Glossary
Startup
409A Valuation
A third party valuation of a company's common stock. Generally used by startup companies to help determine the exercise price for company stock options. For a deeper dive, see our blog post on 409A valuations (read both parts!).
Angel Investor
Wealthy individuals that invest in startups in their early stages of development or seed round of fundraising. Due to the inherent risk of loss of capital or significant dilution in subsequent fundraising, angel investors typically pursue investments with returns that they believe may have the potential to return multiples of the initial investment.
Bootstrapping
Business strategy by which a startup self-finances, eliminating the need for seed or angel investment. Typically achieved through lean operation and a product that generates revenue early in the companies life cycle.
Burn Rate
Rate at which a company consumes cash to cover expenses. Typically expressed monthly or weekly. Usually applied to a company with no revenues, to give a metric of financial health and fundraising needs. A company with a low burn rate can theoretically operate longer without new injection of capital.
Common Stock
A type of equity security, contrasted with preferred shares. Common stock is most frequently issued to founders, management, and employees. In a liquidation event, preferred shares generally take priority over common shares.
Convertible Debt
A loan that allows the lender to exchange the debt for common stock at a predetermined ratio instead of recollecting the principle as cash.
Dilution
Generally speaking, as subsequent financing rounds occur, existing investors will own proportionally less of the company than they did previously since additional equity is generally issued as part of a new financing round. Dilution is not necessarily a bad thing _ since new stock can be issued at a higher price, you may own a smaller piece of a larger company, which means the value of your investment is actually higher than it was previously.
Emerging Growth Company
Stage of a company life cycle in which the company is rapidly, often exponentially, acquiring new customers or users. Typically involves heavy spending for marketing and scaling. Emphasis on growth over revenue or cash flows in an effort to gain market share.
Cap Table
An official document that shows the capital structure of a company, including the specific ownership level by investor. Generally used to view the percentage ownership that each investor or employee owns of a certain company. See a cap table example here.
Fair Market Value
The value of a company based on what investors are willing to pay for it. For private companies or illiquid assets, "fair market value" is generally derived from comparable companies or assets that have recently had a transaction associated with them.
Term Sheet
A document that includes the basic terms of a company's fundraising round (or any investment). Once signed, it indicates that the investor and the company intend to move forward to complete the transaction and stipulates the major economic or corporate governance terms related to the investment.
Initial Public Offering (IPO)
Process by which a formerly private company first issues stock to the public. New disclosures must be made, as the company must now adhere to SEC reporting requirements.
Issuer
The entity / company that shares represent ownership in. For example, if you were investing in shares of EquityZen Inc., EquityZen would be the issuer.
Liquidation
An event that could result in either investors or debt holders to receive cash from the company, either through acquisition or a sale of assets resulting from bankruptcy. In either case, preference clauses determine order of payout to claimants, typically valuing debt holders and preferred shareholders over common stock holders.
Preferred Stock
A type of equity security that has certain rights over common stock holders. These rights may include, but are not limited to, liquidation preferences, dividends, anti-dilution clauses, and managerial voting power.
Right of First Refusal (ROFR)
A common transfer restriction that gives companies / issuers the right to purchase the stock at the same price, before allowing a shareholder to transfer it to a third party. Large investors in companies are also often granted a ROFR prior to transfers or sales.
Repurchase Option
The right of a company to buy back vested or issued shares.
Separation Agreement
Not always one document, the "Separation Agreement" refers to the entire package of rights and considerations when an employee amicably leaves a company. In addition to severance pay, separation agreements often include provisions about non-disparagement, non-disclosure, and vesting of equity.
Shareholder Limit
Established by Section 12(g) of the Exchange Act, requires that private companies register with the SEC, depending on certain criteria, including the type of shareholders and the total number of shareholders.
Shareholder of Record
The name of a share holder as it exists on the registrar of the issuer.
Stock Plan or Employee Incentive Plan
The Stock Plan is an assimilation of all the rights and economic interests that are attached to company stock, including the company's bylaws, grant documents, shareholder agreements, etc. See here for a full list of employee incentive documents that you should keep on file.
Unicorn
A slang term used to describe a startup with a valuation of $1 billion or more.
Tender Offer
An offer from a company to the existing share holders, offering to repurchase their shares at a given price.
Seed Round
The earliest round of fundraising, typically backed by a company's founders, their friends, family, or Angel investors. The company is generally not generating revenues and is in the process of developing their product.
Transfer Restrictions
Contractually defined limitations on an individual's ability to sell or transfer their shares in the company.
Exit Event or Liquidity Event
When an issuer engages in a transaction that allows investors to sell their shares, which generally happens through a tender offer (sale) or an IPO.
Accelerator
A program that provides the mentorship and capital necessary to accelerate the growth and success of young startups. Typically, the program will provide some capital and in exchange will take an equity stake in the startup.
Earnings before interest and taxes (EBIT)
A measurement of the operating profit of the company. A possible valuation methodology is based on a comparison of private and public companies' value as a multiple of EBIT.
Elevator pitch
A concise presentation given from an entrepreneur to a potential investor about an investment opportunity. The presentation should be concise enough to be shared during an elevator ride.
Incubator
A program that provides the mentorship and capital necessary to accelerate the growth and success of young startups. Typically, the program will provide some capital and in exchange will take an equity stake in the startup.
Gross Margin
The difference between revenue and cost of goods sold (COGS), divided by revenue.
Return on Investment (ROI)
The proceeds from an investment during a specific time period, which are calculated as a percentage of the original investment. Also net profit after taxes divided by average total assets.
Road Show
Presentations usually made in several cities to potential investors and other potentially interested parties. A company will often use a road show to create interest from investors before its IPO.
Implied Valuation
The implied valuation is the value of the company that is implicit in the offering price per share. It is calculated by multiplying the offering price by the Fully Diluted Shares Outstanding. For example, Company A raised a Series E round last year at a $2.0 Bn valuation and they had 100 million Fully Diluted Shares Outstanding (and therefore a share price of $20). If an investor purchases shares at a 20% discount to the last valuation, the implied valuation would be $1.6 Bn ($20 x 80% x 100 M shares).