROFA)
A provision giving the recipient (normally a VC) the right to buy stock on the same terms offered to a third party. Also referred to as participation rights, since it guarantees an existing investor can participate in a future round of financing if desired. Read more.
The initial money needed to get a business off the ground, frequently provided by angel investors. Read more.
The first large round of money raised after a seed round, usually once the startup has demonstrated real potential through product / market fit. The average size of European series A rounds was €7.1m in 2018. Read more.
A defined share of equity (usually around 10%) set aside in the cap table to incentivise future employees. Read more.
The document outlining the key terms of a proposed investment, and will likely refer to the cap table, anti-dilution, liquidation preference, pre/post money valuations, etc. A signed term sheet does not constitute an investment, but rather outlines how to proceed should both parties agree on the terms. Read more.
A privately held startup valued at over $1bn, previously a rare almost mythical occurrence (hence the name). Currently 380 in existence globally. See full list.
The rate at which equity is earned, for example in a vesting schedule of four years, each year will earn 25% of the total amount. Usually subject to a cliff. Read more.
Similar to a call option — the right (but not obligation) to buy more stock at a set price within a set period. Read more.
Backlash against the idolisation of the unicorn, named after a real animal and focused on building a sustainable startup culture. Read more.