Terminology Cheat Sheet
The people
Accredited investor
An accredited investor is someone who meets at least one of the following criteria:
- Income over $200,000-$300,000 jointly with a partner over the past two years and a reasonable expectation of maintaining that level of income
- Net worth over $1 million, excluding your primary residence (second homes, such as cabins, can count towards this)
- Professionals in investing in good standing who have obtained the general securities representative license (Series 7); the investment advisor representative license (Series 65); and/or the private securities offerings representative license (Series 82)
Accredited investors often have the opportunity to invest in a broader variety of investments—in both registered and unregistered investments. Examples of registered investments include stocks and bonds through a brokerage or retirement account. Unregistered investment opportunities are oftentimes private equity investments, angel investments, and investments into venture capital funds.
Limited Partner (LP)
A limited partner is an investor who becomes a member of a fund by making a capital contribution to that fund. Their money is then invested on their behalf by the fund’s general partner(s) based on the fund’s investment thesis.
Deal terms and investment rounds
Cap table
A cap table, short for capitalization table, is a list of exactly how much of a company's stock each entity or person owns. Visualize a spreadsheet that lists names and percentage ownership stakes that all add up to 100% — Jamal owns 10%, Syd owns 45%, and so forth.
Valuation
In short, valuation means how much the company is worth. It’s represented in two ways:
- Pre-money valuation: How much the company is worth before investment
- Post-money valuation: How much the company is worth after the investment
Down round
This refers to a round in which a company’s worth has decreased since prior valuation—essentially, when a company is worth less than the last time the total worth was calculated.
Up round
The exact opposite of a down round: when a company’s worth has increased since prior valuation.
Dilution
This is the action of giving someone else, like an investor, partial ownership of the company—a founder is “diluting” their equity stake to make room for someone else. Concerns around dilution are usually about giving away too much of the company, getting too many people involved, or losing control of the company's direction.
Bridge round
This round of financing tides over a company until a next, larger round of funding. Oftentimes referred to as “interim financing,” startups may do this to increase their valuation before the next, bigger funding round.
Investment Agreements
Term sheet
A term sheet outlines terms and conditions under which an investment is to be made. It is non-binding and serves as a basis and template for more detailed and binding documents later.
Convertible note
A convertible note is a loan made to a company that can be converted to stock at some point—also known as a short-term debt that converts into equity. Essentially, it’s a way for seed investors to invest in a startup that may not yet be ready for valuation.
Each convertible will have an interest rate and maturity date and might come with an option to convert at a discount in the future.
- Valuation cap: The ceiling put on the price at which a convertible note will convert to stock in the future. A valuation cap is oftentimes a way to reward seed-stage investors for taking an early risk.
- Discount rate: The valuation discount an early-stage investor receives, relative to investors in later rounds. It is another way to compensate seed-stage investors for taking the additional risk of an early investment.
- Interest rate: The rate of interest that will accrue on a convertible note. Instead of cash, interest often accrues to the principal invested, meaning the number of shares is increased upon conversion.
SAFE (Simple Agreement for Future Equity)
A Simple Agreement for Future Equity (SAFE) is an agreement between an investor and a startup that allows the investor to purchase stock in future equity rounds (if they occur), based on the amount invested. A SAFE covers additional financing rounds and the potential sale of a company.
Essentially a SAFE allows a startup to receive funding in exchange for equity later.
Common and preferred stock
Each company has different “classes” of stock that can be issued, with each class having different rights and preferences. The most typical classes are:
- Common stock: Usually going to founders and employees, common stock is paid out last.
- Preferred stock: Usually going to investors, preferred stock includes preferences allowing stockholders to get a return on their investment before Common stockholders get their share.
