Here’s a glossary of financial terminology for entrepreneurs to fully understand the deal they’re making with angel, venture capital, and private equity investors in business financing contracts. Includes brief pros and cons of each term and what entrepreneurs and founders should be aware of and/or consider during negotiations.

 

Term

Definition

Example

Pros

Cons
Accelerator A program providing mentorship, office space, and funding to early‑stage startups in exchange for equity. Y Combinator is a well-known accelerator. Offers early funding and valuable mentoring. Often requires giving up equity; limited time frame.
Accredited Investor Person/entity legally qualified to invest in high-risk private companies. Usually, net worth >$1M or income >$200K/year. xxxxx xxxxx xxxxx
Angel Investor A wealthy individual who invests in early‑stage startups in exchange for equity. A tech entrepreneur funding a new app idea. Provides early-stage funding that may be hard to find elsewhere. Risky investment; investors may lose their capital.
Angel Syndicate A group of angel investors pooling funds to invest in startups. 10 angels funding a $1M startup round. Shared risk and larger capital pool for startups. Risk of diverging interests among investors.
Anti‑Dilution Provisions Protection for investors to preserve their ownership percentage when new shares are issued at a lower price. A venture capital investor owns 10%, and anti-dilution provisions ensure they maintain that 10% even after new shares are issued. Protects investors from losing ownership during future funding rounds. May reduce the amount of capital a company can raise.
Board Seat A position on a company’s board that allows an investor to vote on major decisions. An investor may have a say in strategic directions like hiring a new CEO. Provides investors with decision-making power. Can create conflicts between majority and minority shareholders.
Board Observer A person who attends board meetings and advises but does not vote. A lead investor might be a board observer but not have voting power. Can provide expertise without the responsibilities of a board seat. Limited influence on critical decisions.
Bootstrapping Funding growth via revenue and personal resources, not investors. We created BizPlanBuilder and starting selling it directly. Get started with savings, credit cards… Retain full control. Slower growth potential.
Bridge Loan A short‑term loan used to bridge the gap until long-term funding is secured. A startup taking a $200K bridge loan before a Series A round. Provides immediate funds to keep operations going. High-interest rates; may convert to equity if not repaid.
Burn Rate The rate at which a company spends its available cash, typically per month. A startup spends $50K a month on operations. Helps measure the company’s financial health and how quickly it may run out of funds. High burn rate without proper funding may lead to business closure. See also, “Runway”
Business Plan Crucial document describing your business and investment opportunity. See the BizPlanBuilder planning system. Satisfies investors’ need for details and projections BS your way through it or using AI, signals potentially lazy leadership.
Capital Call A request from a fund for investors to contribute part of their committed capital. A private equity fund calls for $1M to complete an acquisition. Allows funds to be raised over time rather than upfront. Investors must be ready to provide capital when called upon.
Capitalization (Cap) Table A spreadsheet showing all shares issued, who owns them, and the percentage of ownership. A cap table shows founders with 70%, employees 20%, and investors 10%. Clearly organizes ownership, which helps with funding and exit strategy. Can become complicated as more investors are involved.
Clawback Provision Allows investors to reclaim profits from fund managers if later performance underperforms. If a venture fund overpays itself on early gains but later underperforms, investors can claw back some of those earnings. Protects investors from excessive payouts to fund managers. May limit the incentive for managers to act aggressively.
Cliff (Vesting Cliff) Initial period before stock options begin vesting, typically 1 year. See also, “Vesting” Ensures commitment; discourages early departures. If you leave the company before the cliff, you get no options or shares.
Common Stock Basic ownership shares, typically held by founders/employees.. I own a million shares of Apple. (I wish!)/td> lower priority than preferred stock in liquidation Voting rights
Convertible Note A loan that converts into equity during a later funding round. An investor loans $100K to a startup, with interest, which converts at (often) at a 20% discount in a future equity round. Delays the need to value the company early. Can dilute founders’ ownership if the company grows quickly.
Crowd Funding Funding through small amounts from many individuals, often online. Kickstarter Easy access Compliance complexities and public exposure.
Dilution Reduction of ownership percentage as more shares are issued. When you sell 10% of your company, now you own only 90% of it. Allows raising funds. Reduces founder control.
Down Round A funding round where shares are sold at a lower price than in previous rounds. A startup raises funds at $5 per share, while its previous round price was $10. Provides essential funds; Investors can buy shares at a lower price. Damaging to the company’s reputation and valuation.
Drag‑Along Rights Allow majority shareholders to force minority shareholders to sell their shares in the event of a sale. If the majority agrees to sell the company, all shareholders must sell under the same terms. Ensures the company can be sold without minority shareholder resistance. Minority shareholders may not agree with the sale terms.
EBITDA Earnings before interest, taxes, depreciation, and amortization; a measure of profitability. A company with $10M in revenue and $4M in EBITDA. Reflects a company’s ability to generate profit from operations. Enables comparing efficiencies of similar businesses. Doesn’t account for interest, taxes, or capital expenditures, which are crucial.
Equity Financing Raising money by selling shares of a company rather than taking on debt. A company sells 20% of its shares for $1M. Does not require repayment, and investors share in company success. Dilutes existing shareholders and control.
Exit Strategy A plan for an investor to liquidate their stake in a company. An IPO or selling to a larger company. Provides a clear path for investors to cash out and realize returns. May be difficult to execute; timing is critical.
Fully Diluted Shares Total shares outstanding, assuming all options, warrants, and convertible securities are exercised. Accurate view of dilution; critical during valuation.
Incubator A program offering long-term support, resources, and office space to early‑stage startups. A company may spend 1–2 years in an incubator to refine its product and business model. Provides resources without giving up equity early on. Limited to startups that fit the incubator’s niche.
Incubator vs Accelerator An incubator provides space and time for product development, while an accelerator offers shorter‑term, intensive programs with mentoring and funding. An accelerator typically lasts 3-6 months, while an incubator may last 1-2 years. Accelerators are faster but can demand more equity; incubators offer more time but less immediate funding. Accelerators can be overwhelming and time-limited; incubators may not offer as much access to investors.
Initial Public Offering (IPO) The first time a company offers shares to the public to raise capital. A tech startup going public by offering shares on the stock market. Provides large-scale capital and visibility for the company. Expensive and time-consuming; can expose the company to market volatility.
Liquidation Preference Investors’ right to be paid first upon exit/liquidation. 2x preference means investor gets paid double their investment before others. (Invest $1 for 20% share w/ 2x liquidation preference. Company sells for $5, investor gets $2 first + 20% of $5 = $1.
Score: Investor $3, Founders $2)		 Attracts & increases comfort for investors. May wipe-out the founders’ equity and cash out upon sale. Consider scenarios.
Management Fee A fee (usually 2%) charged by fund managers to cover operational costs. A venture capital fund charging 2% of the total capital raised. Helps fund managers cover operational costs. Reduces returns for investors.
Mezzanine Financing A hybrid form of financing combining debt and equity, typically used to fund the expansion of an existing business. A company takes on $10M in debt, but investors can convert it to equity if the company defaults. Gives the company access to large amounts of capital. High interest rates and risk of converting to equity.
Option Pool A pool of shares reserved for future employee stock options. A company sets aside 10% of its shares for future employees. Helps attract and retain talent without upfront compensation. Dilutes ownership for existing investors.
Pay-to-Play Requires existing investors to participate in new rounds or lose privileges. Encourages ongoing support. Can create friction among investors.
Post-Money Valuation Company valuation after funding round. = Pre-money Valuation + Investment. Simple calculation. Potentially for easy dilution oversight.
Preferred Stock A type of stock that provides investors with priority for dividends and during liquidation. Preferred shareholders get paid first during a liquidation event. Less risky for investors, as they have priority. Generally offers limited voting rights compared to common stock.
Pre-Money Valuation Company value before receiving new investment. Sets dilution expectations. highly negotiable.
Pro‑Rata Rights Allows investors to maintain their ownership percentage by buying additional shares in future funding rounds. An investor owning 5% of a company buys additional shares in the next funding round to maintain that 5%. Ensures investors don’t lose ownership if new shares are issued. May require investors to keep committing funds in future rounds.
Ratchet Extreme anti-dilution mechanism adjusting investor’s shares drastically in down rounds. Protects investors. Punishing dilution for founders.
Recapitalization Restructuring a company’s capital structure (equity/debt mix). Resolves financial distress. Signals trouble to future investors.
Revenue-Based Financing Repay investors a percentage from sales revenue. Learn more. (Formerly known as “Revenue Royalties”) Simple deal. No need to sell company to repay investors. Must have a high-margin product.
Right of First Refusal Gives investors the right to buy shares before they are offered to outsiders. An investor can buy shares before a founder sells them to someone else. Gives investors control over who owns shares in the company. May be difficult for shareholders to sell without investor approval.
Runway The amount of time a company can continue to operate before it runs out of cash, based on current burn rate. A startup has 6 months of runway left with its current spending. Helps founders plan and adjust operations before cash runs out. Can create stress or hinder operations if cash is running low.
SAFE Simple Agreement for Future Equity. Agreement offering investors future equity at next priced round. Quick, simple financing; uncertain future dilution.
Secondary Market Market for buying/selling existing private shares pre-IPO. Liquidity option. Complicated valuations and disclosures.
Seed Round The initial funding stage for startups, often from angel investors or crowdfunding, used to develop a product or service. A company raises $500K from angel investors to build a prototype. Provides early capital for development with fewer demands from investors. Small amounts of money that may not be enough to launch a product.
Series A The first major round of financing from venture capitalists, typically used to scale a proven business model. A company raises $5M to hire employees and expand its product. Allows a company to grow rapidly after proving its concept. Often requires giving up equity, and the business model must be proven.
Series B A later round of funding, used to scale the business even further, often after Series A milestones have been met. A company raises $10M for further expansion after proving success. Significant capital for growth and expansion. Typically involves more control and oversight by investors.
Sweat Equity Ownership earned through work rather than investment. He worked for 6 months developing the product in return for stock in the company. Motivates founders. Subjective valuation.
Tag‑Along Rights Rights allowing minority shareholders to sell their shares on the same terms as majority shareholders. If a majority shareholder sells their stake, minority shareholders can sell under the same terms. Ensures minority shareholders have a way out if the majority sells. Minority shareholders may be forced to sell even if they don’t want to.
Term Sheet Non-binding agreement outlining investment terms before final deal. The VCs gave us a term sheet for investing $5,000,000. They’re interested in investing per ceratin terms — clarifies expectations. Critical negotiation document.
Traction Proof of product-market fit (sales, customers, revenue). We have 100 subscribers using our system now. Boosts valuation. Difficult without funding.
Vesting The process by which employees earn the right to their stock options or benefits over time. An employee’s stock options vest over 4 years, with a 1-year cliff. See also, “Cliff” Encourages employees to stay with the company long-term. Delays the full benefit of stock options, which may frustrate some employees.
Warrants Right (but not obligation) to buy shares later at set price. We sweetened the deal with warrants to by more shares at the same price. Incentive for lenders/investors. Future dilution for founders.
Waterfall Sequence determining payout order in exit events. Predictable payouts. Crucial for founder awareness in exits.