Starting your first independent venture can be exciting and fulfilling, but also terrifying. As a young entrepreneur, you have to learn many things on your own, and quickly - from technical details regarding the product, to handling a legal contract when leasing an office. One of the major concerns would be the thing that keeps the world running - funds! To help you get familiar with the basics, we compiled a list of critical funding lingo that every entrepreneur should know before raising funds.
Angel investor - An individual who invests in the company from his private funds. Usually it is someone who has an association with the idea of the company or a personal connection with one of the founders. He might also consult the company.
Venture Capital (VC) - A group or an individual who will invest in the company in return to certain rights in the company, such as equity. Usually a VC will have a specific domain, such as bio-tech, or will have interest in company of a certain seed round. Samurai Incubate, for instance, are investing solely in pre-seed startups, focusing on core-technologies in one of the verticals of: construction, retail, logistics, fintech, AI, blockchain, FoodTech, IoT, Healthcare.
Seed round / series - The seed round is the first VC funding round of a startup,for example, after an angel investor or pre-seed round. From there onwards, every investment round will be referred to as part of a series (A, B, C).
Bootstrap - A company that is running on self-funding. Usually in this situation the entrepreneur will invest time and money without receiving any funding, in order to get an initial product running.
Options - The right to purchase an agreed-upon amount of the startup’s securities in a certain point in the time for a specific price. This term is usually used in the context of employee benefits, as it is a great way to lure in quality manpower.
Vesting - The schedule in which a member of the company, whether a founder or an employee, would gain actual rights to it’s promised options and could sell them. This is usually used as a way of retaining manpower within the organization.
Burn rate - An indicator to your company’s current lifespan. Burn rate is the amount of funds the company spends every month divided by the entire capital the company has. This will help you know when should you start planning your next funding round so the company could stay afloat until creating revenues.
Exit strategy - This should reflect your long term plans for your venture in a nutshell. How are you planning to gain revenues for you and your investors from the company? It could be selling it, merging it with another company, or going public.
Valuation (post/pre money) - How much does the company worth in the free market? In this context, investor will usually refer to pre-money valuation (before funding), and post money valuation (after funding). When estimating valuation in earlier stages of funding, the valuation will be determined by the market, the product state, if there are clients or pilots in the pipeline. This process happens everytime a new investor comes into the picture, whether it’s a single angel investor or a funding rounds that includes many investors.
Captable - Cap is the doc that reflects the holdings in the company, and details who is holding the equity at this current moment. Loans are not reflected in the cap.
Whether you are already in the mist of building the next unicorn or just toying with the thought of chasing after your startup dream, this basic terminology could help you get a better understanding on how things work. If you just made the leap and have a great idea you want to share with us, contact us - We would love to hear your idea and see if we can help!