Terms Venture Capitalists Should Know
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Whether you’re a venture capitalism newbie or someone who wants to refresh your knowledge about the industry, an understanding of terminology is indispensable.
Being able to “talk the talk” is essential in helping you gain confidence as a venture capitalist, find sound footing in the industry, and to flow better when you engage in discussions or meetings.
We compiled this list so you’d have some of the industry’s key terms at your fingertips.
What 14 Venture Capitalist Terms Mean
What is Equity?
As a venture capitalist, this term is a predominant one that will spring up in various discussions. Simply put, it is the percentage of ownership an individual possesses in a business. Usually, when venture capitalists invest in an entity, it is done in exchange for equity, or the percentage held in a company’s shares.
What is a B2B?
Knowledge of the kind of model an organization utilizes is expedient and can be very helpful in your decision-making process. B2B, business-to-business, means that a company’s target customers are other businesses, and it sells its products and services to other businesses, rather than an individual consumer.
Another related term and probably the more common business model employed is the B2C, business-to-consumer, the typical delivery of goods and services directly to customers.
What’s the difference between Merger and Acquisition?
While these terms have been used in close relation and often interchangeably, they do not mean the same thing and have subtle implications.
A merger occurs when two companies pull together resources to form a joint company. In contrast, an acquisition occurs when a more established company purchases and takes over another company, usually one with less strength.
Acquisitions can either be friendly, which is when it is done with an agreement, or hostile, one which is done without any agreement drawn up.
Explain Liquidation and Liquidation Preferences.
Liquidation is a reasonably common occurrence in the business sphere. It happens when a business does away with its assets and inventory by selling it off and bringing it to a halt.
Typically, a contract is drawn up that serves to protect the interest of investors, thereby giving them access to obtaining their money in the occurrence of liquidation; this contract clause is referred to as the liquidation preference.
What is a Proof of Concept?
A proof of concept portrays the feasibility of a startup idea or concept. As a venture capitalist, this would be demonstrated when startups pitch their ideas to you for funding.
What is an Initial Public Offering (IPO)?
The initial public offering refers to the initial time a company tenders its shares of stock to the public on the stock exchange. When this occurs, the company switches from a private company to a public company. Any other subsequent stock made by the company is referred to as a secondary public offering.
What does Benchmark refer to for VCs?
Benchmark refers to the yardstick a startup company uses to measure its success. As an investor, it refers to the specific pointers investors look out for to measure a startup’s growth, usually used in deciding whether to invest in the startup or not.
What is Pre-Money Valuation?
Investors have to determine the value of your startup before they chip in with the funding. The value of your startup before funding is commonly referred to as the pre-money valuation. It entails the value of all issued stock and other assets that can be converted into common stock. It helps investors compute the percentage of ownership they will get in exchange for the funding.
What is Founder Vesting?
Vesting is the process by which founders “earn” their stock in the startup over time, depending on their commitment and performance. In addition, the vesting agreement gives the startup the right to buy back the stock if a co-founder leaves. This incentivizes the co-founders to stay while hedging the startup against negative impact should one of them leave.
What are Anti-Dilution Provisions?
Anti-dilution provision is a clause that stipulates that if an investor needs to sell stock at a price lower than what they paid, they’re entitled to additional stock to preserve their original equity ownership. The provisions act as a buffer to protect the investors against their ownership stake becoming less valuable.
What are Protective Provisions?
In some cases, particularly early-stage startups, investors would seek to have veto rights over certain corporate actions. The protective provisions may include things such as limits to how you can amend a certificate of incorporation or where you can raise funds. Basically, they give the investors the right to know and stop certain actions that may cause problems in the future.
What is Exclusivity?
When you sign the terms sheet with the investors, they’ll need time to do due diligence to decide whether to invest in your startup or not. Exclusivity is a standard condition that bars you from talking to other investors during this period. Typically, the exclusivity lasts for 30-45 days.
What is Due Diligence?
Due diligence is the review or audit that investors conduct to determine the viability of your business idea before making the investment. They seek to authenticate that everything you represented in your pitch deck, including pre-money valuation, financial records, and intellectual property, is true.
What is Minimum Viable Product (MVP)?
The minimum viable product is the unadorned version of your product. If you’re in SaaS, this is the basic version of your product with the fundamental features and without the bells and whistles. Investors use your MVPN to test how appealing your product is to the target customer to decide whether to make the investment or not.