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
- 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.
- 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.
- 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.
- 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.
- 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).
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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