Decoding Fundraising: Essential Terminology Every Entrepreneur Must Know
Navigating the world of fundraising can often feel like learning a new language. For first-time entrepreneurs, the jargon—filled with abbreviations and technical terms—can be overwhelming. Yet, understanding this terminology is critical for anyone looking to secure funding and negotiate confidently with investors.
By familiarising yourself with key fundraising terms, you’ll not only demystify the process but also position yourself as a knowledgeable and credible entrepreneur. Let’s break down the essential fundraising terminology you need to know to make your raising journey smoother and more successful.
Valuation and Equity Terms
Cap Table (or capitalization table): A table that details the ownership stakes in a company, including that of investors and employees
Dilution: A reduction in ownership percentage caused by the issuance of additional shares
% Dilution = Investment ÷ Post-Money Valuation
Equity: Ownership interest in a company, often expressed as a percentage
Liquidation Preference: The order in which proceeds are distributed in case of a liquidation event
Pre-Money Valuation: The valuation of the company prior to the fundraising round
Post-Money Valuation: The company’s valuation after receiving investment
Vesting: The process by which employees or co-founders earn rights to shares over time.
- Reverse Vesting: shares are received upfront but upon leaving, the employee or co-founder can be forced to sell a certain percentage of them
- Forward Vesting: shares are earned over time, the most common form of vesting
Investment Structure Terms
Convertible Note (or CLA): A form of short-term debt that converts into equity in conjunction with a future financing round
Equity: An agreement between a start-up and investors that provides rights to the investors for future equity in the company without determining a specific price per share
Term sheet: A non-binding proposal, often in bullet-point format, outlining the terms and conditions of a potential investment
SAFE (Simple Agreement for Future): An agreement between a start-up and investors that provides rights to the investors for future equity in the company without determining a specific price per share
Series A, B, C and so on: The various stages of venture capital fundraising rounds, usually progressing as the company matures
Investor-Related Terms
Angel Investor: An individual who invests their private money in start-up, usually during the pre-seed or seed rounds of a start-up
Carried Interest: The percentage of investment profits that the VC receives as compensation
Closings: When a fund legally secured commitments from LPs for a target portion of the intended total fund size
Deployment Pressure: This term refers to a fund has a lot of committed capital, but little capital currently deployed, meaning they are more likely to invest
Limited Partner (LP): An investor in a venture fund; An individual or legal entity such as a pension fund, trust, or family office investing money into a fund
General Partner (GP): An entity that manages one or more venture capital funds; A legal entity responsible for managing the business operations of a fund. The people working at the GP are expected to privately invest the fund to signal commitment
Management Fee: This is the 1-2% of the committed capital per annum that VCs charge to cover operational expenses
Portfolio: The collection of investments held by a venture capital firm
Syndicate: A group of investors who pool their capital to invest together
Venture Capitalist (or VC): A professional investor who invests in companies with high growth potential using funds raised from their limited partners.
Venture Partner: This role can be divided into two types – expert and scout. Expert venture partners are those who bring in expertise, while the scout type typically brings in deals.
Deal Terms and Conditions Terms
Anti-Dilution Clause: A provision that protects an investor from dilution resulting from later issues of shares
Due Diligence: The process of collecting and analysing information before making an investment decisions
Exit Strategy: The method by which an investor intends to liquidate their shares
Lead Investor: The investor who drives the fundraising round and often negotiates terms on behalf of all investors
Oversubscribed: When demand for shared exceed the amount initially available in a fundraising round
Pro Rata Rights: An agreement between an investor and a company, whereby the company provides the investor the right – but not the obligation – to participate in one or more future funding rounds with the goal of maintaining their percentage ownership in the company
Financial Metrics Terms
Burn Rate: The rate at which a company is losing money
Churn: The rate at which customers stop using a product or service
Customer Acquisition Costs (CAC): The costs – usually related to sales and marketing – associated with acquiring a new customer
Customer Lifetime Value (CLV): The total income a company can expect to generate in from a typical customer for as long as that customer remains a client
Internal Rate of Return (IRR): The expected annualised return a fund will generate over the duration of the fund
Runway: The amount of time – usually in months – a company can continue to operate before running out of money
Recommendations for Fundraising Terminology
The Ultimate Term Sheet Cheat Sheet
We created this cheat sheet to help you in term sheet negotiations. It is a compiled list of terms used in convertible note agreements and terms sheets, and added an explanation and the market standard for each term or provision!
That’s a Wrap
Mastering fundraising terminology is more than a linguistic exercise—it’s a foundational step in building your startup’s future. By equipping yourself with these terms, you empower yourself to make informed decisions, build stronger investor relationships, and articulate your vision more effectively. Remember, the journey to successful fundraising begins with understanding the tools at your disposal. With these terms in your arsenal, you’ll be ready to tackle negotiations and secure the resources you need to bring your vision to life.
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About the Author |
EWOR Team
EWOR is a place where the most extraordinary people find the education, network, and capital to solve the world's biggest problems. Our unique combination of an entrepreneurship academy and early-stage VC (up to €150K investment) firm was built for founders by founders, creating an unparalleled community for like-minded entrepreneurs and over a dozen unicorn founders who are building impactful tech companies.
