Top 25 Funding Terms Every Startup Founder Should Know

Starting a business and learning all the new terms can be a real challenge, especially in a field like tech where the funding language feels like a whole new world. We understand that most times, most founders are left feeling lost.

The good news is that getting a grip on these terms doesn’t just make you look knowledgeable—it equips you with the tools to make smarter choices, negotiate better deals, and guide your startup to success.

By the end of this article, you’ll understand the key funding terms every startup founder needs to know. If you’re gearing up for your first pitch or working out details with investors, this guide will serve as your roadmap through the funding process.

1Why is it Important to Understand Funding Terms?

225 Funding Terms Every Startup Founder Should know and what they mean

3FAQs on Funding Terms for Startup Founders

4Conclusion

5References

6Recommendations

Why is it Important to Understand Funding Terms?

Here are the reasons you should understand funding terms as a startup founder.

Knowing funding terms helps you pick the best options for your startup. When you’re clear on what each term means, you can choose the right kind of funding for your business needs.
When you understand the language of funding, you can negotiate more effectively with investors. This knowledge can help you get better terms and deals for your startup.
Being familiar with funding terms allows you to spot and address potential risks. This way, you can avoid problems that might come with the types of funding there is.
Showing that you know your funding terms can make you look more professional to investors and partners. It helps build trust and shows that you’re serious about your business.

25 Funding Terms Every Startup Founder Should know and what they mean

1. Angel Investor

Angel investors are affluent individuals who provide capital for startups, often in exchange for shares.

2. Series A,B,C Funding

These are the stages of funding startups go through after the initial seed funding. These fundings get bigger along the way and as the startups grow. While the series A is usually the first major venture capital investment, designed to help the company expand, the series B and C boost the growth and scales up the business.

3. Term Sheet

A term sheet is a non-binding document that outlines the terms and conditions of an investment deal. It includes details on the valuation of the company, the amount of investment, and the equity stake offered.

4. Valuation

Valuation refers to the process of determining the current worth of a startup. This can be crucial during funding rounds, as it impacts how much equity investors receive for their investment.

Read: 17 Most Valuable Proptech Companies in Nigeria for Startups

5. Equity

Equity represents ownership in a company. When investors provide funding, they often receive equity in return.

6. Cap Table

A capitalization table (cap table) is a spreadsheet or table that shows the equity capitalization for a company, including all shareholders and their ownership percentages.

7. SAFE (Simple Agreement for Future Equity)

A SAFE is an agreement between an investor and a company that provides rights to the investor for future equity in the company without determining a specific price per share at the time of the initial investment.

8. Preferred Stock

Preferred stock is a class of ownership that has a higher claim on the company’s assets and earnings than common stock. It often comes with special rights and privileges.

Also, read: 21+ Best Marketing Newsletters You Should Subscribe to a Startup

9. Common Stock

Common stock is the most basic form of ownership in a company. It typically carries voting rights but has a lower priority claim on assets and earnings compared to preferred stock.

10. Pro Rata Rights

Pro rata rights give investors the option to maintain their ownership percentage in future funding rounds by participating in these rounds.

11. Liquidation Preference

Liquidation preference determines the order and amount in which investors get paid in the event of a company sale or liquidation.

12. Vesting

Vesting is the process by which an employee or founder earns the right to their equity over time, typically over a four-year period with a one-year cliff.

13. Option Pool

An option pool is a portion of a company’s equity reserved for future issuance to employees, typically as part of their compensation package.

Also, see: Top 27 Machine Learning Companies & Startups in Nigeria

14. Burn Rate

Burn rate refers to the rate at which a company is spending its cash reserves, typically expressed as a monthly figure.

15. Runway

Runway is the amount of time a company has before it runs out of cash, based on its current burn rate and cash reserves.

16. Bridge Financing

Bridge financing is short-term financing used to cover expenses until a company secures a more substantial round of funding or reaches profitability.

17. Due Diligence

Due diligence is the investigation or audit of a potential investment to confirm all material facts regarding the investment opportunity.

18. Drag-Along Rights

Drag-along rights allow a majority shareholder to force minority shareholders to join in the sale of a company.

19. Tag-Along Rights

Tag-along rights allow minority shareholders to join a transaction where a majority shareholder sells their stake, typically under the same terms.

20. Pre-Money Valuation

Pre-money valuation is the valuation of a company before it receives new funding. It’s used to determine how much equity investors will receive in exchange for their investment.

21. Post-Money Valuation

Post-money valuation is the valuation of a company immediately after receiving new funding. It’s calculated by adding the new investment to the pre-money valuation.

22. Seed Round

The seed round is the initial stage of funding where investors provide early capital to help a startup develop its product and business model. It’s often followed by Series A funding.

23. Equity Stake

An equity stake is the percentage of ownership an investor holds in a company. It reflects the portion of the company’s equity that the investor has acquired.

24. Liquidation Preference

Liquidation preference determines the order in which investors are paid if a company is sold or liquidated. It ensures that certain investors receive their investment back before others.

25. Exit Strategy

An exit strategy outlines how investors will eventually realize a return on their investment. Common exit strategies include selling the company, merging with another company, or going public through an IPO.

FAQs on Funding Terms for Startup Founders

How does the burn rate affect a startup’s financial strategy?

The burn rate impacts a startup’s financial strategy by indicating how quickly it is consuming its cash reserves. A high burn rate might necessitate raising additional funds sooner or implementing cost-saving measures, while a lower burn rate can provide more flexibility in managing expenses and planning for future growth.

What are common terms included in a term sheet?

Common terms in a term sheet include the valuation of the company, the amount of investment, the type of equity being offered, the percentage of ownership, the rights and obligations of investors, and any special provisions like liquidation preferences or anti-dilution clauses.

What are liquidation preferences?

Liquidation preferences determine the order in which investors are paid if a company is sold or liquidated. Investors with higher preferences receive their investment back before other shareholders get paid.

Conclusion

Remember, understanding is key in the startup world. As you move forward in your entrepreneurial path, keep learning more about funding ideas and stay up-to-date with new trends and terms in the startup community.

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