Glossary of Venture Capital terms
Unicorn Nest helps founders find relevant investors and contact with them. We have compiled this summary to help first-time founders get to know the specific jargon of the venture capital industry. We have included the most popular terms here and demonstrated some of them with additional data. We hope this summary will be helpful for users. If you have any questions or suggestions, don't hesitate to contact us at [email protected].
A few core terms from this glossary
A startup accelerator is a for-profit venture capital fund that provides funding in exchange for a stake in the company. It offers mentorship, resources, education, and networking opportunities to its portfolio companies.
Top-10 accelerators by number of investments:
|Accelerator name||Total number of investments|
|Plug and Play Tech Center||1434|
Acqui-hiring (combination of words “acquisition” and “hiring”) is a relatively new phenomenon in tech industry as a recruitment strategy which stands for purchasing companies in order to recruit and acquire its employees while the product of the company becomes secondary.
A high-net-worth individual or wealthy individual who is likely to be the first source of external funding after friends and family and invests in startups in their early stages of development, or through seed round of fundraising. Due to the inherent risk of loss of capital or significant dilution in subsequent fundraising, angel investors usually pursue investments with returns that believe may have the potential to return multiples of the initial investment.
A contractual clause that protects an investor from having the investment as a percentage of ownership significantly reduced in subsequent rounds of fundraising. The majority of dilution happens in relation to funding rounds if a company is doing well and has structured its fundraising process properly, its expected value will multiply at least a few times over with each consecutive round. The contract works to decrease the amount of shares existing shareholders will own, but increase their overall equity worth by increasing the company’s valuation.
A startup’s business strategy in which the company self-finance, eliminating the need for seed or angel investment. It is typically achieved by using a lean operation and a product that generates revenue early on in the company’s life cycle. One way to fund your startup is by bootstrapping; this is when founders invest their own money in the business or get friends and family to do so. Bootstrapping allows business owners more room to experiment with the business and product since they aren’t pressured to meet investors’ expectations.
A loan for short-term funds to fund the operation until more comprehensive financing is available. In venture capital, the need for a bridge loan typically arises when a company runs out of cash before it has enough track record to close a new funding round with reasonable terms; a bridge loan is designed to create more runway for negotiating the next funding round. It is a temporarily limited amount of financing that serves as a ‘bridge’ until the long-term debt or equity investment can be secured.
The amount of money a company uses over a set period of time to support expenses. It is usually expressed monthly or weekly and typically applies to a company with no revenues, giving a metric of financial health and fundraising needs. A company with a low burn rate, assuming it has the capital to continue operations, theoretically can operate longer without new injections of capital.
A business plan is essentially a roadmap for your startup, describing the objectives and how they will be achieved. It should address topics like the business’s finances, market strategies and management plan. A business plan is also used to attract investors during the early stages before your company has established a proven track record. It typically includes: executive summary, product, management team, marketing plan, business system and organisation, realisation schedule, risks and financing.
An official document that shows the capital structure of a company, including the specific percentage ownership that each individual owns. Generally used to view who owns how much of a certain company, though in later rounds of funding a company’s cap table might have multiple share classes having very distinct rights regarding liquidation preference.
When a fund makes an investment, it notifies its limited partners to put their capital into the fund account to invest in the portfolio companies. When a general partner is ready to make an investment, it will ask its limited partners for the capital they have already committed to putting into the fund.
Capital Under Management
The total amount of money a venture capital team is managing. It includes all the funds they are still working with, as well as the full original size of some very old funds that are no longer making new investments. It is just waiting to liquidate the last few remaining portfolio companies for this last round of funding.
The share of generated profits that an investment manager is entitled to keep as compensation. Typical venture capital fund incentive fees range from 20% to 30%, depending on the fund. It is also referred to as an “Incentive Fee” or a “Performance Fee”.
Usually, in employee stock agreements, stock options do not vest until one year after they are granted. Options may only be exercised after they have vested but before the specified expiry date. Other possible stock vesting agreements usually give the employee an incentive to perform well and remain with the company for a longer period. Vesting usually occurs before the expiry date.
The type of equity security is contrasted with preferred shares. Common stocks are most frequently issued to both founders and management; in a liquidation event, preferred shares generally take priority over common shares.
Convert preferred shares to common shares. The preferred stock that VCs are issued almost always comes with conversion rights, conversion generally happens in relation to a liquidation event, once converted the shares can not be converted back. Convertible notes can also be converted into preferred shares at a conversion ratio based on the issue price of a future financing round.
A convertible note (also known as convertible debt) is a type of short-term debt from an investor to a startup that can be converted into common shares (see common stock), or preferred shares (see preferred stock) depending on the nature of the investor. The investor loans money to a startup, and the convertible note “converts” the loan (principal plus interest) into equity that is repaid at the maturity date.
Corporate Venture Capital
Corporate venture capital is a subset of venture capital. Corporate VC entails a corporation making systematic investments into startup companies by taking an equity stake in an innovative startup somehow related to the company’s own industry and potential future roadmap, and offering synergies, networks, and other support that a regular VC may not bring to the table. See the blog entry “The Lure of Corporate Venture Capital” for more on this subject.
Top Corporate VC investors by total money invested
|Investor name||Money invested, bln USD|
|GV (Google Ventures)||42.4|
|Mubadala Capital Ventures||16.6|
|Bain Capital Ventures||15.8|
Crowdfunding is a financing method where a group of individuals invests in your business. You need to showcase your project on a large scale to convince investors, so that they will invest. Depending on the type of crowdfunding, investors may receive shares or interest, or products or services for their investment; pay nothing at all; or possibly ask for something as part of their investment.
Potential investors can access proprietary information on a target company, such as financial accounts, compensation agreements, intellectual property, and customer contracts, in a safe, digital location. Data rooms are frequently used to help with legal or financial due diligence during a purchase, but they can also be used for other purposes. A venture capital firm, for example, will want to go over all of the corporate documents (including charter documents, stock and option paperwork, contracts, etc.)
The total number of transactions completed in a given time period. An investor, corporation, or funding institution’s deal flow is the quantity and quality of possible investment possibilities available to them.
A decacorn is a privately held startup company with a market capitalization of more than $10 billion. There are now less than 20 decacorns in the world, almost all of which are based in the United States or China (the single exception in April 2019 was India’s Flipkart, which was valued at around $12 billion). A decacorn is a unicorn that has evolved into a decacorn.
The most famous decacorns:
Generally speaking, as new financing rounds occur , existing investors generally own a different proportion of the company than previously . The new stock issued may be at a higher price and you may have a piece of a larger company , which means the value of your investment is actually higher than previously .
Shareholders can receive a share of profits paid by a company to its shareholders. Dividends can be paid in cash or in shares.
A funding round in which a startup issues shares at a lower valuation than in their previous round. A down round is considered a rather detrimental indication that a company is struggling.
A drag-along right is a provision in an agreement that allows a majority shareholder to force a minority shareholder to join in the sale or merger of the company.
The amount of capital available for a new investment in the venture capital. It can be divided into two parts: money available for totally new investments and money reserved for follow on investment to existing portfolio companies.
The equivalent of a full-body search in the investments. The company provides the VC team with a business strategy, financials, team information, and other documents. Prospective investors use this method to analyze the viability of an investment and validate that the company’s information is correct.
Venture capital investment during the period from seed to late-stage deals (the early phase of a company’s life). This is when companies have a proven concept and little revenue but still have sufficient venture capital interest to attract external funding for continued development.
Breakdown of early-stage deals historical data by the amount of capital invested:
|Stage||Money invested, bln USD|
Earnings before interest, tax, depreciation and amortisation (EBITDA)
EBITDA, Earnings Before Interest, Tax, Depreciation and Amortisation, is a measure of a company’s operational profitability, before any interest or tax has been paid. It is a valuable measure when used to compare companies in the same sector, but should not be used to compare companies in different industries.
An entrepreneur’s short presentation given from an entrepreneur to a potential investor about an investment opportunity. In the financial world, this refers to a short presentation from an entrepreneur to try convince a venture capitalist that a business idea is worth investing in.
Employee Stock Option Plan
An employee stock ownership plan (ESOP) is a type of employee benefit plan that allows eligible employees to benefit from the value of the company’s stock. Under an ESOP, certain employees have a right to buy shares in the company at a predetermined price (exercise price) within a specified period of time (exercise period). Under a (Restricted) Stock Ownership Plan, employees are not granted options, but buy shares at once. ESOPs and (Restricted) Stock Ownership Plans offer companies a way to employ (and retain) high-quality people at relatively low salaries
The percentage of ownership in a company is referred to as equity. VCs usually invest in return for equity, which is a percentage of the company’s stock. Equity refers to a company’s ownership and is often represented by common and preferred shares. Assets minus liabilities equals equity.
An exit occurs when a significant amount of company ownership is sold for cash, debt, or equity of another company. Venture capital funds typically invest in companies with a clear exit milestone in mind. If your company is not ready to exit within a few years, then you should not consider receiving VC funding either.
Fair Market Value
“Fair market value” is the value of a company based on what investors are willing to pay for it. This can vary widely depending on how recently the company’s value was assessed.
A family office is a private venture capital fund investing on behalf of a single high-net worth individual, family, or group of families. Private funds are able to be more flexible than institutional VCs due to the lack of outside investors.
Top family offices:
A round of funding in which a startup issues shares at the same post-money valuation as its previous round of funding. This effectively signifies that your company’s value has decreased. Existing shareholders’ stock, including yours, will be worth less after the round due to dilution.
An investor has previously invested in the company — generally in a later stage than their initial investment. When an investor invests in a follow up financing.
Anti-dilution provisions are used in convertible debt or preferred stock securities to ensure the value of the instrument remains constant. It does this by automatically adjusting the conversion price of the instrument to that new lower price.
When ownership is calculated taking into account all possible sources of new shares (convertible loans, options, warrants) it is called fully diluted. By lowering each class of security to its Common Stock equivalent, fully diluted computations are used to compare the percentage ownership of a firm by different classes of securities.
An investment vehicle managed by general partners, that limited partners commit capital to. They are pooled investment funds that manage the money of investors who seek private equity stakes in startups and small- to medium-sized enterprises with strong growth potential. These investments are generally characterized as very high-risk/high-return opportunities.
You can browse all the VC funds in our catalog.
Fund of funds
A private equity and venture capital fund that invests money in a portfolio of different private equity or venture capital funds . The funding entity is often referred to as a limited partner to the venture capital funds.
|Top funds of funds||Number of deals|
|Matrix Partners China||646|
|World Innovation Lab (WiL)||139|
|Vintage Investment Partners||130|
|Mirae Asset Venture Investment||101|
|Ontario Teachers' Pension Plan||84|
|Mubadala Capital Ventures||83|
|J & W Seligman||77|
General Partner (GP)
VC funds are usually set up as limited partnerships, with one General Partner (a business run by the VC team that manages the investments) and a number of Limited Partners (LPs, the investors of the VC fund). General Partners are a term used to describe the important members of the VC team.
An organization that provides office space, resources, advice, and networking opportunities to early-stage entrepreneurs (usually in exchange for equity).
Initial Public Offering (IPO)
Initial public offering (IPO) is the first time a private company’s stock is made available to the public. All companies planning an initial public offering (IPO) must register with the Securities and Exchange Commission (SEC) and take all necessary steps to comply with all applicable rules and regulations.
Internal rate of return (IRR)
The interest rate at which a certain quantity of capital must be invested today in order for it to grow to a specific value at a future date.
Investment committee (IC)
An investment committee is a group of partners at a VC fund that will make the ultimate call on each of its investments. In a small fund, the IC will include all of the firm’s partners. In a larger fund, the IC may consist solely of the firm’s most senior partners.
A later stage company is typically about 6 to 12 months or so away from an IPO or strategic takeover. The usual characteristic of a late stage startup is that it has proven its concept and achieved significant revenues, and is approaching cash flow break-even or positive net income.
The lead investor is the most active stakeholder during the venture financing process and takes the bulk of the work in negotiating, performing due diligence and monitoring the business post-closing. The lead investor usually/invest more than other investors who participate in the round. The lead investor is often located near the company or specializes in the company’s industry.
|Name||Lead investments||Total investments|
|Technology Development Fund||660||705|
|New Enterprise Associates||359||2062|
You can learn which investors are leading rounds in our catalog.
Limited Partner (LP)
A limited partner, typically funds 99-100% of a venture capital fund, is an investor that invests in VCs.
A liquidation event that results in an acquisition of company assets, or the sale of the company itself, under the supervision of a bankruptcy court. In either case, preference clauses determine the order in which claims against the company are paid out. Debt holders and preferred shareholders (if applicable) typically value over common stockholders.
In the event of company liquidation, it is the order in which investors, or debt holders, get paid. Commonly used by venture capitalists to ensure they see at least some return on their investment, in different liquidation scenarios. The last-invested money has the highest priority, and common shares have the lowest priority. Typically, in a successful high-value exit, all share classes will get their full share of the exit proceeds. In a distressed fire sale exit typically only the share classes close to the top of the stack has any value.
When a general partner sells an asset’s equity and distributes the proceeds to its limited partners. an occurrence that permits an investor to profit or lose money on his investment. Initial Public Offerings (IPOs), trade sales, buy-outs, and takeovers are all examples of liquidity occurrences.
In an initial public offering, the lock-up period is determined by the underwriters. A period of time that must elapse before the holder can transfer or sell security.
The annual fees that a fund will charge to its limited partners. The management fee is normally one to three percent per year (usually two percent) and is calculated on committed money during the investment period and then invested capital after the investment period ends. The fee charged by general partners to limited partners in order to administer a fund.
Mergers & Acquisitions (M&A)
Mergers and acquisitions are abbreviated as M&A. A deal is called an acquisition when one firm buys another and clearly identifies itself as the new owner. A merger occurs when two companies, normally of similar size, agree to merge into a single new entity. M&As can be a smart way for a startup to expand.
Non-disclosure agreement (NDA)
A non-disclosure agreement (NDA) is a legal contract between two or more parties that defines sensitive material and information that the parties want to communicate but should not be shared with outsiders.
“On the same terms as” is a legal expression that refers to equal treatment for two or more parties in a contract.
Participating Preferred Stock
A liquidation preference gives the owner of preferred stock a share of the company’s remaining assets after the holders of common stock and debt holders are paid. It’s designed to provide a safety net for the original investors in case the company is sold or dissolved.
A funding round with participation from a big number of investors, sometimes as many as 20 and without any investor having a sufficiently large stake to be truly invested in the success of the company.
Pay To Play
A funding round that includes a large number of investors, sometimes as many as 20, but none of them has a sufficiently enough ownership in the firm to be fully invested in its success. For this reason, founders should avoid party rounds for at least the first few rounds.
A venture capital fund’s portfolio firm is a company that has received funding from the fund.
Top investors by number of portfolio companies
|Investor name||Number of portfolio companies|
|EASME - EU Executive Agency for SMEs||3460|
|National Science Foundation||1772|
|Right Side Capital Management||1177|
The worth of a company following a funding round is known as post-money valuation. The dollar amount invested in the transaction is added to the pre-money valuation to arrive at the post-money valuation.
The company’s theoretical value prior to the investment agreement between the company and the investors. The number of fully diluted shares of the company before the investment transaction is multiplied by the purchase price per share in the investment transaction to arrive at a pre-money valuation.
You can check out startup valuation using our Startup Valuation Nest.
The stage before the seed stage. Investors have started to invest in companies at this stage in the hopes of finding them early on. A pre-seed company is often just the founder(s) and an idea. The first round of investment for a new firm occurs so early in the process that it is not usually counted among the funding rounds.
Preference shares are a type of stock that guarantees the investor a fixed amount of money or assets before holders of Common Stock receive any money or assets.
This safeguards the investor by ensuring that they receive their funds and, in some cases, a guaranteed return on their investment before Common Stock holders receive any money or assets.
Top private equity investors by number of deals
|Private equity investor||Number of deals|
|Tiger Global Management||1125|
|SoftBank Vision Fund||431|
Investors in a company can be part of a subsequent round of funding in order to maintain their percentage ownership, thus pro-rata investment rights are exercised to maintain the same percentage which is described as “continuous investment”.
Registration rights allow investors in a public offering to require the company to include shares owned by the investors in a registration statement filed with the Securities and Exchange Commission. There are three general types: the first is a demand registration, which gives investors access for up to 90 days after completion of an offering to request underwriting for additional shares; the second is a piggyback registration, which gives investors access to unsold shares after an initial public offering; the third is an S-3 registration right which gives investors access to undeclared shares after an IPO.
A method of valuing a company based on a comparison of private and public values as a multiple of revenue. When analyzing a company that is not yet profitable, the revenue multiple is frequently applied.
Right of First Refusal
The right of first refusal is a particular departure right offered to a company’s strategic partner in Venture Capital. The partner is given the option to buy the company on the same terms as a third-party buyer.
The term “run rate” refers to a company’s predicted financial performance based on its present financial performance and the assumption that existing conditions will not change.
A SAFE agreement is a contract between a corporation and an investor. A SAFE is used by the investor to invest in the company. With a SAFE, the investor receives the right to purchase stock in a future equity round (if one occurs) in exchange for the money, subject to specific restrictions stated in advance in the SAFE.
A secondary sale is when a shareholder of a private company sells his or her shares to another buyer, often prior to an IPO. Sometimes, the company itself will sell a small portion of its equity in a secondary round. This is a transaction in which an investor buys shares from an existing shareholder rather than from the company itself (through an issue of stock). Series B or C rounds are very late stage; at this point the founders and early employees may want some liquidity but want to keep their incentives to continue working on the project as well.
Before the early stage, the first stage of venture capital funding. Angel investors frequently offer the initial funding required to get a business off the ground.
A graph of seed round deals in the last 10 years:
Here is a video from Y Combinator useful for any seed-stage startup:
Series A round
The first important round of funding in which one or more venture capitalists invest in a fast-growing company that has previously been financed by founders, seed venture capitalists, and/or angel investors. A Series A round typically raises between two and ten million euros.
A graph of series A total deals in the last 10 years:
Series B round
This round of funding is usually sought by companies that have already developed a solid product and user base. This can be the case if an initial investment has already been made. The main goal of this funding round is to get enough money for your company to grow and reach the next level in its sustainable growth.
Series C Round
When Series C shares are issued, the startup has already reached a certain level of success, and is looking to develop new products, expand to new markets, or even acquire other companies. Series C brings new investors to the table. These investors include private equity firms and late stage VCs. They provide more capital with the expectation of higher multipliers.
A shareholders’ agreement is a contract between a company’s owners that spells out their duties, responsibilities, and rights as shareholders. It addresses important topics such as corporate administration, officers, fresh share issues, day-to-day management, decision-making, and shareholder exits.
A right to buy or sell a given number of shares of stock at a specific price for a set length of time. At high-growth organizations, stock options are frequently employed as long-term incentive compensation for management and staff.
The group of venture capitalists who all engage in the same investment round under the same conditions.
Check out Unicorn Nest research about syndicates:
Right of shareholders to sell shares with same terms as majority shareholders. This applies to a sale by investors and is known as Co-Sale right.
A non-binding agreement that lays out the fundamental terms and conditions of an investment or other transaction. The Term Sheet is a document development template for more extensive legal papers. Once signed, it signifies that the investor and the company want to proceed with the transaction and specifies the investment’s major economic and corporate governance aspects.
A unicorn is a privately held startup firm with a market capitalization of more than $1 billion. There are currently around 800 unicorns in the world, with the majority of them hailing from the United States and China.
You can delve into our research on Unicorn Universities here:
Venture capital funds typically invest in beginning companies as minority shareholders, notably in high-growth industries such as software, the internet, and consumer technology. Some venture capital firms concentrate on very early stage (pre-revenue) businesses and make a high number of minor investments. Later-stage venture capital funds often invest in more established companies that have significant revenue and consumer traction but are still unprofitable.
Debt financing given by specialized banks or venture debt funds is known as venture debt. Venture debt is frequently used in conjunction with venture capital funding. Venture financing, unlike traditional bank loans, is available to potential startups and growth enterprises who do not have positive cash flows or large assets to utilize as collateral.
Venture partners are a type of VC firm’s associated professional who has a limited area of work. They are not “generic” partners in the proper sense of the word. Given the large number of VC companies that exist presently, more VCs are employing venture partners as a method to differentiate out.
When something promised is delivered and the recipient’s ownership is officially transferred. Employees typically have their shares vest according to a set timeline. To maintain alignment of interests between the company and the employee, vesting effectively means that employees only receive their stock remuneration after a term of service.
The right to buy stock at a set price at a later period. Stock options are similar, although they are often awarded to investors rather than employees.
The Conversion Ratio is adjusted according to a formula that takes into consideration both the lower price and the number of shares issued at the lower price. This is preferable to a Full Ratchet for the company.
Losses are recorded as decreases in the value of assets and/or decreases in the value of companies.
Venture capital is a whole industry of its own, with its particular vocabulary, jargon, and memes. It may seem not easy to understand everything at once. Make sure to take your time to orient in this new domain.
If you’ve found that some definitions are incorrect or you have suggestions on what to change, you can write to as at [email protected]