15 Venture Capital Terms You Should Know | Article – HSBC VisionGo
A primer on the most common VC terms.
By Sharon Lewis
Venture capital (VC) is an unfamiliar term to many people, and can often seem like a new invention born out of the entrepreneurship craze – in turn driven by Silicon Valley success stories. However, VC actually has a much longer history, dating back to the years after World War II, and has become a field of its own, with its own terminology and characteristics.
The venture capital world can contain some wildly interesting stories, but reading about them can often be quite the bore. Readers may have to put themselves through dense language and business jargon to get the scoop on the latest VC developments, and that can make the learning process less exciting than it could be.
To insulate yourself from confusing jargon, here is a list of 15 common VC terms you need to have in your dictionary.
- Burn Rate
The burn rate is the amount of VC money a startup is spending to get operations up and running. It is usually measured in monthly terms. This in turn helps to measure the runway of a startup, or the time it has until it runs out of money.
- Cap Table
The cap table or capitalization table is an organized chart showing how the equity within a startup is structured. There is no set template for a cap table, but it generally includes a breakdown of equity ownership, dilution (explained below), and the value of each financing round.
- Convertible Note
These are funding instruments that help raise capital with a promise to issue stock to the investor at a later date. They are instruments of debt, meaning that convertible notes generally bear interest, and they also have a time limit or a maturity date that enforces conversion of the note. On this date, the lender receives an amount of equity equivalent to the accrued total of principal and interest.
- Deal Flow
Deal flow refers to the number of investment opportunities available to a VC at a given period of time. These can come about in many ways: referrals, cold-calls from interested startups, pitch competitions and accelerators, and in rarer cases, active headhunting on a VC's behalf to get in on a truly promising startup. However, robust deal flow does not necessarily mean that a VC will accept all deals that come their way.
Dilution refers to a decrease in the ownership share within a startup. This usually happens after a round of financing – when an investor injects funds into the startup for shares, founders forfeit some of their ownership to those investors in return for the investment.
An exit in VC terms is when an investor makes an exit from the company by selling their stake in the startup. Exits commonly take place via an acquisition or Initial Public Offering (IPO). In an ideal situation, an exit will take place at a time when a company’s value has increased relative to its value when the VC initially made the investment. Essentially, exits are the profit-making end goal for investors.
- Lead Investor
The lead investor is the most important investor during a round of financing on account of two factors – they contribute the majority of the funds of the round’s total raise, and also set or negotiate the terms of that particular round of financing. They also usually get a seat on the board of directors.
- Limited and General Partners
VC firms generally have two kinds of partners – general and managing partners who undertake the overall management of the firm’s business, including raising funds and making investment decisions, and limited partners – third-party investors who commit capital to the firm.
- Liquidity event
A liquidity event is when the startup decides to convert its equity into cash by way of a merger, acquisition, IPO, or any other event. It is an exit strategy for investors and founders to cash out their stakes in the company.
- Preferred stock
Preferred stock refers to equity that comes with preferential treatment. Investors holding preferred stock receive dividends and other payouts before other shareholders, and get preference during liquidity events as well.
- Return on Investment (ROI)
ROI is the monetary return that a VC expects from their investment, and is usually measured in percentage. A general rule of thumb is that the higher the risk of the investment, the higher the expected returns will be.
A Simple Agreement for Future Equity, or SAFE, is a contract to raise debt-free seed capital. Similar to a convertible note, SAFEs help startups raise funds today in exchange for shares that will be issued to the investor at a later date, with no debt involved.
- Seed capital
Seed capital is the funding a startup receives prior to any major VC activity, when a startup has an idea, and needs financing to develop the idea so that it is ready for bigger investments. Seed funding usually come from the founder’s own assets or personal networks.
- Term Sheet
The term sheet is a document containing the terms of an investment that the investor offers to a startup. The terms are negotiable, and generally outline the investor’s proposal, including investor rights, board seats, and the proposed startup valuation. Receiving a term sheet is usually a sign that an investor is serious about the funding.
A startup’s valuation is its estimated worth based on factors such as the stage of the startup, its founders’ profiles, the innovative quality of its technology, or general market trends. Valuation can be pre-money valuation (value of a company before investment) and post-money (pre-money valuation + any investments made).
It’s more geekspeak than rocket science. VCs use language that might sound more formulaic than anything else to some, but this list of basic terminology will arm you enough to get to the bottom of what they really mean.