More Common VC/Investing Terms

Since you guys enjoyed the last time we created a common list of VC/Investing terms here is another one:

More Common VC/Investing Terms

  1. Soft capital commitment: it’s when an investor says that he/she will invest money once some milestone is hit (generally that milestone is getting the lead investor). No papers are signed at this point and those commitments are very fragile. When the COVID hit most of such commitments disappeared in an instance.
  2. Lead investor: The first investor in a funding round; can be also referred to as the anchor investor. Those are hard to find and sometimes anchor investors get better terms for additional risk they are taking.
  3. Down Round: A fundraising round in which a company raises money at a lower value than before. For example, if you raise your series A at 10 million valuation and then raise Series B at 8 million valuation – that’s a down round. Horrible thing to happen with a startup and sometimes kills the company completely.
  4. Anti-dilution Clause: A contractual clause that protects investors from having their investment value reduced in future funding rounds. This clause protects investors from the down rounds – if she invested 2mil at 10mil valuation and a startup had to raise additional capital at 8mil, she will be given additional shares.
  5. Pro Rata Rights: A contractual clause that protects investors from having their stake in the company diluted. This means that investors are allowed to buy additional shares at every round of funding to maintain their stake in the company. So an early investor in Uber might maintain her 1% in the company even on the day of the IPO because of that provision (she’ll spend some extra money retaining this stake of course).
  6. Bridge round/bridge loan: A round of funding or a loan that helps a company achieve a certain milestone that it couldn’t achieve using money from the previous round. For example the founders have $ 100k in their account after their Seed round but they want to acquire additional 10k users prior to raising their Series A. That will cost additional $ 300k and at this point bridge rounds/loans are coming into play. Generally bridge rounds/loans are raised from existing investors.
  7. Cap Table: paper that provides data on who owns what percentage of the company, when did they join and at which value did they invest. One of the must-haves at every single round of fundraising.
  8. Management Fee: The fees that General partners of Venture funds charge their limited partners each year. VCs pay for their due diligence and sometimes provide support to the startup (such as accounting services, legal services etc.) by taking money from that management fee. If you work with a small fund, chances are they won’t be able to help you with that since their management fees are small.
  9. No shop clause: A clause in a term sheet that prohibits founders from sharing the term sheet with other investors in an attempt to receive a competing offer. Rarely used in real life, but if an investor wants to sign one of those with you, run a very precise background check on the investor – that might be a sneaky move by a sketchy VC.
  10. Party Round: A round in which a startup raises multiple investments from a lot of small investors. This is becoming a new trend because “it’s easier to raise 10k from 10 investors than 100k from one investor” – that statement isn’t always true so you have to assess the situation yourself. We recommend party rounds for founders with large networks of industry professionals who are making $ 100k+/year in salaries.
  11. Washout Round: A round in which founders and previous investors get significantly diluted. The new investor in this round will most likely gain majority ownership. Basically it’s like a bad version of the acquisition. Washout Rounds (similar to washout sale) happen in the situation of the company crisis – this is the last resort for a startup.
  12. Lock-up Period: A specific amount of time that must pass before someone can sell their shares in a startup. That’s one of the downsides of IPOs – founders of the company frequently face 6-18 months lock-up periods and that’s why some companies (like Spotify) prefer direct listing. These provisions also prevent investors in your company from running around selling your shares the next day they bought them.

Some of these terms we got from the previous post, so if there is something you’d suggest us to include in the next article – make sure to comment what it is that you want us to cover next!

And here is the link to our previous post on this subreddit: top 10 terms in fundraising

submitted by /u/FundraisingRad1
[link] [comments]
Startups – Rapid Growth and Innovation is in Our Very Nature!

10 major terms used by startup investors – a list created after 200 interviews with investors.

I run a podcast about fundraising for early stage startups and I've conducted nearly 200 interviews with angel investors, VCs and successful founders and created a list of the major terms/acronyms that they are using. Here it is.

1. VC – venture capital – most frequently meaning venture capitalist or
venture capital firm.
Putting aside the official definition of Wikipedia, when someone says “VC”
they usually mean Venture Capital firm – investment organization that
invests in Seed+ stages. If someone at the Pre-Seed stage is saying “We
are talking to a lot of VCs” they are right – they are just talking. VCs rarely
join pre-seed rounds, so don’t spend much time reaching out to them
unless you have great metrics to show them, try reaching out to angel
investors instead.

2. CAC – customer acquisition cost.
So this is the amount of money spent on acquiring one customer. It can be
easily calculated by dividing all money spent on this issue by the number of
customers you really got. So to calculate my Google Ads CAC I’ll divide the
budget spent on Google Ads by the number of customers it brought me.

3. CPC – cost per click.
This is basically the amount of money you have to pay your advertiser for each
click. Facebook and google ads provide this metric, but just so you know –
to calculate CPC you need to divide the budget of the ad on the number
of clicks your ad got.

4. LTV – lifetime value.

Which is a gross income you get from working with one client. The
description for LTV calculation is a bit long and complicated, so click here
if you want to understand how to calculate LTV.

5. MRR – monthly recurring revenue.
In other words MRR measures how much revenue you generate in a
month. MRR is very important because investors look for its steady
growth. One of the most frequent things we hear while talking to Seed-
stage investors is: “MRR has to be growing 10-20% Month Over Month if
you want me to invest”. That’s why you should focus on MRR so much.

6. ARR – annual recurring revenue.
Basically the same as MRR but for the year. Important only at Seed,
Series A+ stages where VCs are trying to see if the company is big
enough for them. If you are an early stage startup, don’t worry about it.

7. SaaS – software as a service.
Which means providing a customer with an already licensed and hosted by
provider software on a subscription basis. The main advantage of this service is
that you do not need to pay for creating and installing software.

8. B2C – business to consumer.
This term mostly refers to such type of commerce which specialise at direct
selling between business and an individual consumer. An example would be
Netflix, that drives most of its profits from individual consumers.

9. B2B – business to business.
This is the type of business that sells products and services to other
businesses. An example of a B2B startup would be Unity Technologies,
whose main customers are other companies.

10. R&D – research and development.
R&D is basically the efforts that a company makes to create something
innovative and give itself some competitive advantage.

The primary reason for why I decided to start sharing with the "startups" and similar subreddits is to understand what early stage founders really want to hear about. So if you are an early stage founder and you found this article helpful, please let me know what else would you like to know about fundraising for startups!

submitted by /u/FundraisingRad1
[link] [comments]
Startups – Rapid Growth and Innovation is in Our Very Nature!

Terms of use for my new app

Hello,

How do I write the terms and conditions for my App. I am in the process of developing my app but don't have a clue on how to write the "terms of use" or "Privacy Policy". is there a guide or a general template that I can follow? Any help is greatly appreciated!

Thanks

submitted by /u/chaitanyagoa
[link] [comments]
Startups – Rapid Growth and Innovation is in Our Very Nature!

What Is A Convertible Note? – Meaning, Terms, & Examples


convertible note

The problem – an early-stage startup’s growth trajectory is hard to predict. The information is limited and the company goes through numerous ups and downs for some years before stabilizing its growth. This makes it difficult to determine the real valuation of the startup, which makes most early-stage investors like angel investors and venture capitalists take a back foot during the early equity funding rounds due to the risks involved.

The solution – Convertible notes.


What Is A Convertible Note?

A convertible note is short-term debt-cum-investment tool used to invest in early-stage startups that the investor can choose to convert into common shares at a later time or an event when it is easier to determine the company’s valuation.

In simple terms, it’s a short-term loan given to an early-stage startup by an investor not with the intent that it is going to be paid back, but with the intent that, in the future, it’ll convert into ownership in the startup.

Now, to understand this definition of convertible notes better, let’s break it into four parts –

Short-Term Debt-Cum-Investment Tool

A convertible note is a special short-term loan. That is, when someone writes you a convertible note of any amount, you’re expected to pay it back, along with decided interest, within one to two years.

This is also considered to be a safe investment tool as the investor gets an option to convert this debt into equity at a later stage if he sees that the company has potential and his investment will have more return if converted into equity.


Used To Invest In Early-Stage Startups

Unlike corporates or late startups, early-stage startups are risky. There is very less information that can be used to correctly determine its valuation, and since such startups can fail any time, it’s risky for investors to provide such startups with long-term loans.

This is where convertible notes come to the rescue of the entrepreneurs. It lets the investors invest in early-stage startups in the form of short-term convertible loans.

Investor Can Later Choose To Convert Into Common Shares

The startup’s valuation isn’t decided when the convertible note is issued, mainly because the startup isn’t mature enough to be valued. Later, if the investor believes that the startup is doing good, he has the option to convert this debt into equity according to the valuation then.

At A Time Or An Event When It Is Easier To Determine The Company’s Valuation

The convertible notes are converted into equity when the company is mature enough to be valued. This usually occurs during the seed investment or Series A investment stage when other investors join the board.


Convertible Notes Terms & Key Parameters

There’s more to just the simple explanation of convertible notes. Just like other loans, this loan has a fixed term (usually between 1-2 years) and accrues interest.

However, unlike other loans, this loan comes with a reward for the risk undertaken. At the end of the term, it’s up to investors if they want to get the principal back with interest or the loan to be converted into equity. All of these depend on the terms set at the time of signing the loan agreement –

  • Maturity Date: This represents the date when the note will become due and the startup has to pay it back.
  • Interest Rate: It’s the rate at which interest accrues on the investment provided to the startup. However, in cases when the debt is converted into equity, this interest accrues as additional principal, which increases the number of shares upon conversion.
  • Valuation Cap: Cap is the maximum valuation at which the note can convert into equity. The investors in the convertible note get converted into equity at a predetermined valuation set at the time of signing the convertible note.
  • Discount: This is the valuation discount the investors offering a convertible note receive relative to the investors in the subsequent financing round.
  • Conversion Trigger: The point of convertible note is to convert at the onset of a certain event in the future. Usually the next qualified funding round is considered to be the conversion trigger for the convertible note.

How Convertible Note Works?

Both valuation cap and discount are offered to compensate for the additional risk an early-stage investor incurs while investing without knowing the future valuation of the company. They form the spine of the bond and differentiate this loan from others.

Convertible Note Example #1 – Note With A Valuation Cap But No Discount

Let’s assume that a startup XYZ raised its seed funding of $ 50,000 from an Angel investor, Mr A, by issuing a convertible note with a $ 5M valuation cap and no discount.

Next year, the company went on to raise its Series A investment at a pre-money valuation of $ 10M at a price of $ 10 per share.

Now, even though the company is now valued at $ 10M, Mr A will have the option to convert his investment of $ 50,000 into equity shares at the valuation of $ 5M. That is, he’ll get the share price of $ 5 (5M/10M*10) and will get an option to convert his investment into 10,000 shares which would have otherwise cost him $ 100,000.


Convertible Note Example #2 – Note A Discount But No Valuation Cap

Let’s assume that a startup XYZ raised its seed funding of $ 60,000 from an Angel investor, Mr B, by issuing a convertible note with a 40% discount to the Series A round.

Next year, the startup went on to raise its Series A investment at a pre-money valuation of $ 10M at a price of $ 10 per share.

Now, unlike other investors, Mr B, will get a 40% discount on this price per share if he wants to convert his debt into equity ($ 6 per share). That is, he’ll be able to convert his investment into 10,000 shares (60,000/6) which would have otherwise cost him $ 100,000.

Convertible Note Example #3 – Note With Both Valuation Cap And A Discount

Most often than not, a startup issues both the valuation cap and a discount to the investor. In such a situation, the investor weighs both the options at the time of the valuation and converts his debt into equity at the lowest possible rate.

Let’s assume that a startup XYZ raised its seed funding of $ 50,000 from an Angel investor, Mr C, by issuing a convertible note with a $ 5M valuation cap and 40% discount to the Series A round.

If at the seed funding round, the company is valued at $ 10M at a price of $ 10 per share, the 40% discount will convert Mr C’s investment at $ 6 per share.

The valuation cap, however, would result in $ 5 per share (5M/10M*10) and would be the actual price at which Mr C’s investment would convert into Series A.

Pros and Cons Of Convertible Notes

Just like other investment vehicles, convertible notes also have certain pros and cons which attract some investors and entrepreneurs while repelling a few.


Convertible Notes Benefits

  • Simplest Structure and Fewer Complications: Unlike equity funding, it isn’t necessary for a startup to be a registered C Corp or LLC to take funding in the form of a convertible note. Moreover, this type of funding requires less paperwork and lower legal fees.
  • Investor Benefits: Investors play safe with convertible notes – they act as debtholders during the early stage when the risk is more, and convert to equity stakeholders at a later stage when the risk is less. Moreover, they also receive discounts or valuation caps on their converting balance as a reward of taking early risks.
  • Deferred Negotiations: With convertible notes, the startup defers the negotiations surrounding the valuation to a later stage when the company is mature enough to be valued well. This saves a lot of time and fees.

Convertible Notes Cons

  • Future Risks: If the valuation cap is kept low, the next round could be negatively affected as such investors will get a disproportionally large portion of the equity from the next round. Similarly, if the valuation cap is kept high, the next round could negatively affect investors.
  • Faulty Clauses: Since convertible notes are custom-made, investors can include many clauses that can have future implications on the startup and its growth.
  • Lack Of Noteholder Control: When it comes to convertible notes, the investors are at mercy of the startup owners, with little power to sway the outcome of their investments. They do not even get a chance to negotiate in the future valuation of the company. Often times, this results in a valuation which they do not agree with.
  • Future Decision-Making Right: The note gives investors a future right to be a part of the decision making. If they get more shares than expected and start interfering with the decision making, this could affect the smooth functioning of the business.

Go On, Tell Us What You Think!

Did we miss something? Come on! Tell us what you think about our article on convertible note in the comments section.


Feedough

5 Terms That are Killing Your Startup Pitch

Whether you’re (virtually) presenting before a group of investors or meeting an angel investor one-on-one via Zoom, the words you use to explain your company and your strategy are critical to securing funding. While the content of your presentation itself is essential, even the best business ideas can be derailed by poor word choice or etiquette.

Investors aren’t usually looking for a quick win or an opportunity to take advantage of a short-term loophole. They’re looking for companies that will define an entire category (i.e., Google and search engines, Facebook and social media, Salesforce and customer relationship management). And your word choice reveals a lot about both your approach to entrepreneurship and your potential as a partner.


StartupNation exclusive discounts and savings on Dell products and accessories: Learn more here

Adopt the right mindset

Investors are looking for founders who are unreasonably ambitious. A lot of founders make the mistake of attacking the progress or intelligence of their competitors. This doesn’t look good. Instead of attacking another company’s strategy, focus on why your company is resilient.

No matter how comfortable you feel with an investor, always remember that meetings are a professional setting, and basic etiquette is required. When you get in front of a potential investor, demonstrate that you value his or her time. Be confident in your plan but remain humble. You are asking for money, after all.


Related: How to Prepare Before Pitching Your Business to Investors

Use the right language

If you have a positive attitude and demonstrate a credible vision, you’ve already got a leg up on most of the competition. But there are some words you need to remove from your vocabulary if you want your pitch to generate investment.

Here are a few of the terms you should avoid:

Acquisition

Investors want an initial public offering, not a quick acquisition. If you highlight an acquisition as a positive in your pitch, you may hurt your chances. To appeal to investors, pitch your business as an investment opportunity with IPO potential, not a quick a win.

Disruptive (and other similar buzzwords)

Using buzzwords to explain your plan or product is off-putting to most investors. If you toss around words like “disruptive,” “visionary” and “innovative,” they’ll suspect you’re using them disingenuously. Many founders before you have used the same buzzwords in their pitches and failed to back them up with details. Most investors rely on pattern matching, so your buzzword use is a bad indicator.

Solo founder

Building a company is tough, but it’s 10 times harder if you try to do it alone. Not that it’s impossible, of course. Stitch Fix had a messy beginning, but CEO Katrina Lake has largely led the company to IPO by herself. Nevertheless, investors usually like to see a strong set of co-founders and team members who can support each other through all the ups and downs of business.

Channel sales

If somebody else controls the relationship with your customer, and thus the revenue, you should expect to pay a heavy tax. The Apple app store, for example, takes a whopping 30 percent cut of all in-app purchases. Even though channel partners can help with distribution, investors don’t like the chunk of revenue they take.

Plus, as you scale, your channel partner will probably try to compete with you (i.e., Spotify and Apple Music). That’s not to say channel sales can’t be done. For example, Supercell built a nine-figure mobile game business through app stores, but this approach can scare off many investors. They would rather you build direct connections with your customers and own the relationships yourself.

Regulated markets

Investors want customers to be able to purchase your offerings rapidly and without legal constraints so that you can scale across your market. If your target customer has burdensome compliance requirements when choosing vendors (e.g., requests for proposals for local governments), or if your product itself must comply with challenging regulations (e.g., HIPAA in U.S. healthcare), then you should expect your sales to take months, not weeks, to close. This makes you less attractive to investors.

Yes, some companies make money in regulated markets, but it’s extremely challenging to win over investors with a business plan that involves navigating extensive regulation.


Sign Up: Receive the StartupNation newsletter!

Conclusion

Pitching tips and tricks are a dime a dozen, but don’t forget to focus on word choice when pitching your business. Use the right language to your advantage, and you can craft a sincere pitch that excites potential investors.

The post 5 Terms That are Killing Your Startup Pitch appeared first on StartupNation.

StartupNation

[Lemonade in The Street] IPO Launch: Lemonade Proposes Terms For $270 Million IPO

Lemonade (LMND) intends to raise $ 270 million from the sale of its common stock, according to an amended registration statement.

Read more here.

The post [Lemonade in The Street] IPO Launch: Lemonade Proposes Terms For $ 270 Million IPO appeared first on OurCrowd.

OurCrowd

I signed a contract to be part of a startup that never existed, am I still legally bound to comply with the terms? (Oregon)

I was going into business with this guy and we signed this contract saying we would work on the project, and not create other businesses that compete in the same industry. The company never really existed legally, we never sold anything, and we just stopped talking to each other. Is this contract valid even if the entity mentioned never existed?

submitted by /u/ResponsibleNumber0
[link] [comments]
Startups – Rapid Growth and Innovation is in Our Very Nature!

I am about to launch my first business and i am fortunate to own a 4 character domain name, which is also the name of the business. In terms of branding how do i go about trade marking this?

Do i trademark "XXXX" ( business name )

Or "www.XXXX.COM" ( Domain name )

Or "XXXX.COM – The _______ company " ( company name with a tag line) ?

Whats the best approach here from a branding perspective ? That can be scaled across the board ?

For context, its a b2b startup and most initial leads are going to come from linkedin.

submitted by /u/Authmadeasy
[link] [comments]
Startups – Rapid Growth and Innovation is in Our Very Nature!