Startup Funding Glossary: Essential Startup & Venture Capital Terms
Startup Intelligence · Startup Funding Glossary
The complete startup funding glossary — every key term, instrument, metric, and concept founders and investors need to navigate venture financing from pre-seed through IPO.
Startup funding has its own language. Founders who understand the terminology can navigate fundraising conversations, evaluate term sheets, negotiate with investors, and build a clean cap table. Founders who do not often discover the meaning of key terms after they have already signed.
This glossary organizes the essential startup funding terms into ten categories — from financing instruments and valuation concepts to metrics, governance, and exit terminology. Use it as a reference during fundraising, diligence, and investor conversations.
1. Financing Instruments
SAFE (Simple Agreement for Future Equity) — A financing instrument commonly used by early-stage startups. The investor provides capital under an agreement that can convert into equity later, typically when the company conducts a qualifying financing. SAFEs have no interest and no maturity date.
Convertible Note — A form of debt that can convert into equity under specified circumstances. Convertible notes typically include an interest rate, a maturity date, a valuation cap, and a discount.
Equity Financing — Raising capital by selling an ownership interest in the company, typically preferred shares in a priced round.
Debt Financing — Borrowing money that must be repaid according to specific terms, with interest, repayment schedules, and covenants. Venture debt is a common form of debt financing for startups that have already raised institutional equity.
Preferred Stock — A class of stock that typically includes additional economic and governance rights, such as liquidation preferences and board representation. Institutional venture financings usually involve preferred stock.
Common Stock — The most basic class of stock. Common shareholders typically have voting rights but are last in line for proceeds in a liquidation.
2. Valuation Terms
Pre-Money Valuation — The agreed value of the company immediately before a new financing.
Post-Money Valuation — The company's implied value immediately after the investment. Post-money = pre-money + investment.
Valuation Cap — The maximum valuation at which a SAFE or convertible note converts into equity. If the next round prices above the cap, the investor converts at the cap.
Discount — A percentage off the next round's price. If the next round prices at $20M and the investor has a 20% discount, they convert at $16M effective valuation.
Price Per Share — The price investors pay for each share in a priced equity round, derived from the company's agreed valuation and capitalization structure.
Fully Diluted Market Cap — Total company value calculated using all shares outstanding, including options, RSUs, and warrants.
3. Ownership Terms
Dilution — The reduction in an existing shareholder's percentage ownership following the issuance of new shares.
Cap Table (Capitalization Table) — A record of a company's ownership structure, including founders, employees, option pools, angel investors, venture capital investors, SAFE holders, convertible note holders, and other shareholders.
Option Pool — A reserve of equity set aside for current or future employees. Investors often require a company to create or increase an option pool as part of a financing.
Option Pool Shuffle — The practice of carving out an option pool from the pre-money valuation, which causes existing shareholders (usually founders) to bear the dilution from the pool.
Primary Shares — New shares created by the company. When they are sold, the cash goes directly to the company's balance sheet.
Secondary Shares — Existing shares owned by founders, employees, or VCs. When they are sold, the cash goes to the individual seller, not the company.
4. Funding Stages
Bootstrapping — Financing a company primarily with the founders' own money and the company's operating revenue.
Pre-Seed — The earliest stage of external startup financing. Capital is often used to prove that a business idea can become a viable company.
Seed Round — Early-stage financing used to help a startup develop its product, validate its market, and build the foundation for future growth.
Series A — Financing associated with the transition from early validation to building a scalable business. Institutional venture capital firms frequently become major participants at this stage.
Series B — Financing focused on scaling an established growth engine, including sales organization, product portfolio, and operational infrastructure.
Series C and Later Rounds — Financing for companies that have already achieved substantial scale, used for international expansion, acquisitions, and preparing for an eventual IPO.
Bridge Financing — Temporary funding that will eventually be replaced by permanent capital from equity investors or debt lenders.
5. Term Sheet Terms
Term Sheet — A document that outlines the principal economic and governance terms proposed for an investment.
Liquidation Preference — A provision determining how proceeds are distributed to certain shareholders during a liquidation or exit. A common structure is a 1× liquidation preference.
Participating Preferred — An investor receives its liquidation preference and then participates in the remaining proceeds according to the applicable ownership structure.
Non-Participating Preferred — An investor generally chooses between taking the liquidation preference or converting to common stock and participating according to its ownership percentage.
Anti-Dilution Protection — Provisions that can protect investors if a company later raises financing at a lower valuation. Common approaches include broad-based weighted average, narrow-based weighted average, and full ratchet.
Pro Rata Rights — Rights that allow an investor to participate in future financing rounds to maintain its ownership percentage.
Board Representation — The right to appoint a member to the company's board of directors. Board composition matters because the board can have substantial authority over strategic decisions.
Protective Provisions — Provisions that give certain investors the right to approve specific corporate actions, such as a sale of the company or the issuance of new securities.
Founder Vesting — A vesting schedule for founder shares, commonly a 4-year vest with a 1-year cliff.
Drag-Along Rights — Rights that allow a majority of shareholders to require minority shareholders to join in a sale of the company.
Co-Sale Rights — Rights that allow minority shareholders to participate in a sale of shares by a major shareholder.
6. Metrics & Financial Terms
Burn Rate — The rate at which a startup with little or no revenue uses available cash to cover expenses. Gross burn is total cash out; net burn is gross burn minus revenue.
Runway — The amount of time a company can continue operating before exhausting its available cash under current assumptions. Runway = cash available ÷ monthly net burn.
ARR (Annual Recurring Revenue) — The annualized value of recurring revenue from subscriptions or contracts.
MRR (Monthly Recurring Revenue) — The monthly value of recurring revenue.
NDR (Net Dollar Retention) — The percentage of recurring revenue retained from existing customers after accounting for upgrades, downgrades, and churn. NDR above 120% is a premium driver.
CAC (Customer Acquisition Cost) — Fully-loaded cost to acquire a paying customer.
LTV (Lifetime Value) — Gross profit earned from a customer before they churn.
LTV/CAC — A measure of how much profit a customer generates relative to the cost of acquiring them. LTV/CAC > 3 is a common benchmark.
Gross Margin — Revenue minus cost of goods sold, divided by revenue. A high gross margin indicates a scalable business.
Rule of 40 — A benchmark for software companies: revenue growth rate plus free cash flow margin should exceed 40%.
SBC (Stock-Based Compensation) — Non-cash expense representing the value of equity granted to employees.
TVPI (Total Value to Paid-In) — A fund performance metric calculated by dividing the fund's cumulative distributions and residual value by the paid-in capital.
7. Investor Types
Angel Investor — An individual who invests personal capital in startups, typically at the earliest stages.
Venture Capital (VC) — Institutional investment in high-growth companies, generally in exchange for equity. VC funds raise capital from limited partners and are professionally managed by a general partner.
GP (General Partner) — The investment team that raises and manages a venture fund. GPs source deals, make investment decisions, sit on boards, and are responsible for generating returns.
LP (Limited Partner) — The capital providers in a venture fund. LPs include endowments, foundations, sovereign wealth funds, pension funds, family offices, and high-net-worth individuals.
Accelerator — A program that provides services through a highly selective, cohort-based program of limited duration (usually 3–12 months), often in exchange for equity.
Incubator — Typically a physical space providing training for entrepreneurs, access to networks, and specialist equipment, often on flexible terms.
Strategic Investor — A corporate or industry investor that may provide industry expertise, distribution, customers, or technology in addition to capital.
8. Deal Structure & Governance
MFN (Most Favored Nation) — A clause giving the investor the right to adopt the terms of any better deal issued later. Common in SAFEs issued early in a round.
Qualified Financing — The triggering event that causes a SAFE or convertible note to convert, usually defined as a priced round above a minimum size.
Full Ratchet — A type of anti-dilution protection that resets the investor's conversion price to the new, lower price in a down round. Extremely favorable to investors and punishing to founders.
Weighted Average — A type of anti-dilution protection that adjusts the conversion price based on the number of new shares issued and the price. Standard market practice.
No-Shop / Exclusivity — A provision that prevents the company from negotiating with other potential investors for a specified period.
Information Rights — The financial and operational information that investors are entitled to receive, such as quarterly financials, annual budgets, and cap table updates.
Right of First Refusal — A right that gives the company or existing investors the first opportunity to purchase shares before they are sold to a third party.
Conversion Rights — The conditions under which preferred stock can be converted into common stock, often automatic upon a qualified IPO or with the approval of a majority of the preferred shareholders.
Voting Rights — Rights attached to preferred shares that can cover the election of directors, major corporate actions, future financings, mergers, acquisitions, and changes to the company's charter.
9. Due Diligence & Process Terms
Due Diligence — The process investors use to evaluate a company before making an investment, covering financial, legal, commercial, technical, and management areas.
Data Room — A structured collection of documents that investors review during due diligence, typically organized into categories such as corporate, financial, cap table, commercial, legal, product, people, fundraising, and security.
Deal Flow — The number of quality startup companies and opportunities available for venture capital firms to invest in.
Pitch Deck — A presentation used to introduce a company to potential investors, typically covering the problem, solution, market, traction, team, and fundraising requirements.
Warm Introduction — A connection to an investor made through an existing relationship, such as a founder, advisor, or existing investor.
Reference Check — Conversations with founders or other investors who have worked with a VC to evaluate their behavior, support, and alignment.
10. Exit Terms
Exit — A liquidity event that returns capital to investors, primarily acquisitions and IPOs, plus secondary sales.
IPO (Initial Public Offering) — The process by which a private company offers shares of its stock to the public for the first time, raising capital and becoming a publicly traded company.
M&A (Mergers and Acquisitions) — The consolidation of companies through various types of financial transactions, including mergers, acquisitions, and takeovers.
Lock-Up — A 90–180 day period after an IPO during which insiders are prohibited from selling their shares.
DPI (Distributions to Paid-In) — Real cash returned to LPs. DPI = distributions ÷ paid-in capital. A DPI of 1.0x means LPs got their money back.
MOIC (Multiple on Invested Capital) — Proceeds divided by invested capital. A simple measure of return that is not time-manipulated like IRR.
No comments: