Funding a New Business Cheat Sheet

Funding a new business: glossary of terms

This list of common financing and investing terms will have you sounding like a pro to your company team and prospective investors in no time!

• Accelerator: A program designed to help startups grow by providing funding, mentorship, resources, and access to a network of investors in a structured and time-limited environment.
• Acquisition: When one company purchases another company, often to gain access to its technology, customer base, or market share.
• Angel investor: An affluent individual who provides capital to startups or early-stage companies in exchange for equity ownership. They often offer mentorship and expertise.
• Balance sheet: A balance sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. It lists assets, liabilities, and shareholders’ equity.
• Bootstrapping: A method of financing a startup or business by using personal savings, revenue generated by the business, and minimal external capital. It allows founders to maintain control and ownership.
• Budgeting: The process of creating a financial plan that outlines expected revenues and expenses over a specific period. It helps in managing resources and making informed financial decisions.
• Burn rate: The rate at which a startup or company spends its available capital. It indicates how long a company can operate before running out of funds.
• Cash flow: Represents the movement of cash in and out of a business. Positive cash flow indicates that a business is generating more cash than it is spending, while negative cash flow suggests the opposite.
• Cash flow statement: Details the cash inflows and outflows of a business during a specified period. It helps assess a company’s ability to generate cash and manage liquidity.
• Convertible note: A debt instrument that can convert into equity in the company at a future date or under specific conditions, often used in early-stage investments.
• Corporate venture capital (CVC): Involves established corporations investing in startups that align with their industry or strategic objectives.
• Crowdfunding: A method of raising capital from many individuals, typically through online platforms. It can take various forms, such as rewards-based, equity-based, or donation-based crowdfunding.
• Debt financing: Borrowing funds from lenders, such as banks or investors, with the agreement to repay the borrowed amount along with interest over time.
• Donation-based crowdfunding: A fundraising method where backers contribute to support charitable causes, projects, or personal needs without expecting financial returns.
• Due diligence: The process of thoroughly researching and assessing a startup or investment opportunity to evaluate its viability, risks, and potential returns.
• Elevator pitch: A concise and compelling presentation of a startup’s value proposition, typically delivered in the time it takes to ride an elevator.
• Equity: Represents ownership in a company. It is often distributed to investors in exchange for their capital and can take the form of shares or ownership stakes.
• Equity crowdfunding: Allows startups to raise capital by offering equity or ownership shares to a large number of investors through online platforms.
• Exit strategy: A plan outlining how founders and investors intend to exit or cash out their investments in a startup, which may include options like acquisition, IPO, or merger.
• Financial controls: Policies, procedures, and practices implemented by a business to manage its financial resources, minimize risks, and ensure accurate financial reporting.
• Initial public offering (IPO): The process by which a private company becomes publicly traded by offering shares to the public on a stock exchange for the first time.
• Incubator: A program or organization that supports early-stage startups by offering resources, office space, mentorship, and sometimes funding, typically in a more open-ended timeframe than accelerators.
• Investor pitch: A presentation given by startup founders to potential investors, outlining their business model, market opportunity, and financial projections to secure funding.
• IP (intellectual property): Refers to legal rights associated with creations of the mind, including patents, trademarks, copyrights, and trade secrets, which can be valuable assets for startups.
• KISS (keep it simple security): Another type of financial instrument used in equity crowdfunding, offering a straightforward agreement for investors to receive equity.
• Liquidation preference: A term in investment agreements that specifies the order in which investors receive proceeds from a startup’s liquidation or exit event.
• Private equity: Refers to investments made in private companies by private equity firms or investors. It often involves acquiring a significant ownership stake in the company.
• Pro forma financials: Projected financial statements that estimate a company’s future financial performance. They are often used for forecasting and planning purposes.
• Profit and loss statement (P&L): Shows a company’s revenues, expenses, and profits (or losses) over a specific period. It provides insights into a company’s financial performance. Also known as an income statement.
• Real estate crowdfunding: Involves raising capital from multiple investors to fund real estate projects, providing them with an opportunity to invest in real estate without owning physical property.
• Regulation crowdfunding (Reg CF): A set of rules that govern equity crowdfunding offerings in the United States, allowing startups to raise funds from a wide range of investors.
• Revenue: The income generated by a business through its primary operations, such as selling products or services.
• Revenue-based financing: A funding model where a startup receives capital in exchange for a percentage of its future revenue until a predefined return is reached.
• ROI (return on investment): A financial metric that measures the profitability of an investment by comparing the gain or loss relative to the cost of the investment.
• ROI calculator: A tool used to assess the potential return on investment (ROI) for a specific project, initiative, or business decision.
• Runway: The amount of time a startup can operate before exhausting its available capital, based on its current burn rate and available funds.
• SaaS (software as a service): A software distribution model where software applications are hosted by a third-party provider and made available to customers over the internet on a subscription basis.
• SAFE (simple agreement for future equity): A type of financial instrument used in equity crowdfunding that provides investors with the promise of future equity in the company once specific conditions are met.
• Scale: Refers to the process of growing a business by increasing its size, market reach, and operations to achieve greater profitability.
• Seed funding: The initial capital raised by a startup to support product development, market research, and other early-stage activities.
• Strategic partnership: A collaboration between two or more companies to achieve mutually beneficial goals, such as accessing new markets, technologies, or resources.
• Valuation: The process of determining the financial worth or value of a startup or company. It often plays a crucial role in investment negotiations.
• Venture capital: Refers to funds provided by venture capital firms to startups and small businesses with high growth potential. In return, they receive equity in the company.
• Working capital: The capital available to a business for its day-to-day operations. It is calculated as current assets minus current liabilities and is crucial for maintaining liquidity.