Here is a glossary of terms commonly used by entrepreneurs, investors, accelerators, and others who interact with startup ventures and startup financing.
An anti-dilution is a provision in an option or a convertible security, and it is also known as an “anti-dilution clause.” It protects an investor from equity dilution resulting from later issues of stock at a lower price than the investor originally paid. These are common with convertible preferred stock, which is a favoured form of venture capital investment.
Account Receivable (AR)
Accounts receivable refers to the money a company’s customers owe for goods or services they have received but not yet paid for. It refers to accounts, a business has a right to receive for a product or service it has delivered.
Accounts Payable (AP)
Accounts payable refers to the money a company owes its suppliers for goods and services that have been provided and for which the supplier has submitted an invoice.
Accounts payable appears under liabilities on balance sheet.
AssetsAssets refer to everything a company owns. An asset is a resource with economic value that an individual or a corporation owns or controls with the expectation that it will provide immediate or future benefit. Two broad categories of assets that appear on a company’s balance sheet are –
Book Value of Equity per Share (BVPS)
Book value of equity per share is a financial measure which indicates a per share estimation of the minimum value of an entity’s equity.
BVPS is calculated as –
BVPS = Value of common equity / Number of outstanding shares
BVPS is a factor that investors use to determine whether a stock is undervalued. Investors view a stock valuable if a business can increase its BVPS.
Cash flow measures how much cash a company takes in versus how much it expends.
More cash coming in than going out means cash flow is positive. For less cash coming in and more cash going out, the company is cash flow negative.
A business is considered healthy when its cash flow is steadily positive for a long period of time.
Common shares are a security that represents ownership in a corporation.
Common shares are issued to business owners and other investors as proof of the money they have paid into the company. Common share holders have least claim and are at the bottom of priority ladder in ownership structure. In the event of liquidation, common shareholders have rights only after bondholders, preferred shareholders and other debtholders are paid in full.
Convertible debt is a type of debt security that can be converted into a predetermined amount of the underlying company’s equity at certain times during the debt’s life.
With convertible debt, a business borrows money from a lender where both parties agree from the outset to repay (all or part) of the loan by converting it into a certain number of common shares at some point in the future.
Current assets are assets used to generate value within immediate term.
Customer Acquisition Cost (CAC)
Customer acquisition cost is the cost of convincing a consumer to buy your product or service. It includes research, marketing and resource costs.
CAC can be calculated –
Dilution is a reduction in the ownership percentage of a share caused by the issuance of new shares.
Dilution occurs when a company issues new shares to investors and when holders of stock options exercise their right to purchase stock. With more shares, share in profits also gets diluted. This often lowers share price as well.
To mitigate these downsides, company must ensure that money raised from issuance of new shares is used to grow company’s revenues and after-tax profits, raising the price per share above the pre-issue price.
Drag-along is a right that allows a majority shareholder to force a minority shareholder to join in the sale of a company.
The minority shareholder is given same price, terms and conditions as any other seller. Drag-along rights are designed to protect the majority shareholder.
Due diligence is an investigation of a business or person prior to signing a contract, or an act with a certain standard of care.
It is technically an investigation or audit of a potential investment or product to confirm all facts, such as reviewing all financial records, plus anything else deemed material. It refers to the care a reasonable person should take before entering into an agreement or a financial transaction with another party.
Earnings per Share (EPS)
Earnings per share is the portion of a company’s profit allocated to each outstanding share of common stock.
Earnings per share is an indicator of a company’s profitability.
EPS is calculated –
EBITDA is earnings before interest, taxes, depreciation and amortization. It is the primary calculation used to determine how much of a company’s cash flow comes from outgoing operations.
EBITDA can be either positive or negative. When EBITDA is positive for a long period of time, a business is considered healthy.
EBITDA is calculated –
EBITDA = Net profit + Interest + Taxes + Depreciation + Amortization
Face value is the nominal value or dollar value of a share stated by the issuer.
The cumulative face value of all of a company’s stock shares designates the legal capital that must be maintained in the business.
Fair value is the sale price agreed to, by a willing buyer and seller, assuming both parties enter the transaction with mutual consent.
Financial Operating Plan (FOP)
A financial operating plan is a financial plan outlining the revenues and expenses over a period of time.
A financial operating plan (FOP) uses past performances, incomes and expenses to forecast what to expect in the following years. It then incorporates past and recent trends into the planning so as to most accurately forecast what is to come. It will define goals for areas such as budgeting, sales, and payroll as well as create a cash flow projection.
General Partner is theindividual in a limited liability partnership business structure, who oversees the management of the business, and who is personally exposed to the debts of the business.
A general partner is also usually a managing partner and active in the day-to-day operations of the business.
Gross margin is the amount of money a company has left after subtracting all direct costs of producing or purchasing the goods and services it sells.
Higher gross margin enables more money for the company to contribute to its indirect costs and other expenses.
Gross Margin is calculated –
Gross Margin (%) = (Revenue – Cost of goods sold) / Revenue
The acquisition of one company by another in the same industry. The new combined entity may be in a better competitive position than the standalone companies that were combined to form it. Horizontal acquisitions expand the capacity of the acquirer, but the basic business operations remain the same.
Indemnity is compensation for damages or loss, and in the legal sense, it may also refer to an exemption from liability for damages. The concept of indemnity is based on a contractual agreement made between two parties, in which one party agrees to pay for potential losses or damages caused by the other party.
Key Performance Indicators (KPI)
Key Performance Indicators are a set of quantifiable measures that a company uses to gauge its performance over time.
These metrics are used to determine a company’s progress in achieving its strategic and operational goals, and also to compare a company’s finances and performance against other businesses within its industry.
A limited partner is a business partner whose liability is limited to the amount of their investment in the company.
A limited partner is different from GP (general partner) who is more actively involved in the firm’s day-to-day activities.
As an entrepreneur you are most likely to interact with a GP.
Liquidation preference determines the pay-out order in case of a company liquidation. More specifically, liquidation preference is frequently used in venture capital contracts to specify which investors get paid first and how much they get paid in the event of a liquidation event, such as sale of the company.
Lifetime Value (LTV)
LTV is a forecasting method used to estimate the projected revenue from a customer over the lifetime of their relationship with your business.
It helps determine the long-term value of the customer and how much net value you generate per customer after accounting for customer acquisition costs (CAC).
- Product Development – lifetime value metrics help decide how to incorporate customer feedback into product development
- Marketing – knowing the LTV of a customer can help determine whether acquiring new customers provides a sufficient return on investment (ROI)
Long-term assets are assets used to generate value in future or long term period. These are also known as fixed or capital assets.
Net margin is the ratio of net profits to net sales. It is typically expressed as a percentage.
Net margin is calculated –
Net margin = Net profit / Net Sales
Pre-money valuation is the valuation of a company or asset prior to an investment or financing. If an investment adds cash to a company, the company will have different valuations before and after the investment.
Preferred shares are issued to business owners and other investors as proof of the money they have paid into a company.
Preferred shareholders rank higher than common shareholders on company ownership structure and have priority claim to assets if the company is liquidated.
Post-money valuation is a way of expressing the value of a company after an investment has been made. This value is equal to the sum of the pre-money valuation and the amount of new equity.
Redeemable or callable debt, is a debt that a borrower can repay prior to its maturity. The borrower usually pays a premium, or fee, to the holder when a debt is redeemed.
A shareholders’ agreement is an arrangement among a company’s shareholders, describing how the company should be operated, along with shareholders’ rights and obligations. The agreement also includes information on the management of the company and privileges and protection of shareholders.
Total Addressable Market (TAM)
Total addressable market (TAM) is the overall revenue opportunity available or foreseen for a specific product or service, taking into account the future expansion scenarios.
TAM is a form of market sizing that enables a business to define the holistic revenue opportunity offered from its product or service.
Total addressable market is also known as global total market, even if the proposed business is unable to serve some parts of this market.
Tag-along rights, also referred to as “co-sale rights,” are contractual obligations used to protect a minority shareholder, usually in a venture capital deal. If a majority shareholder sells his take, it gives the minority shareholder the right to join the transaction and sell his minority stake in the company.
These are different from drag-along rights.
A term sheet is a nonbinding agreement setting forth the basic terms and conditions under which an investment will be made.
A term sheet is an important document because it is an essential step to signing the final business agreement. It contains a list of indicative terms and conditions; displays the intentions of entering into a funding or financing arrangement; and establishes relationships between investors, venture capital providers, start-ups, and other firms.
Unit economics are the direct revenues and costs associated with a particular business model expressed on a per unit basis.
Unit economics looks at the direct revenues and costs associated with the most basic element of a company’s business model. From this data, it is possible to project how profitable the company may be (or not), and when it can be expected to reach profitability.
Vintage of a fund
Vintage of a fund is the year in which the first influx of investment capital is delivered to a company. This marks when capital is contributed by venture capital, a private equity fund or a partnership drawing down from its investors. Investors can use the vintage year of an investment to further explain its returns.
Venture debt is a form of debt financing for emerging venture-backed companies.
This type of financing has emerged as a means of financing start-ups that are “in between” more traditional venture capital financing rounds.