Finance Terminology for Start-ups. Founder’s glossary of terms (2/4)

In the previous post, we defined some general business terms that every founder should know. Moving on from there, we will define and understand terms relating to investment and financing of startups here.
As a founder, at some stage, you will definitely start looking around for investors to give you the money you need to scale your business and grow. Each time you do that is called a round, an investment round. And when you decide to have an investment round, you will hear a lot of these terms popping around you, you must understand these terms to achieve your fundraising goals.
- Equity
Refers to the ownership of the company, 100% equity means the total ownership of the company. In other words, it means 100% of the shares of the company.
Equity is usually given up to investors who invest in equity rounds. - Term sheet
A term sheet is a document outlining the terms of an investment transaction, in an equity round. Term sheets are not guarantees or commitments to invest, and they are sometimes used as the starting point of negotiating an investment. - SPA (Stock Purchase Agreement)
After completing all necessary work to conclude the investment transaction, an SPA is signed by both the company and the investor. This is the agreement to purchase a specified amount of stock for a specific price. - Convertible Debt/Note
A convertible note means a debt agreement with an investor to finance the company, this debt plus any accrued interest will then convert to equity shares when the company raises an equity round or upon meeting the conversion criteria defined in the agreement.
Some of the defining criteria of a note is that is has a maturity date and an interest rate. - SAFE (Simple Agreement For Future Equity)
Similarly to convertible notes, the SAFE is an agreement in which the investor provides funds to the company for future shares. However, the SAFE is fundamentally different than a note, it carries no interest and does not have a maturity date. Simply put, the SAFE is not a debt instrument, the Convertible Note is.
There are now multiple types of SAFEs issued by YCombinator. - Cap Table
The Cap Table is a simple table listing the owners of the company, the number of shares they have and % of ownership.
As the business grows with more and more investors putting in money, the cap table grows and becomes more complicated, with different classes of stock being issued to investors.

- Dilution
Dilution is the ownership decrease incurred by the current owners of the company when new shares are issued for new investors. In the Cap Table example above, what would be the dilution effect if the company issues 25 new shares for an investor?
The answer is 20% (New Shares / Total Shares = Dilution), as illustrated in the updated Cap Table below:

- Valuation
Quite simply, the value of the company. - Pre-money Valuation
The value of the company immediately before raising funds. This affects % of ownership given up and is used to determine the value of the company after receiving the investment. - Post-money Valuation
Equals Pre-money Valuation PLUS New Money (investment amount)
In the Cap Table example above, if we assume that the Pre-money Valuation was $1,000,000 before “Investor 1”’s investment. Then the company’s Post-money Valuation would be?
$1,000,000 / 100 shares (before investor 1 made his investment) = $10,000 is the value per share
25 shares (issued to investor 1) x 10,000 = $250,000 is the amount of “New Money” coming from investor 1
Post-money Valuation = $1,000,000 + $250,000 = $1,250,000
- Valuation Cap
Is the upper limit of the company value inserted as a clause in a convertible note or a SAFE. As an incentive for investors to inject the cash now and support the company in achieving the milestones required for a “Priced Round”.
Now that we established an understanding of investment terminology, let’s dig deeper and understand the different rounds of investment, types of investors and common terms used during a fundraising process.
- Friends & Family Round
This refers to the early investments made by your friends and family, people who trust you and believe in your idea. Usually, this investment is based on personal trust rather than on a proven business model. - Seed Round
Now that you have used up the money you gathered from friends and family, and your own savings on top. You hope to have reached a stage where you can raise Seed capital. A Seed round is basically early-stage investment in a business that has already built its product/offering and ideally acquired a few customers.
Historically, the friends and family round was considered a seed round. However, in the ever-growing startup ecosystem, Seed rounds evolved and became more complex to raise, just an idea doesn’t suffice anymore. - Series A, B, C….
Each of these letters refer to an equity round happening after the seed round. They are usually separated by bridge rounds, in the form of convertible notes or SAFEs. - Priced Round
This refers to an equity round. - Angel
An angel/angel investor is an individual who invests in early-stage startups, typically in Seed and Pre-seed rounds. - Accelerator
A time-bound program (usually a few months) designed to provide mentorship, guidance, and resources (funds, coworking space, tech support, etc.). Accelerators also help the company in fundraising through an extensive network of investors. - Incubator
An incubator program is usually longterm, and while they provide similar benefits to the ones provided by an accelerator, they tend to be more focused on supporting the company and helping the founders overcome early-stage challenges. Whereas, an accelerator is focused on fundraising and on speed. - VC
A Venture Capital / Venture Capitalist is an investment firm that specializes in “higher risk” investments such as startups. Getting VC funding is more complex than all of the other investors mentioned above, as they require the business to be at a certain stage, and usually come in post-revenue. They also conduct detailed due diligence on the business as a pre-requirement to any investment. - Due Diligence (DD)
An exercise conducted by an investor/buyer before entering a business transaction, it is a detailed study of the business/opportunity and an investigation into the validity of the information provided as well as an evaluation of the commercial potential of the business.
Just going back up and reading this post, I realized that the material is much meatier than the first post. Do not be alarmed though, as the purpose of this blog is not only to introduce the terms and leave you in the dark about them.
With each new post, I will be shedding light on these terms and hopefully, as you follow and read the coming posts, you will have a greater understanding of the whole picture. Of how these terms affect your business and how they are all related to each other in one way or another.
Until then, stay focused, and keep on keeping on!
Signing off.
P.S. let me know in the comments section what kind of topics and which of these terms you would like me to deep dive into.
