Know Before You Seek

While there are a lot of ways to wobble or worse, flounder while building up a company, failing to understand financial jargon should not be one of them.

You want to build a company, keep control, and earn a fair share of any windfall. Similarly, with their own vested interests in mind, investors and venture capitalists want to profit from the company as much as possible, minimize their financial risk and, often, gain the operating control needed to do so. Balancing these interests is a delicate process that requires a clear-eyed understanding of the terms involved during negotiations.

Amidst an abundance of technical jargon that entrepreneurs face during fundraising discussions, let us visit and learn about (each of these are covered in subsequent blogs) for understanding them better on our journey. Familiarity with the phrases below will help you avoid needlessly giving up equity, control, and profits in the event of a successful exit. While it is always advisable in my perspective to have an expert legal person to assist, knowing these will hopefully help any entrepreneur in talking sensibly and put forth a better impression on prospective investors.

1. Valuation: the monetary value of the company
2. Pre-Money Valuation: company’s value before receiving funding 
3. Post-Money Valuation: cost of company after investment
4. Burn Rate: how fast is the cash blown (or burned)
5. Convertible Notes: allows startups to raise money without valuation discussions
6. Capped Notes: ceiling on the valuation of notes converted to equity
7. Uncapped Notes: no guarantee of how much equity the debt will purchase
8. Preferred Stock: comes with certain rights attached
9. Participating Preferred Stock: get liquidation preference
10. Non-Participating Preferred Stock: convert shares to common stock
11. Liquidation Preferences: determine who gets paid what and when
12. Pro-rata Rights: right of investors to participate in later funding rounds
13. Option Pool: chunk of equity reserved for future hires
14. Board of Control: composition of the board post-funding
15. Vesting: an incentive program for investors and team