There are a lot of terms and acronyms used in the venture capital industry, and it can be tough to keep up with them all. Some (not all) of this jargon is not as confusing as it seems.
In this venture capital glossary, we’ll define some of the most important terms and provide some examples of how they’re used. If you want to learn more about any of these terms, we have linked more material on each.
We hope that VC world becomes more understandable to you after reading this.
The ARR (annual recurring revenue) metric is used by companies to measure the amount of revenue that is generated on an annual basis from their customers. This figure is calculated by dividing the total revenue by the number of active customers in a given period of time.
An angel investor is an individual or organization that provides funding and other resources to early-stage startups. These investors are typically motivated by the potential for high returns, and are willing to take on greater risk in order to achieve them.
An anti-dilution clause is a contractual provision that helps protect a company’s shareholders from the dilutive effects of future rounds of financing. This clause ensures that the percentage of ownership held by each shareholder remains unchanged, even if the company raises more money at a lower valuation than the last round.
Blended preferences occur when an investor has a mix of preferred and common shares in the company. The preference means that the holder gets their money back first and also gets dividends or other distributions before the common shareholders.
This is when a company is self-funding its growth. This means that the startup is not reliant on outside investors to finance its operations, but is instead using its own revenue to finance its expansion. Bootstrapping can be a risky strategy, but it can also help a company avoid giving away too much equity to early investors.
A bridge loan is a short-term loan that is used to finance the gap between two rounds of financing. This loan is typically used to keep a company’s operations running until it can secure more permanent funding. Bridge loans are typically either flat or down rounds.
The burn rate is a metric used by startups to measure the rate of expenditure on their operations. This figure is calculated by dividing the total amount of money that has been spent by the company in a given period of time by the average monthly burn rate.
A capital call is a request by a fund for its limited partners to contribute more money to the fund. This call is made whenever the fund invests into new companies and needs to deploy capital. Limited partners are usually contractually obligated to commit this capital under the limited partner agreement.
A cap table is a document that lists all of the shareholders in a company and their respective ownership stakes. This document is used by venture capitalists to track the ownership of a company and to determine the amount of capital that has been invested into it.
A carried interest is a share of the profits that is earned by a venture capitalist as compensation for their services. This profit share is usually in addition to the capital that has been invested by the venture capitalist. Carried interest is generally only awarded to those investors who have achieved exceptional returns on their investments.
Cash-on-cash return (COCR) is the annual cash flow that an investor receives from their investment, divided by the amount of money invested.
In venture capital, cash-on-cash is usually calculated at the end of a fund lifecycle. It is used as a lagging indicator to show how well the fund deployed capital, and it is used as marketing material to help the general partners pitch limited partners to raise their next fund.
Churn rate is the percentage of customers that leave over a given period.
A clawback is a provision that allows limited partners to reclaim any carried interest paid during the life of the fund in order to normalize the final carry amount. This provision protects LPs from paying carried interest on one investment then incurring losses on the rest of their portfolio.
Come along rights are a contractual provision that gives investors the right to join in on any future investment rounds.
Common stock is a type of equity that represents ownership in a company. This type of stock typically has voting rights and entitles the holder to receive dividends from the company. Common stockholders are below preferred stockholders in the equity, and they are only paid after all preferred shareholders are compensated.
Control rights are the rights that shareholders have to participate in the management of a company. These rights allow shareholders to vote on important company decisions, such as the election of directors or the sale of the company. Control rights also give shareholders the ability to veto certain actions that may be taken by the company’s management.
Convertible notes are a type of debt that can be converted into equity in a company. This type of debt usually has a lower interest rate than regular debt and allows the holder to purchase shares in the company at a discount.
Corporate venture capital funds use corporate funds to invest into startups. These funds come off of the corporate balance sheet, and investment decisions are based on corporate strategy more than pure financial returns.
A covenant is a contractual provision that limits the amount of debt that a company can incur. This provision helps to protect the interests of lenders by ensuring that the company does not take on too much debt. Debt covenants are usually found in loan agreements and can include things such as the maximum amount of debt, the interest rate, and the maturity date.
Cumulative dividends are a type of dividend that is paid to shareholders who have held their shares for a certain period of time. This dividend accumulates over time and is paid out in addition to the regular dividend payments. Cumulative dividends are usually only paid to those shareholders who are in good standing with the company.
Cutback rights are a contractual provision that gives investors the right to sell their shares back to the company at a predetermined price. This provision allows investors to sell their shares back to the company in order to protect their investment in case of a down round.
Demand registration rights are a contractual provision that gives investors the right to demand that their shares be registered with the SEC. This provision allows investors to sell their shares publicly if they choose to do so.
Dilution in venture capital is the process of issuing new shares in a company which reduces the value of each existing share. This occurs when a company raises capital by issuing new shares, and can be caused by either a new investor coming into the company or by the conversion of debt to equity. Dilution can also occur when a company issues stock options to its employees.
A non-disclosure agreement is a legal contract between two or more parties that prohibits them from sharing any confidential information about the deal or the parties involved. This agreement is typically used in negotiations to protect the interests of the parties involved.
Read more: What is an NDA?
An operating agreement is a contract between the limited partners and the venture capital firm that outlines the financial details of the investment. It also specifies the rights and responsibilities of both parties.
An option pool is a set of shares that are set aside for the purpose of granting options to employees and advisors. This pool is typically created when a company is founded, and the shares are then granted to employees and advisors as options over a period of time.
An over-allotment option is an option that the lead investor has the right to purchase additional shares from the company in the event that there is excess demand from investors. This option gives the lead investor the opportunity to increase their ownership in the company and ensures that they maintain a controlling stake.
Pari passu is a term used in venture capital to describe a provision in a term sheet that requires investors to participate in subsequent financing rounds on a pro-rata basis.
Participating preferred stock is a type of preferred stock that gives the holders the right to receive dividends and to participate in the company’s profits. This type of stock typically has a higher dividend rate than regular preferred stock, and the holders have first priority when it comes to receiving their money back in the event of a liquidation.
Party round occur in early financing rounds when companies raise large amounts of money from a large number of different investors instead of raising from a smaller group of investors.
Pay to play is a term used in venture capital to describe a provision in a term sheet that requires investors to participate in subsequent financing rounds on a pro-rata basis.
Piggyback registration rights are a type of registration right that allows investors to register their shares with the SEC on the same Form S-3 used by the company. This option is typically granted to investors who participate in a company’s Series A round of financing.
A portfolio company is a company that has received money from investors in order to grow and expand its business. Venture capitalists invest in these companies with the hope of achieving a return on their investment through an eventual exit event, such as an initial public offering (IPO) or a sale of the company.
Post-money valuation is the value of a company after it has raised money from investors. This figure includes the amount of money that has been raised, as well as the value of the company’s existing equity.
Preemptive rights are a type of right that allows investors to maintain their ownership percentage in a company by purchasing shares in subsequent rounds of financing on a pro-rata basis. This option ensures that the investors have an opportunity to maintain their ownership stake in the company and prevents them from losing out on future opportunities.
Preferred stock is a type of stock that gives the holders certain rights, such as the right to receive dividends and to participate in the company’s profits. This type of stock typically has a higher dividend rate than regular stock, and the holders have first priority when it comes to receiving their money back in the event of a liquidation.
Pre-money valuation is the value of a company before it has raised money from investors. This figure includes the amount of money that is being raised, as well as the value of the company’s existing equity.
Pre-seed funding is typically the first round of financing for startups. This often comes from angel investors, accelerators, incubators, startup studios, or early-stage VCs.
Price anti-dilution protection is a term used in venture capital to describe a provision in a term sheet that protects investors from having their ownership percentage diluted in future rounds of financing. This provision ensures that the investors maintain their ownership stake in the company and prevents them from losing out on future opportunities.
Protective provisions are a set of clauses in a term sheet that protect the interests of the investors. These provisions ensure that the investors maintain their ownership stake in the company and prevent them from losing out on future opportunities.
A private placement is a type of investment that is made by a large number of investors in a company that is not open to the general public. This type of investment is typically made through a private placement memorandum, which is a document that contains information about the company and the terms of the investment.
Pro-rata rights are a type of right that allows investors to maintain their ownership percentage in a company by purchasing shares in subsequent rounds of financing on a pro-rata basis. This option ensures that the investors have an opportunity to maintain their ownership stake in the company and prevents them from losing out on future opportunities.
A Qualified IPO is an initial public offering that is registered with the Securities and Exchange Commission (SEC) and meets all of the requirements specified in the JOBS Act. This type of IPO is open to all investors, regardless of their income or net worth.
A ratchet is a clause in a term sheet that allows the investors to maintain their ownership percentage in a company by purchasing shares in subsequent rounds of financing.
Redemption rights describe a provision that allows the investor to sell their shares back to the company at a predetermined price. This provision gives the investors the option to cash out their investment and provides them with some protection in case the company does not perform well.
Registration rights are a type of right that allows investors to register their shares with the Securities and Exchange Commission (SEC) so that they can sell them to the general public. This provision gives the investors the ability to liquidate their investment and provides them with some protection in case the company does not perform well.
A repurchase option is a clause in a term sheet that gives the company the right to buy back the shares of the investors at a predetermined price. This provision gives the company the ability to regain control of its shares and prevents the investors from selling them to the general public.
A restricted stock is a type of security that is given to employees of a company as part of their compensation. This type of stock typically cannot be sold or traded for a certain period of time, and the holder is required to forfeit the stock if they leave the company.
ROI is a metric that is used to measure the profitability of an investment. It is calculated by dividing the amount of money that has been made by the amount of money that has been invested.
Reverse dilution is a type of dilution that occurs when the company issues new shares of stock. This dilution decreases the ownership stake of the existing shareholders and gives the new shareholders a larger stake in the company.
A right of first refusal is a clause in a term sheet that gives the company the right to buy back the shares of the investors at a predetermined price. This provision gives the company the ability to regain control of its shares and prevents the investors from selling them to the general public.
A road show is a series of presentations that a company makes to potential investors in order to attract funding for their business. The presentations are typically made by the company’s CEO or CFO and provide an overview of the business and its financials.
Rule 506(b) is a provision in the United States Code that allows companies to raise money from accredited investors without registering with the SEC. This provision provides companies with some flexibility when raising money and makes it easier for them to get funding from accredited investors.
A SAFE note is a type of security that is used to raise money from investors. It is similar to a convertible note, but it has fewer restrictions and is easier to understand.
Super pro rata is a term that refers to the right of a shareholder to maintain their ownership stake in the company even if the company issues new shares of stock. This term is typically used in the context of a rights offering, where the shareholders are given the opportunity to purchase new shares of stock at a discounted price.
A side letter is a supplemental agreement that is entered into between the company and the investors. This agreement typically contains more detailed information about the terms of the investment than what is found in the term sheet.
A seed round is the initial round of funding that a company receives from investors. This round is typically used to finance the development of the company’s product and to hire the initial employees.
A senior liquidation preference is a clause in a term sheet that gives the investors seniority over the other shareholders in the event of a liquidation. This provision ensures that the investors will get their money back before any other shareholders receive anything.
Series A funding is the first major round of funding for a startup. It typically follows a seed round, in which the company raises smaller amounts of money from family, friends, and angel investors. It’s succeeded by a Series B funding round.
A separation agreement is a contract that is signed by the company and the investors when they split up. This agreement outlines the terms of the separation and ensures that both parties are protected legally.
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