Investment Terms Primer

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It can seem as if those in the investment world speak their own language, and while it's nothing too complicated, it will make life easier if you get familiar with the relevant terminology. This glossary of commonly-used terms will get you up to speed in no time at all.

The People

Angel Investor – Someone who provides a startup company with an initial sum of capital in return for a stake in the company. Angel investors tend to get in on the action at the very early stages of a startup’s life, before a Seed Round.

 

Board of Directors – A group of experienced business people, elected by the stockholders to oversee company affairs. A typical Board of Directors will include both investors and mentors. 

 

Entrepreneur – A company founder or someone who starts a business venture on the assumption that they will personally absorb all potential risks and rewards.

 

Entrepreneur in Residence (EIR) – An experienced business person, usually a seasoned entrepreneur, who is elected by a Venture Capital Firm to help vet any potential investments as well as mentor the firm’s portfolio companies.

Lead Investor – Either a venture capital firm or an individual investor that organizes a round of funding for a company. Usually, the lead investor has invested the most capital in that round. 

 

Venture Capitalist – An individual investor who invests in companies as part of a venture capital firm.

 

Incubator – An organization that helps early-stage companies to grow and develop, usually in exchange for equity in the company. 

The Companies

B2B – Stands for business to business. This type of company targets other businesses with their products or services. 

 

B2C  – Stands for business to consumer. This type of company sells products or services directly to customers.

 

Benchmark – A measurement of success used to evaluate startups. Investors set certain benchmarks by which they measure a company’s progress as it grows and develops. 

 

Bootstrapped – A bootstrapped company is one that is funded by the entrepreneur’s own personal resources or is funded by revenue the company itself has generated. 

 

Portfolio company – Companies that Venture Capital firms have invested in are considered to be “portfolio companies” of that firm.

 

Startup – A startup company is simply one that is in its early stages. 

 

Disruption – Products or technologies are considered “disruptive” when they introduce a significant innovation into an existing market whether by challenging normative pricing models in that market, or by displacing old technologies or targeting a new audience.


Sector – This is the market in which a startup operates. Some that you may have heard of are fintech, agritech, consumer technology, cleantech, medtech.

Investment Activities

Acquisition – When one company buys a controlling stake in another company. This can be a friendly transaction or a hostile one.

 

Buyout – When a purchaser buys a large enough portion of a company’s shares to give them a controlling interest in the company.

 

Capital – Monetary assets, usually raised by the entrepreneur,  available for use to grow and develop a company. 

 

Capital under management – The amount of capital (or financial assets) that a venture capital firm is managing and investing.

 

Due diligence – Detailed analysis performed by investors before making an investment. It generally includes an investigation into the financial records, the market and estimation of potential ROI.

 

Equity financing – The act of raising capital for a company by selling off shares in it. 

 

Exit – The method by which the investor and/or entrepreneur “exits” their investment in a company. Ths most common options are IPO or a buyout from another company. 

 

Ground floor – This refers to the very beginning of a venture, and often, the best time to come in as an investor.

 

IPO – Stands for “initial public offering”. This is the first time that shares of stock in a company are offered to the public or on a securities exchange. 

 

Round – Startups generally raise capital from VCs firms in a series of stages – called rounds. Typically, there will be an initial “seed” round which may then be followed by Series A, B, C, or as needed.

 

Seed – The seed round is the first official round of startup funding. Seed capital is generally used to create a proof of concept for a new idea or product or to build a prototype. Such a company is referred to as a “seed stage” company.



Series – This is simply another word for the round of financing the company is in. 

 

Stage – This describes the stage of development of a startup company. The most commonly used categories are seed-stage, early-stage, mid-stage, and late stage. 

 

Term sheet – This is a non-binding agreement outlining the details of investments to be made in a company. The term sheet can be referred to drawing up more detailed legal documents at a later stage.

 

Valuation – The act of determining a company’s value. This is usually done by an analyst who takes into account its capital structure, the management team, revenue or potential revenue and other relevant factors. 


Venture capital – This refers to capital provided by venture capital firms, usually to small, high-risk, startups that show significant potential.

General Terms

NDA – stands for “Non-disclosure agreement”. This is a legally binding agreement designed to protect confidential information from being shared with other parties.

Preferred Stock – This refers to stock that carries a fixed dividend to be paid out before any common stock dividends.

 

Proof of Concept (PoC) – An early-stage pilot of a startup’s product or services used to demonstrate it’s feasibility.

 

Pro-rata rights/ Supra pro-rata rights – A VC with supra pro-rata or pro-rata rights has the option of increasing their ownership of a company in subsequent funding rounds.  


ROI – This stands for “return on investment.” It refers to money the investor will get back as from his investment in a venture. A successful company will have a high ROI.

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