As with any industry, the startup world comes with its own unique vocabulary. When working with funders and partners, it helps to be able to “speak the language.”
To be clear, SOAR Innovation believes that Eastern Kentucky entrepreneurs ought to focus more on their business plans than adopting the lingo. That said, becoming “fluent” in startup terms can offer a boost to your confidence.
We’re here to help you climb the jargon learning curve a little faster. The SOAR Innovation team rounded up the most common terms in capital fundraising to help you sound like a pro in your next funder meeting.
Common capital fundraising terms every entrepreneur needs to know
Debt funding is a loan taken out by a small business owner. The cost of the capital is the interest rate. Borrowers pay back debts through monthly payments according to the terms set before taking out the loan.
Borrowers must pay back their loans. Otherwise, they risk incurring costly fees or losing some or all of the collateral they put up to secure the loan.
Equity funding is an investment made in exchange for partial ownership of a business.
Seeking an equity investment is an attractive fundraising strategy because it brings in an immediate infusion of cash without requiring debt repayments. In exchange, the entrepreneur has to be willing to share decision-making power and a share of the profits with investor partners.
Angel investors are individual funders or funding groups looking to invest their wealth into promising startups and small businesses.
Angel investors often help early-stage entrepreneurs transition their businesses from pre-revenue ideation to revenue generation. They may invest as early as the prototype phase. However, some angel investors may prefer to fund market-tested ideas that already count on a consistent customer base.
Many angel investors are interested in equity deals, but expect terms to vary.
Venture capitalist (VC)
Venture capitalists, or VCs, are individual investors or groups that provide capital to startups in exchange for equity. Venture capitalists often operate as partnerships, where several investors pool money into one VC fund. This approach spreads out investment risks and gains.
VCs make large investments and typically look for businesses exhibiting the potential for exponential growth.
Small business lender
Small business loans are the most common form of capital fundraising for entrepreneurs and small businesses. Small business lenders include banks, credit unions, and other certified lending institutions.
Getting your small business loan from a lender backed by the Small Business Administration is best, as they’ll typically offer better rates and terms.
Business owners should exercise caution when seeking out a small business loan. Predatory lenders take advantage of unsuspecting borrowers with high interest rates, unreasonable collateral requirements, balloon payments, and other terms that could sink your business.
Community Development Financial Institutions (CDFIs) are small business lenders that enable more entrepreneurs to access funding through increased financial backing.
Small business owners should put CDFIs at the top of their list when seeking debt funding.
Loans from CDFIs typically offer more favorable terms and interest rates to entrepreneurs who are having trouble finding a lender that will work with them.
Pitching your business
An executive summary is the first section of a business plan. It should summarize what you intend to accomplish with your business and outline how you plan to achieve your goals.
The executive summary is one of the first things an investor will read about your business.
First impressions are everything — which is why the executive summary is one of the most important elements of your business plan.
An elevator pitch is a quick-fire summary of what an entrepreneur intends to accomplish with their business. It should be concise, compelling, and persuasive to the recipient. Investors should feel inspired to get involved with a company after hearing one.
The elevator pitch should lay out:
- The value proposition
- The growth opportunity
- What makes the business different — and worth investing in
A pitch deck is a tool used to present a business to funders via PDF, PowerPoint, Google Slides, Keynote, or other platforms.
The best pitch decks will use storytelling and data to persuade investors to get on board with a business idea.
A financial forecast is a future-looking estimation of financial performance. It’s a critical element of a business plan and pitch presentation because investors make their decisions based on the likely future outcomes of a business.
Developing a financial forecast requires a strong foundational awareness of current finances. The strongest forecasts are based on actual data: current spending, current customer growth rate, and current revenues.
Then, financial professionals consider the variables, such as increased investments in marketing, sales, or product, and how those changes may impact future results.
The churn rate is the percentage of customer losses calculated by month, quarter, and/or year. It’s mostly relevant to the subscription-based services offered by software (SaaS) businesses. Churn rate is one performance figure every investor will want to know, because it lays clear the quality of your product and customer experience.
Every investor will ask about a burn rate. It is a measure of how much cash is flowing out of the business each month. Many startups will have a negative burn rate, which is to say, it spends more than it brings in.
Investors will look at the burn rate to answer important questions, such as:
- Whether the startup is spending effectively
- How much longer the startup will last without funding
- When a startup is projected to break even
Due diligence is the process of investigating a company’s finances, performance, and liabilities. Investors perform due diligence before making an investment to assess whether the claims made during a pitch presentation are credible.
The business owner must provide the following for investors to review:
- The current budget
- Cash flow
- List of business assets
- Active debts
- Contracts with third parties
- Patents and provisional patents
- Any conflicts of interest
- Current lawsuits or impending legal action
A term sheet is how an investor presents their investment offer to a business owner. It indicates all terms of the investment deal, including how much they’ll invest in the company, how they expect to earn money from the deal, and the percent of equity requested. Term sheets are typically negotiable.
Board of directors
Shareholders elect a board of directors to lead a company’s strategic direction and oversee management.
In the context of a startup, the board should provide an advisory role to the CEO to improve the company’s chances of succeeding. Often, the board members will have key skills or connections in the industry that can help the business pick up momentum sooner.
Capitalization table (cap table)
A cap table breaks down the distribution of equity across company owners and makes it possible to assess the value of equity held by each owner. New and current investors need to understand how ownership spread will evolve as businesses go through multiple investment rounds.
Common stock represents ownership in a company. Owners will hold common stocks in proportion to their equity shares. Common stock affords voting rights on major company decisions and board seats.
Business owners typically pay profit shares or dividends to common stock owners unless the equity deals have different terms.
Preferred stock is a different category of ownership. Typically, preferred stock owners receive dividends or profit shares before common stock owners. This category doesn’t come with voting rights.
Dilution happens when a company issues new shares during new rounds of equity investments.
When this happens, current investors may see their percentage of ownership go down. Their total equity value may not decline, as the value of their shares sometimes will increase. Still, the trade-off is fewer votes toward company decision-making.
Anti-dilution protection is a contract clause that protects equity investors from the negative impacts of share dilution. It creates an obligation to maintain a consistent ownership percentage or value if future equity investment rounds occur.
A convertible note is a unique form of investment. It starts as a loan but may transform into an equity investment if the investor sees value and decides to take that step.
Valuation is an estimate of the current or future value of a company. A company valuation is an important figure to have in hand when approaching investors. It helps them analyze what equity percentage an investor would want to pursue. A valuation also reveals key information about the business that helps investors decide.
An exit strategy is a business owner or investor’s plan to sell their shares in the company. An exit occurs when a business reaches a particular profit milestone or the owners wish to bring it through an initial public offering. The purpose of an exit strategy is to maximize profits for shareholders and minimize the potential for losses.
Liquidation preference is a contract term requested by angels and VCs to protect their investments. It designates who gets paid first if a company is sold or goes out of business. Sometimes, investors may even ask to be put before the founders.
Many businesses will undergo multiple investment rounds throughout their lifetime. The earliest investment is known as seed funding. Each subsequent round is called Series A, Series B, then Series C.
Initial public offering (IPO)
An IPO is a company’s first time offering the purchase of shares to the general public.
When a company “IPOs,” it’s typically one of the first times that private investors receive a payout. IPO is a typical exit strategy for high-growth businesses.
Mergers and acquisitions (M&A)
A merger is the consolidation of two or more companies. An acquisition is the takeover of one company by another. M&A activity is common in high-growth industries, such as media, technology, manufacturing, and more.
Reach out to SOAR Innovation for advice, funding strategy, and entrepreneurship resources
Eastern Kentucky entrepreneurs, check out the many resources SOAR Innovation has to offer:
- The Complete Guide to Entrepreneurship in Eastern Kentucky, which is full of easy-to-follow checklists and advice for small business owners
- Free direct services to launch and improve your business
- Frequently updated blog highlighting resources, local funders, and more
Contact the SOAR Innovation team to learn more.