A Brief Glossary of Key Terms in Fundraising

  • Angel Investor – A (usually) wealthy private investor in startup companies.
  • Cap / Target Valuation – The maximum effective valuation for an investor in a convertible note.
  • Convertible Note – This is a debt instrument that will convert into stock; usually preferred stock but sometimes common stock.
  • Common Stock – Capital stock typically issued to founders and employees, having the fewest, or no, rights, privileges and preferences.
  • Dilution – The percentage an ownership share is decreased via the issuance of new shares.
  • Discount – A percentage discount from the pre-money valuation to give safe or note holders an effectively lower price.
  • Equity Round – A financing round in which the investor purchases equity (stock) in the company.
  • Fully Diluted Shares – The total number of issued and outstanding shares of capital stock in the company, including outstanding warrants, option grants and other convertible securities.
  • IPO – Initial Public Offering – the first sale of stock by a private company to the public.
  • Lead Investor – Usually the first and largest investor in a round who brings others into the round.
  • Liquidation Preference – A legal provision in a company’s charter that allows stockholders with preferred stock to get their money out of a company before the holders of common stock in the event of an exit.
  • Maturity Date – The date at which a promissory note becomes due (or at which it will automatically convert to stock in the case of a convertible note)
  • Equity Incentive Plan / Option Pool – The shares allocated and set aside for grants to employees and consultants.
  • Preferred Stock – Capital stock issued in a company that have specific rights, privileges and preferences compared to the common stock. Convertible into common stock, either automatically (e.g., in an IPO) or at the option of the preferred stockholder (e.g., an acquisition).
  • Pre-money Valuation – The value of a company prior to when investor money is added.
  • Pro-rata rights (aka pre-emptive rights) – Contractual rights that allow the holder to maintain their percentage ownership in subsequent financing rounds.
  • Protective Provisions – Provisions in a company’s charter that give exclusive voting rights to holders of preferred stock. For example, the approval of these stockholders, voting separately from other stockholders, may be required for an acquisition.
  • Safe – Simple Agreement for Future Equity – Y Combinator’s replacement for convertible debt.
  • TAM – Total Available Market. In pitches, this is the estimated total revenue available for the product(s) you are selling.
  • Venture Capitalist – A professional investor in companies, investing limited partners’ funds.