In this post, I will go over essential terminology in the start-up world. These are words and phrases that I often hear when dealing with my clients and entrepreneurs. If you want to be able to intelligently follow a conversation in this world, make sure you enhance your vocabulary. This is the newest FBS blog post, “The Start-up Dictionary.”
Accredited Investor – It is often required of private companies to take investments only from those who qualify as “accredited investors.” These investors are generally high-net-worth individuals who have the access and ability to invest in higher risk investments such as Venture Capital, Hedge Funds, and Angel Investments. To qualify as an Accredited Investor in the United States, one must have a net worth of at least $1 Million (excluding the value of their primary residence) or have income of at least $200,000 each year for the last two years (or $300,000 combined if married) and be expected to make the same or more in the current year.
Angel Investor – An angel investor is an individual who provides financial capital to startups and entrepreneurs, usually in exchange for convertible debt or equity. These investors are often among the business owner’s family and friends.
Churn Rate – The percentage of subscribers of a service or application who unsubscribe from that service during a given time period is the churn rate. It is important to know because your new subscribers must exceed the churn rate in order to continue growth.
Crowdfunding – This is an alternative way to raise money (without going through a PPM or other offering document). The people who are donating to the cause do not need to be accredited because they are not purchasing ownership shares. Using websites like Kickstarter, Gofundme, Crowdfunder, etc. business owners can raise small amounts of money from a large pool of people.
MVP (Minimum Viable Product) – The MVP refers to building a product with the least amount of effort that can also return customer value.
PPM (Private Placement Memorandum) – A PPM is a legal document used to sell debt or equity of a private company. In this document, you will find the business summary, risks & terms of the investment, financial position of the company, management biographies, and other information. It may also be referred to as an “Offering Memorandum” or “Offering Document.”
Seed Funding/Capital – This is usually the initial capital that is raised for a company (although there may be pre-seed rounds of funding as well). These funds usually come from the founders of the company, their friends, and/or family. These funds are offered in a form of a securities offering for an equity stake in the company.
Note: I have often seen the mistake of new companies taking in seed money outside of a securities/offering agreement. It is highly recommended to not do so in this manner for various reasons, one being that the terms may be unclear causing issues in the future.
Seed, Series A, Series B, etc. – These are the differentiators between funding rounds. The names are often seen as arbitrary, but they are used to differentiate the rounds of funding. Seed being the first, Series A second, and so on. Sometimes they are used in differentiating what type of money is being raised. For example, Series A can be to expand, B to grow revenue, C to grow users, etc.
Shoe String Budget – I know, what’s up with all the footwear lingo? Well, this refers to when someone is stretching a budget (aka using less money than is required).
Sweat Equity – This is when a party contributes effort and time to a company instead of capital. Start-ups will sometimes use this model when it is on a “shoestring budget” or is “bootstrapping” (Oh yeah, I just used them in a sentence). The owner will often pay with stock or stock options instead of capital for work done.
Term Sheet – This document outlines the basic terms and conditions of which an investment is made. It is usually a non-binding agreement that is used as a template to develop a detailed binding agreement that will be created later. It usually states what type of equity, debt or convertible notes (as well as what equity rates are received when converted) are involved.
Value Prop (Proposition) – A value prop identifies why a consumer should buy one product or service over another and how your product uniquely creates value.
Knowledge: Nolo.com, Investopedia.com, Forbes.com, Fundable.com, Techopedia.com, & Personal Knowledge
Images: funderbuilt.com (accredited image), wsj.com (angel investor image), businessinsider.com (burn rate image), causevox.com (crowdfunding image), wired.co.uk (seed funding image), virtue-marketing.com (shoestring budget image).