It is often baffling to not comprehend the difference between common shares and preferential shares or the implications of a term sheet. Common investor terms and their correct meanings go a long way in communicating with your investors as well as for personal understanding.
Here is a list of some commonly used investor terms that are useful for the startup and SMB ecosystem:
Acquisition:When a bigger corporation like Microsoft or Google, buys a controlling stake in your company. Now your business is being acquired by the bigger company. Start-ups or an SME going for equity campaigns prefer acquisition.
Add-on services: Add on benefits which you get from your investors apart from the monetary support. These may be in the form of introducing you to other investors or assisting you for an IPO or assemble a professional management team.
Benchmarks: Task objectives used to quantify the achievement of a company. Some of the most commonly used benchmarks are annual growth in sales. It is used to decide further funding of the company.
Buyout: Buying a company or a major controlling stake in a company or business. It is the goal of most start-ups going for equity fundraiser campaigns.
Board of directors: Representatives of the shareholders in a firm, who are entrusted to make policies, hire or fire executives, make management decisions and fairly balance the interests of both the top management as well as shareholders.
Cap table: The short form for the word, capitalisation table. It is a comprehensive list of name and the number of shares each person holds all adding up to 100%.
Common vs. preferred stock:Preferred stock is giving investors the preference shares over others. It gives them the facility to get their investment back first, before the common shareholders. The founders, as well as the employees, are usually given common shares, which mean they’re the last people to get paid.
Convertible note: It is a loan given to a business. The issuer or holder can change it to shares. Each convertible note has an interest rate, a maturity date, and can come with the choice to change at a discount in future.
Dilution: Giving your equity stake to someone else is known as a dilution to make room for that person.
Drag along rights: It empowers a majority stockholder, to ask a minority holder to agree to the sale of a company. By buying the minority stockholders shares at the same price, terms, and conditions as any other seller, and securing 100% of the company’s shares.
Due diligence: Before making an investment, investors analyse and assess the facts of a business is known as due diligence.
Exit strategy: The process through which an investor ‘cashes out’ of a deal to get the return on investment. Few examples of exit strategies are acquisition, IPO, and buyout.
Initial public offering: Also known as IPO, when the shares of a private company are made available to the public. Start-ups pursuing equity campaigns go for IPO.
Return on investment: It is the income or expense as a consequence of an investment expressed in percentage terms.
Risk: The probability of loss either wholly or part of the initial investment through a business is known as risk expressed as average returns from an investment.
Seed capital: It is the initial investment which is put into a start-up or SME, originating from the company’s founder, friends, and family. It helps to pull the attention of investors in early and later stages of fundraising.
Stock option pool: The percentage of the company’s shares allocated to a pool for future employees. These are the shares which come out of your portion only is known as stock option pool.
Term sheet: It is a non-binding summary of the terms as well as conditions. It defines as to how an investment is to be made like, the interest rate on a loan investment, or simply the valuation of equity.
Valuation: It is an assessment of how much your business is worth at a particular time.
Pre-money valuation: Valuation of your company, before investment by the angel investors.
Post-money valuation: Valuation of your company, after the investment by the angel investors.
Vesting: It is a process through which you ‘earn’ your share over time, quite similar to your salary. Granting share over a period gives an incentive to employees for staying with the company.