Glossary of Terms

An accelerator is a specialized program designed to propel the growth of early-stage startups by offering mentorship, funding, and resources. In exchange for capital injection, accelerators typically take an equity stake in the startup, aiming to fast-track their success in the competitive business arena.

Allocation in startup finance refers to the designated portion of a funding round reserved for a specific investor, whether it be an individual, fund, or group. This predetermined amount, expressed in a monetary value, ensures clarity and transparency in the investment process.

An Anchor Investor, often known as the lead investor, is the first investor in a fund or funding round. This strategic participant plays a pivotal role in setting the tone for the investment, providing credibility and influencing subsequent investors to join.

Angel Investors, often referred to as the unsung heroes of startup finance, are affluent individuals who inject capital into early-stage startups, typically during their seed round. These financial patrons play a crucial role in fueling innovation and growth, taking calculated risks in exchange for potential high returns.

The Annual Revenue Run Rate (ARRR) is a financial metric that estimates a startup's total revenue for the year based on its monthly revenue. It provides founders with a snapshot of their business's revenue trajectory and helps in forecasting annual performance.

An Anti-dilution Clause is a contractual safeguard for investors, shielding them from substantial ownership reduction in subsequent fundraising rounds. This provision adjusts the conversion or exercise price of convertible securities or options in response to events that might dilute the investor's stake, ensuring a fair deal.

AOV, or Average Order Value, is a crucial metric in the realm of startup finances. It represents the average monetary value of each customer transaction, providing valuable insights into consumer behavior and revenue generation.

ARRG Ratio, a dynamic blend of Average Recurring Revenue (ARR) and Growth Rate, is a pivotal metric for startups. It gauges the efficiency of revenue growth, offering a comprehensive view of a company's financial health.

Blended Preferences in startup finance refer to a scenario where all classes of preferred stock share equal payment rights in the event of a liquidation. This financial structure aims to create parity among different classes of preferred stock, ensuring fairness and equality in the distribution of liquidation proceeds.

Bootstrapping in startup finance is a strategic approach where a startup achieves self-financing, foregoing external investments like seed or angel funding. This method relies on lean operations and early revenue generation to sustain and propel the company through its initial stages.

A Bridge Loan in startup finance is a short-term funding solution provided by investors to sustain a company until the next round of financing. It acts as a financial bridge, offering crucial capital with the expectation of being converted into equity during the subsequent equity financing round.

Burn Rate in startup finances signifies the rate at which a company expends cash to cover its operational expenses. Typically expressed on a monthly or weekly basis, this metric is especially relevant for companies in the early stages without significant revenues, offering insights into financial health and fundraising needs.

A Cap Table, short for Capitalization Table, is a foundational document illustrating the ownership structure of a company. It details the distribution of equity among investors, employees, and founders. For Indian founders, the Cap Table is a crucial financial blueprint, offering a clear snapshot of who owns what within the company.

A Capital Call in startup finance occurs when a fund, having identified an investment opportunity, notifies Limited Partners (LPs) to contribute capital. This capital infusion is essential for the fund to execute investments in portfolio companies, aligning the interests of LPs with the fund's strategic investment decisions.

Carried Interest, a pivotal component in startup finance, represents the share of profits that an investment manager retains as compensation. Commonly termed as an "Incentive Fee" or "Performance Fee," it aligns the interests of fund managers with the success of the ventures they invest in. For Indian founders, understanding Carried Interest is vital in comprehending the incentive structures within venture capital funds.

A Clawback or Clawback Provision, integral to financial contracts, is a contractual clause often present in employment agreements, especially within financial firms. This provision stipulates that money already disbursed may need to be returned under specific conditions, ensuring accountability and aligning financial outcomes with agreed-upon performance metrics.

In startup finance, a Vesting Cliff is a crucial element in employee stock options agreements, typically set at one year. It designates a specific duration before which no stock options vest. For Indian founders, understanding the Vesting Cliff is essential in crafting equity structures that align with employee commitment and organizational goals.

Come Along Rights, sometimes referred to as Tag Along Rights, empower investors with the option to sell their shares if a founder or key employee decides to sell theirs. This protective measure ensures that investors aren't left financially stranded if founders choose to exit, fostering fairness and aligning interests within startup investments.

Common Stock, a fundamental element in startup finance, represents a type of equity security distinct from preferred shares. Typically issued to founders, management, and employees, Common Stock plays a vital role in shaping the ownership structure of a company. In the context of an exit event, it's crucial to note that Preferred Shares usually hold priority over Common Shares.

Control Rights, a pivotal facet in startup finance, delineate the authority of an investor or shareholder in influencing the company's decisions. These rights often revolve around voting power, board seat designations, and consent requirements for specific actions. For Indian founders, understanding Control Rights is paramount in maintaining a balanced power dynamic within the company.

The Conversion Ratio, a pivotal element in startup finance, signifies the number of shares of Common Stock into which each share of Preferred Stock can be converted. For Indian founders, understanding the Conversion Ratio is fundamental in navigating the complexities of equity structures, especially in the context of fundraising and potential exit scenarios.

Convertible Rights, a pivotal aspect in startup finance, grant investors the option to convert their Preferred Stock into Common Stock at a predetermined Conversion Rate stated in the corporate charter. This conversion is often triggered automatically, especially upon the occurrence of a Qualified IPO. For Indian founders, comprehending Convertible Rights is essential in navigating investor relationships and ensuring a seamless transition during significant milestones.

Convertible Debt, a strategic financial tool in startup ecosystems, represents a loan structure where the lender has the option to convert the debt into common stock at a predetermined ratio instead of seeking repayment in cash. For Indian founders, understanding Convertible Debt is crucial in navigating flexible financing options during early-stage growth.

Convertible Rights, a strategic feature in startup finance, grant investors the privilege to convert their Preferred Stock into Common Stock based on a predetermined Conversion Rate outlined in the corporate charter. This conversion is typically automatic, especially in the event of a Qualified IPO. Mandatory conversion becomes imperative to ensure alignment among all stakeholders and facilitate a level playing field for new investors.

Covenants, integral components in startup finance contracts, represent obligations outlined within an agreement. When the obligation involves taking a specific action, it's termed a Covenant, while refraining from certain actions is labeled a Negative Covenant. For instance, committing to secure life insurance on key employees is a Covenant, while refraining from budget deviations approved by investors is a Negative Covenant. For Indian founders, understanding Covenants is crucial in navigating contractual commitments.

Cutback Rights, a nuanced element in shareholder agreements, come into play when piggyback registration rights are exercised, but the volume of shares exceeds what underwriters can effectively sell without impacting the offering's price. In such scenarios, Cutback Rights determine which shareholders' shares will be included in the public offering and whose shares may be left out. For Indian founders, comprehending Cutback Rights is pivotal in ensuring fairness and transparency in public offerings.

Demand Registration Rights, a strategic provision in investor agreements, grant investors the authority to compel the company to register their shares for public sale, even in the absence of a planned public offering by the company. Typically, investors or a group are bestowed with one or two Demand Registration Rights. Activation of these rights usually occurs post the company's initial public offering (IPO) or after a specified timeframe. For Indian founders, understanding Demand Registration Rights is crucial in fostering investor relations and navigating the dynamics of public offerings.

Dilution in startup finance refers to the reduction in ownership percentage experienced by existing investors as a result of subsequent financing rounds. It occurs when additional equity is issued during new funding rounds, causing existing shareholders to hold a smaller proportion of the company. Importantly, dilution is not inherently negative. In fact, it can be a positive indicator as new stock issuance at a higher valuation may lead to owning a smaller piece of a more valuable company. For Indian founders, comprehending dilution is essential for effective equity management.

A Down Round in startup finance signifies a fundraising event where the company is valued at a lower value per share compared to previous funding rounds. This valuation decline can be influenced by various factors, including market fluctuations, operational challenges, or shifts in investor sentiment. For Indian founders, understanding Down Rounds is pivotal for strategic decision-making and maintaining investor confidence.

Drag-Along Rights in startup finance confer the authority upon a specified percentage of shareholders to compel other shareholders to sell their shares or cast their votes in favor of the company's sale. This provision acts as a protective mechanism, preventing a minority group of shareholders from obstructing the sale of the company to an acquirer seeking 100% ownership. For Indian founders, grasping Drag-Along Rights is crucial for fostering consensus and facilitating strategic exits.

Due Diligence in startup finance represents the meticulous examination conducted by potential investors to evaluate the feasibility of an investment and verify the accuracy of information provided by the company. This process is a comprehensive scrutiny that encompasses financial, legal, operational, and strategic aspects. For Indian founders, understanding Due Diligence is paramount for fostering investor trust and securing successful fundraising.

Earnings Before Interest and Taxes (EBIT) stands as a pivotal metric, representing a company's operating profit. For Indian founders navigating the financial landscape, EBIT serves as a key indicator of operational efficiency. This term is instrumental in valuation methodologies, particularly when comparing the value of private and public companies based on a multiple of their EBIT.

The Elevator Pitch is a succinct presentation, an art form in the startup realm, where entrepreneurs convey their investment opportunity to potential investors in the brief duration of an elevator ride. Tailored for Indian founders, this concise pitch is designed to capture attention, generate interest, and leave a lasting impression in a limited timeframe.

Employee Stock Ownership Program (ESOP) signifies a reserved pool of options, strategically earmarked for future employee compensation packages. Tailored for Indian founders, ESOPs serve as a potent tool to attract and retain top talent by offering a stake in the company's success.

Exercise Price, also known as Strike Price, refers to the predetermined amount an employee must pay to execute their stock options within an Employee Stock Ownership Program (ESOP). Tailored for Indian founders, understanding the nuances of the exercise price is crucial in crafting equitable and motivating stock option plans.

An Exit Event, or Liquidity Event, signifies a pivotal moment for startups when the issuer undertakes a transaction, allowing investors to divest their shares. Tailored for Indian founders, understanding Exit Events is crucial for strategizing investor returns and celebrating the fruits of entrepreneurial labor.

Exit Velocity, originally a baseball term, finds its parallel in venture finance to describe the swiftness between investment and exit in the startup ecosystem. In the context of Indian founders, Exit Velocity signifies the pace from the initial investment to the liquidity event, enabling investors to cash out. This term is crucial for understanding the speed of returns and gauging the maturity of the invested ventures.

Fair Market Value (FMV) represents a company's worth, determined by what investors are willing to pay. Crucial for Indian founders navigating the startup landscape, FMV is often established through comparable transactions or valuations in the dynamic market.

A fiduciary is an individual entrusted with special duties, holding a responsibility to act in the best interest of another party. In the financial landscape of Indian startups, understanding fiduciary obligations is paramount for fostering trust and transparency.

First Refusal Rights, also known as Preemptive Rights, empower investors with the privilege to purchase additional shares in future offerings by the company. This provision ensures that investors have the opportunity to maintain their proportional ownership and participate in subsequent fundraising rounds on equal terms with other stakeholders.

The Friends and Family Round signifies the initial injection of capital into an early-stage startup, sourced from the personal networks of the founders. This funding round typically marks the first external financial support, often crucial for startups at their nascent stages, even during the ideation phase.

Full Ratchet, a form of Anti Dilution Protection, acts as a robust shield against ownership dilution for early investors in a startup. This mechanism ensures that if a subsequent fundraising round results in a reduced ownership percentage for existing investors due to newly issued shares, these investors have the right to adjust their Conversion Ratio and maintain their original ownership level.

Fully Diluted, a crucial metric in startup finance, refers to the comprehensive count of Common Stock shares. It encompasses not only the shares already issued by the company but also includes potential shares that could arise if all outstanding options, warrants, convertible preferred stock, and convertible debt were to be exercised or converted.

A Fund of Funds (FoF) in the realm of Indian startup finances is a specialized investment vehicle crafted to channel capital into private equity or venture capital funds. This entity, often known as a Limited Partner (LP), plays a pivotal role in supporting the growth of startups by investing in multiple funds.

The GP Operation Agreement (OA) is a pivotal governance document for General Partners (GPs), outlining deal economics, fund management specifics, operational procedures, and terms related to transfers, termination, and dissolution.

GP, or General Partner, refers to a key player in a fund responsible for managing its operations and making investment decisions. The GP typically carries a stake in the fund, aligning their interests with those of the limited partners (LPs).

General Solicitation involves the public solicitation of investors, often through advertising or uncontrolled public offerings. This practice may affect a company's compliance with securities regulations and alter the safe harbors available to them.

Grandfather Rights, often encapsulated in a grandfather clause, are provisions where an existing rule continues to apply to certain situations, exempting them from new regulations. Individuals or entities enjoying these rights are deemed to have 'grandfathered in' or acquired rights, preserving their status quo.

Gross Margin represents the percentage difference between revenue and cost of goods sold (COGS), providing insights into a company's profitability before considering operating expenses.

Growth Equity represents private investments in established, late-stage companies. The primary objective is to fuel revenue growth by expanding into new markets. Investors typically acquire minority positions in leading companies within well-established market segments.

An Incubator is a specialized program designed to offer mentorship, guidance, and capital to propel the growth of nascent startups. In return for support, incubators commonly acquire an equity stake in the startup, fostering a symbiotic relationship between the incubator and the emerging business.

Information Rights empower investors to receive regular financial updates from a company, be it annually, quarterly, or monthly. This privilege, rooted in corporate law, grants investors access to critical financial data and other information, ensuring transparency in the business's operations.

An Initial Public Offering (IPO) marks the pivotal transition of a private company into the public domain. In this process, the company issues its stock to the public for the first time, necessitating adherence to stringent SEC reporting requirements and making crucial disclosures.

An Inside Round refers to a financing round in which a startup secures funding exclusively from its existing investors. This funding strategy involves tapping into the trust and confidence previously established with current backers.

An Investment Syndicate represents a collaborative group of investors who pool their resources to collectively participate in a funding round for a startup. This strategic alliance brings together diverse expertise and capital to support promising ventures.

An Investor’s Rights Agreement is a crucial pact often demanded by early or significant investors in a startup. This agreement encompasses provisions like "First Offer" (the right to partake in future fundraising) and "Observer Rights" (attending board meetings). For Indian founders, this agreement safeguards investor interests and influences shareholder dynamics.

An issuer is the foundational entity or company that shares symbolize ownership in. In simpler terms, it is the business or organization that offers and manages the ownership stakes represented by shares. For Indian founders, understanding the role of the issuer is paramount in the startup financing realm.

The JOBS Act, or Jumpstart Our Business Startups Act, enacted in April 2012, is a regulatory framework designed to catalyze growth for early-stage companies. It introduces provisions addressing shareholder limits for private firms and modifies regulations around private investor solicitation.

A Key Man Clause is a protective provision within a Limited Partnership Agreement (LPA). It grants Limited Partners (LPs) the right to terminate the agreement if a crucial General Partner (GP), often a key decision-maker, departs from the fund.

Key Man Insurance is a protective measure where a company secures insurance policies on the lives of crucial employees, as mandated by investors. In the Indian startup landscape, this ensures financial stability in the event of a key individual's unexpected absence.

Key Man Risk refers to the vulnerability a startup faces when heavily dependent on a single influential individual, often the founder. To mitigate this risk, a strategic approach involves building a robust and capable team around the central figure.

A lead investor in an Indian startup is the proactive contributor who spearheads negotiations, conducts due diligence, and oversees the company post-investment. This investor, often situated near the startup or specializing in its industry, typically commits a larger investment compared to other participants in the funding round.

A Letter of Intent (LOI) is a formal agreement between businesses, including startups, and potential customers. Similar to a Memorandum of Understanding (MOU), it outlines commitment, interest, terms, and pricing before the delivery of goods or services. Typically non-binding, LOIs clarify understanding between parties and are often showcased to investors.

A Limited Partner (LP) serves as a major investor, typically funding 99–100% of a venture capital or private equity fund. LPs play a pivotal role in supporting the growth of startups by providing capital for investments.

A Limited Partnership Agreement (LPA) serves as a comprehensive, often intricate, document outlining the terms and conditions between Limited Partners (LPs) and General Partnerships in a venture. For Indian founders, understanding this legal framework is pivotal for navigating the intricacies of partnership dynamics.

Liquidation, for Indian startups, signifies an event wherein investors or debt holders could receive cash. This unfolds through acquisitions or asset sales arising from bankruptcy. The order of payout, dictated by preference clauses, typically prioritizes debt holders and preferred shareholders over common stockholders.

Liquidation Preference in Indian startup finance refers to the predetermined order in which investors or debt holders receive payouts during company liquidation or bankruptcy. This strategic provision, often utilized by venture capitalists, ensures prioritized returns on their investment in various liquidation scenarios.

Liquidity in the realm of Indian startup finances pertains to the ease with which an asset can be transferred, experiencing minimal interference from the issuer. While public equity showcases high liquidity with numerous buyers and sellers, private company stocks exhibit lower liquidity due to more limited market participants.

A lock-up period signifies the duration during which the holder of a specific security, such as stocks, is restricted from transferring or selling the said security. In the dynamic landscape of Indian startups, this temporal constraint plays a crucial role in shaping trading activities.

Management Fees represent the annual charges imposed by a venture capital fund on its Limited Partners (LPs). Typically ranging between 1–3%, with 2% being standard, these fees are levied on committed capital during the investment period and later on invested capital post this period.

A Memorandum of Understanding (MOU) is a pivotal agreement between startups, particularly those in the pre-product phase, and potential customers. It serves to establish a written understanding of commitment, interest, terms, and pricing before the delivery of goods or services. Often used interchangeably with Letter of Intent (LOI), MOUs are typically non-binding, facilitating partnerships and defining working relationships.

A milestone in the startup realm signifies a crucial event or achievement that serves as a trigger for additional investment by venture investors. These milestones act as markers of progress, aligning the startup's growth with investor confidence.

MFN, or Most Favored Nation, is a provision allowing the largest investor to receive all benefits negotiated by other Limited Partners (LP) with the individual LP investors. This ensures equal treatment and privileges for the anchor investor.

Net Revenue, distinct from gross revenue, reflects a company's income after factoring in price reductions, adjustments, and refunds. It provides a more accurate representation of actual revenue generation.

Non-binding refers to the level of legal commitment in documents like term sheets, Memorandums of Understanding (MOUs), and Letters of Intent (LOIs). These documents allow both investors and startups to withdraw from the proposed agreement without legal consequences.

A Non-disclosure Agreement (NDA) is a legally binding document employed by entrepreneurs to shield their ideas when sharing them with external parties, such as potential investors.

An Option Pool is a predetermined set of Common Stock shares, specified in the corporate charter, reserved to be offered to employees, officers, and directors at favorable prices. It aims to attract a skilled team without triggering Price Antidilution Protection for Preferred Stock.

An Over-Allotment Option grants investors the right to exercise the First Refusal and Come Along Rights of fellow investors who choose not to utilize their own privileges. It adds a layer of flexibility in investment scenarios.

Pari passu, a legal term with profound financial implications, signifies equal treatment for multiple parties within an agreement. In the context of startup finances, it ensures that all parties are treated "on the same terms as."

Participating Preferred refers to a type of stock in which holders, upon liquidation, receive their initial investment back along with a share of any remaining proceeds. This contrasts with non-participating preferred, where holders choose between their initial investment or the amount they would have received if converted to common stock.

Participating Preferred Stock, a distinctive class of shares, provides the shareholder with the right to partake equally with Common Stockholders in the remaining assets post-settlement of the Liquidation Preference on liquidation, sale, or merger of the company.

A Party Round signifies a shift in early-stage financing, where instead of securing substantial funds from a few major investors, startups opt for smaller amounts from numerous individual investors. This trend has gained prominence in recent years, reshaping the dynamics of fundraising in the startup ecosystem.

In venture capital, "Pay to Play" is a contractual provision empowering investors to maintain their financial commitment to a startup, ensuring ongoing support. Failure to comply may result in the loss of certain rights, often linked to anti-dilution safeguards.

Piggyback Registration Rights grant investors the privilege to include their shares in a public offering conducted by the company or another shareholder. This right is often unlimited until registration rights conclude.

Piggyback rights confer upon an investor the privilege of having their shares included in a company's registration for an Initial Public Offering (IPO). This strategic provision aligns with the investor's aspiration to be part of the IPO journey, leveraging the company's public debut.

A pledge embodies a contractual agreement wherein one party commits to transferring cash proceeds from equity liquidation to another party. This transfer occurs in exchange for cash received before the liquidation event transpires.

A portfolio company, in the realm of startup finances, refers to a business entity that has secured an investment from a venture capital fund. Once an investment is made, the funded company becomes a part of the investment portfolio managed by the venture capital fund.

Post-Money Valuation, a vital metric in the startup funding landscape, results from adding the investment amount to the Pre-Money Valuation. It signifies the overall estimated worth of a company after external funding.

Post-money valuation in the landscape of startup finances refers to the overall estimated worth of a company after incorporating the capital injected during the current financing round. It signifies the company's value inclusive of the recent infusion of funds.

Pre-Money Valuation signifies the hypothetical value of a company before a mutual investment agreement between the company and investors is established. It serves as a crucial benchmark in financial negotiations.

Preemptive Rights, akin to the rights of first refusal, grant shareholders the privilege to acquire new shares of a company before external parties. Often termed "Right to Participate Pro Rata in Future Rounds," it's a standard provision in term sheets.

Preferred Stock represents a class of stock equipped with a Liquidation Preference. This grants shareholders the right to receive priority distributions of money or assets in the event of a sale, merger, or liquidation

Price Anti Dilution Protection is a mechanism designed to shield investors from potential losses by adjusting the Conversion Ratio of Preferred Stock in case the company issues new shares at a price lower than the initial investment. This adjustment ensures a fair balance between investor interests and subsequent valuation changes.

The Price/Earnings to Growth (PEG) ratio serves as a key valuation metric, gauging the equilibrium between a stock's price, earnings per share (EPS), and the anticipated growth of the company. It provides insights into a stock's potential value relative to its earnings growth.

Private Placement involves the targeted sale of securities directly to a limited pool of qualified buyers, such as accredited or institutional investors. This strategic approach often exempts the placement from standard SEC disclosure and registration requirements, providing flexibility in fundraising.

Private Placement Memo (PPM) serves as the comprehensive blueprint, typically spanning 50–100 pages, outlining the intricacies of initiating a fund or making a significant investment. It essentially functions as the business plan, encapsulating the core strategies and details.

Pro-rata rights empower an investor to maintain their proportional ownership stake in a company by participating in subsequent funding rounds. This provision allows investors to uphold their percentage of ownership and signals commitment to promising ventures.

Protective Provisions embody the right of an investor or a group of investors to veto specific transactions within a company. These provisions serve as a protective shield, requiring approval via a class vote of the Preferred Stock before certain critical decisions can proceed.

A Qualified IPO refers to the initial public offering of a company, specified in its corporate charter by a predetermined size and price. Typically, it involves a predefined threshold of gross proceeds and a specific share price to meet the criteria.

A Ratchet is a protective provision in investment agreements that shields investors from potential losses in subsequent funding rounds or an Initial Public Offering (IPO). It ensures down-round protection by allowing investors to receive additional shares if a future financing round or IPO occurs at a lower valuation than the initial investment.