Breaking into the Venture capital industry almost seems impossible! For early stage founders VCs could be a make or break opportunity for a startup. However, the VC industry is one that is not fully understood by many who approach it. This article will break down the terms and jargon used by VCs in a simple understandable manner. Some common VC jargons that all aspiring founders should know include:
Term sheet: This is a document that outlines the terms and conditions of a potential investment, including the amount of funding, the ownership stake, and any other important details. This is basically the contract you have with the VC and is essential to raising funding for your startup.
Valuation: This is the process of determining the value of a company, often by analyzing its financial performance, market potential, and other factors. The valuation of a company also determines the equity split between partners and VCs. There are two terms that refer to the value of a company: Pre-money valuation and post-money valuation. Pre-money valuation is the value of a company before it has received funding from investors while post-money is the value of the company after the investments. Pre-money determines the amount of equity that the company will give to investors in exchange for funding. If a company has a $1 million valuation, which is determined by the company’s financial performance and market potential, and is given $250000 in funding, the investor will receive 25% equity of the company. Both these terms are important in the fundraising process, and impact both investor and founder.
Due diligence: This is the process of thoroughly reviewing a potential investment opportunity to ensure that it is a good fit for the venture capital firm. The diligence process includes review of the company’s operations, financial performance, and management team, as well as assessing the market and industry in which it operates.
Cap table: This is a document that shows the ownership structure of a company, including the number of shares held by each shareholder and the percentage of ownership they have. A cap table will include the following information:
- The number of shares owned by each shareholder.
- The percentage of ownership held by each shareholder.
- The pre and post-money valuation of the company.
- The terms and conditions of each investment.
Liquidation preference: This is the amount of money that investors are entitled to receive before other shareholders, in the event that the company is sold or liquidated. It determines the priority of investoress in receiving their investment back in the event of a sale.
Board observer: This is a person who is not a board member but has the right to attend board meetings and provide input on important decisions. They provide valuable insight to the company without the founder needing to give up more control of their company.
Series A, B, C funding: These are the different rounds of funding that a company may go through as it grows and matures. Series A funding is typically the first round of funding, followed by Series B and Series C.
Down round: This is a situation where a company raises funding at a lower valuation than its previous round.
Unicorn: This is a term used to describe a private company that has a valuation of $1 billion or more.
Exit: This is the process of selling a company or taking it public, in order to realize a return on investment for the venture capital firm and its investors.
The venture capital industry can be a challenging and complex environment for aspiring founders to navigate. However, understanding the terms and jargon used by VCs can help founders better understand the industry and improve their chances of securing funding and support from investors. By familiarizing themselves with key VC jargons, such as pre-money valuation, liquidation preference, and board observer, founders can better prepare themselves for the venture capital funding process and position themselves for success.
