The Venture Capital Glossary: 30 Terms Every Founder Should Know
Navigating the world of venture capital (VC) can be daunting for founders, especially when faced with industry-specific jargon. Understanding key VC terms is essential for securing funding, negotiating deals, and building strong investor relationships.
In this comprehensive glossary, we break down 30 critical venture capital terms every founder should know before stepping into a pitch meeting or signing a term sheet.
Accelerator
An accelerator is a program that provides early-stage startups with mentorship, resources, and funding in exchange for equity. Examples include Y Combinator and Techstars.
Angel Investor
A high-net-worth individual who invests personal funds into startups, often in the early stages. Angel investors may also provide mentorship and industry connections.
Anti-Dilution Protection
A clause that protects investors from equity dilution if a company raises future funding at a lower valuation. Common types include full ratchet and weighted average.
Bootstrapping
Funding a startup without external investment, relying on personal savings or revenue. Bootstrapping allows founders to retain full control but may limit growth speed.
Burn Rate
The rate at which a startup spends cash before becoming profitable. A high burn rate may indicate unsustainable spending.
Cap Table (Capitalization Table)
A spreadsheet detailing a company’s ownership structure, including equity held by founders, investors, and employees.
Convertible Note
A short-term debt instrument that converts into equity during a future financing round, typically with a discount rate or valuation cap.
Corporate Venture Capital (CVC)
Investment arms of large corporations that fund startups, often for strategic alignment (e.g., Google Ventures).
Deal Flow
The rate at which investors receive startup investment opportunities. Strong deal flow is crucial for VCs to find high-potential companies.
Dilution
The reduction in ownership percentage when new shares are issued (e.g., during a funding round).
Down Round
A funding round where a company’s valuation is lower than in previous rounds, often seen as a red flag.
Due Diligence
The process where investors evaluate a startup’s financials, market potential, and legal standing before investing.
Employee Stock Ownership Plan (ESOP)
A pool of equity reserved for employees, used to attract and retain talent.
Exit Strategy
How investors plan to cash out, typically through an IPO, acquisition, or secondary sale.
Follow-On Investment
Additional funding provided by existing investors in subsequent rounds.
Fully Diluted Shares
The total number of shares outstanding if all convertible securities (options, warrants, etc.) were exercised.
General Partner (GP)
The managing partner in a VC firm responsible for making investment decisions.
Initial Public Offering (IPO)
When a company goes public by listing its shares on a stock exchange.
Lead Investor
The primary investor in a funding round who negotiates terms and often recruits other investors.
Liquidation Preference
A clause ensuring investors get paid first in an exit, often with a 1x or 2x return before others receive proceeds.
Minimum Viable Product (MVP)
A basic version of a product used to test market demand before full-scale development.
Pitch Deck
A presentation used to attract investors, covering the business model, market opportunity, and financial projections.
Post-Money Valuation
A company’s valuation after new funding has been added.
Pre-Money Valuation
A company’s valuation before new funding is injected.
Pro Rata Rights
The right of existing investors to maintain their ownership percentage by investing in future rounds.
Runway
The time a startup has before it runs out of cash, based on its burn rate.
SAFE (Simple Agreement for Future Equity)
A convertible security popularized by Y Combinator, allowing startups to raise funds without setting an immediate valuation.
Term Sheet
A non-binding agreement outlining the terms of an investment, including valuation, equity, and investor rights.
Unicorn
A privately held startup valued at over $1 billion.
Venture Debt
A loan provided to startups, often used alongside equity financing to extend runway without further dilution.
Final Thoughts
Mastering these 30 venture capital terms empowers founders to negotiate better deals, communicate effectively with investors, and make informed financial decisions. Whether you're raising a seed round or preparing for an exit, understanding VC terminology is crucial for long-term success.
By familiarizing yourself with these key concepts, you’ll be better equipped to navigate the complex world of startup funding and build a thriving business.
