Here are some start-up speak for every founder’s kitty.
Every industry has its basic terminology that features in stakeholders’ conversations frequently. The start-up space is no different.
Understanding start-up speak is required for you as an African founder, especially the fundamental fundraising lexicon if you are looking to secure funding for your venture. And which African founder is not traipsing the fundraising trail at one time or the other?
Whether you are an aspiring or established founder, familiarising yourself with and thoroughly understanding key fundraising vocabulary will make you sound like a pro, likely help you lock down investments and leave a lasting impression on potential investors.
We have curated some of the basic fundraising terms below. View the list as a mini vocabulary to add to your repertoire. Good luck pitching your start-up in investor meetings.
- Burn rate. This is the rate at which your company is spending its capital. Monitoring your start-up’s burn rate is crucial for managing cash flow and ensuring your company’s financial stability.
- Cap Table. This is short for capitalisation table. It is a spreadsheet outlining the ownership stakes and equity distribution among your company’s founders, employees and investors.
- Common Stock: Prior to funding, most start-ups have only common stock.
- Dilution. Dilution results from an activity that causes a shareholder’s equity to become reduced (aka diluted). This can happen through several activities like raising money via an equity round of funding or issuing unissued shares in the company to make room for a co-founder or a stock option pool, to name two instances.
- Equity. In simple terms, it is a share of ownership of your company. When an investor provides equity funding to your start-up, they are buying a portion of it. This means that they will share in the company’s profits (or losses) if it is successful.
- Exit Strategy: This involves how founders and investors intend to eventually exit or sell their shares in a start-up, usually through an initial public offering (IPO) or acquisition.
- Liquidation Preference. A liquidation preference is a right that you often give to preferred shareholders. It protects them if your company is sold at a distressed value. The investors get their money back before non-investing equity holders receive theirs.
- Preferred Stock.: Once investors plough money into your company, they require special protection rights known as preferred stock.
- Return On Investment (ROI): Before deciding to plough funds into your business, investors would assess its potential ROI. It is the measure of return or profitability on an investment.
- Revenue Model: This is your strategy outlining income generation avenues; be it through advertising, product sales, subscriptions, etc.
- Run Rate: Often used to project growth and attract investors, the run rate estimates your company’s future financial performance based on its current expenses and revenue.
- Runway. This is the length of time your start-up can operate with its current funds before requiring additional capital. Understanding your runway is vital for financial planning and fundraising efforts.
- Term Sheet. This document lays out the terms of the collateral and investment. It outlines the things your startup is giving and those you are receiving in return. Usually, term sheets are non-binding and serve as a basis for defining a final agreement.
- Valuation. Your start-up’s valuation is its estimated value. And it is determined by several factors – financial performance, growth potential, and competitive landscape. Why is valuation important? Well, it determines how much equity investors will receive in exchange for their investment in your company.
This is, by no means, an exhaustive list. However, it is an excellent starting point.
A firm grasp of these 14 terms will empower you, assist as you engage with potential investors and navigate the fundraising process effectively.
Mastery of them will enable you to communicate your vision, financials and growth potentials to investors; thus increasing your chances of success in the cutthroat space of start-up funding.
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