Funding terms that all entrepreneurs should be aware of to improve their chances of raising funds As an entrepreneur intending to raise funds for your venture, developing a team or growing your business, you should have a clear understanding of the basic fundraising terms that will enable you to present yourself as the expert you are. It is wise to familiarise yourself with key terminologies so as to be able to converse with key stakeholders as professionally as you can, in order to lock down investment as effortlessly as possible whilst leaving an unforgettable impression. We have summarised below key terms, mastering of which will help you impress stakeholders and become better at running your business. We are going to discuss thirty fundraising terms that you could utilize in your verbal or written communication with your investors or other stakeholders: Term sheet: A term sheet is a bullet-point summary that states offers made by potential investors, and specifically highlights the areas of interest for investment purposes by the various investors. It may help you get a clear idea of the things you should negotiate about and start working on. Milestone: A milestone is a highlighted target that has to be achieved and can also be considered as the successful completion of a phase. For instance, successfully raising enough money to boost your startup is a milestone that you will have achieved. One milestone leads to another milestone. If you are able to achieve your milestones, you may easily attract follow on investment. Runway: Your initial objective should be gathering enough money in the first fundraising round so that you can easily reach the second fundraising round without any financial constraints. Your runway, as a startup, is the amount of time you are left with before your business runs out of cash. It is advisable that you gather enough money initially so that your runway doesn’t empty out in the middle of the road that leads to your next target. Burn rate: Burn rate is the rate at which a startup is spending its cash on a monthly basis. For instance, you find your monthly expenses amounting up to £1000 and you predict that it’s going to take about 14 months to reach the next milestone, then according to the calculations, you will need to keep at least £14000 in order to fulfill your target. Venture capitalists: Funding provided by venture capitalists serves as the main source of finance to boost your startup. Venture capitalists are constantly on the lookout for startups and are always ready to invest in an opportunity that is going to promise them high returns. A high-quality pitch deck with an amazing business idea with sufficient traction is enough to attract venture capital investors towards your startup. Due diligence: In order to move investor funds into your business account, you’ll have to bear with the due diligence required. Due diligence is the process by which potential investors review your business financial and operational performance by investigating every minor financial detail of your business records. For a startup, the due diligence might not come as hard as when you plan to raise funds amounting to a million pounds or more. Make sure you speak to your startup accountant or a suitable management accountant to help you prepare your records and documents for detailed due diligence scrutiny. Venture partners These are senior decision-makers that VC firms hire to manage the investment provided to the startups by them. These partners are not permanent members of the partnership. The decision about whether investment should be made or not is highly dependent upon these individuals, so it is advisable that you build a relationship of trust with these partners. In addition, they might hold more influence and impact than the brand itself. Family offices: Family offices act as wealth managers and advisors for ultra-wealthy families. Multi-family offices are becoming a popular option for wealthy families, the reason might be the efficiency it offers for slightly less wealthy families. The investment approach they adopt usually differs from those of angels and VCs, they might also follow a different strategy to get track of their investment and returns. Exit: Exit can also be termed as the ‘end game’ of your business. An exit is a move, that has to be added as part of your business plan so as to confirm to investors how you plan to cash out on your business, either through a merger, acquisition or going the IPO route. Dilution: In simple terms, dilution is the process of decreasing your ownership in a company by issuing stocks to get other owners on board. When you raise equity funding, you are giving up a percentage of your ownership in return for equity funds from investors. The amount of dilution that occurs, depends on the investors and their willingness to agree on the required percentage for the amount they invest. Board seats: Its critically important to evaluate the investor who is interested in making an investment to your portfolio, as it is witnessed that the investors who offer huge investments, usually plan to take a seat on your firm’s board of directors. These high profile investors intend to hold major influence over the company’s decisions to examine whether their money is being put to good use or not. Churn rate: Churn rate may be used to measure customer satisfaction. If your company is facing a high churn rate, it means that your business is losing a high percentage of customers or subscribers during a specified period of time. Churn rate can have a great impact on your firm’s capability to reach the next fundraising round. SAAS Accountants are familiar with key metrics and KPI’s that investors look out for in SAAS businesses before investing in them. Valuation: A valuation can also be considered as calculating the worth of your company. Investors will usually conduct a valuation of your firm before they invest (pre-money valuation) and after they have invested or financed (post-money valuation). A competitive startup accountant should be able to help you with your company valuation or provide feedback on methods that can help you improve the companies valuation. IPO: As soon as you decide to make the shares of your company available to the general public, you are making an IPO that is an initial public offering. This is also considered as an exit strategy. Acquihire: Acquihire may also be referred to as ‘talent acquisition. Acquihire is an act of buying out a company not because of its product or service but to acquire talent and expertise of the employees or staff of that company. If you are going to employ people make sure you have payroll set up properly with support from a competitive payroll accountant. Fundraising Terms That All Entrepreneurs should know Executive summary: Your business plan is briefly summarized in your business plan. An executive summary holds critical importance when it comes to applying for loans or real estate funding for commercial purposes. Your executive summary will receive more attention than your business plan, so make it as concise and clear as you can. Convertible note: An investment vehicle that is considered as a loan that intends to convert into equity if the provider of the loan so requires. Convertible notes help delay the valuation agreement between the company and the investors and allows the agreement process to proceed much faster. These notes have a valuation cap, along with an interest rate and a discount on the valuation from the next investor. Angel investor: Seed investors who provide assistance to startups by funding them at the pre-seed and seed stages when the risk of a startup to collapse are relatively high. Lead investor: A lead investor is the first investor who takes the risk of putting money into your startup. A lead investor might not be the only and the entire investor in your venture but it does motivate other investors to invest in your business. You may also consider that investor as the lead investor. Elevator pitch: If you want to spark the interest of investors, you have to be persuasive in your pitch, being to the point and concise would suffice, this brief speech or introduction is what we term as the elevator pitch. An elevator pitch should be no longer than 3 minutes. Ask a startup accountant for help with reviewing your pitch deck and your elevator pitch. Super Angel: Super Angels are former entrepreneurs turned investors in their respective industries, who have exited their industry successfully in the past. These investors are highly active and are usually willing to make investments for later rounds. They may offer a large amount of investment as well as a small one. Investor Updates: Your investor update is a tool through which you can attract and engage investors. We advise you to utilize an automated data-driven investor update to hook and maintain the interest of investors for the long-term Storytelling: A conversation has to be catchy and should catch one’s attention. As an entrepreneur, you should be able to craft an interesting conversation by telling a story and adding elements of interest, in order to get your investors interested in funding your business. Financial forecasting: Financial forecasting is required to foresee the growth potential of a business by cross-comparison through market research. It is the prediction of the future business conditions that might affect your business in the long run. Common stock: A type of security that declares a form of corporate equity ownership for the shareholder. These shares give their owners an opportunity to hold a consensus on the corporate policy of the company. Common stockholders will be paid an amount equal to the worth of the share, in cases where liquidation occurs. Liquidation preference: A contract or agreement that is signed between the investors and the company includes a clause that clearly highlights the order in which investors will receive their respective payments, an investor might be repaid before the actual founder of the company in some cases. Venture capitalists utilize this clause in their own favor just for the purpose of mitigating their risk of investment. Cap table: A capitalization table is used for the purposes of displaying the percentage ownership of the relevant investors and individuals in a tabular format. Changes in the percentage of ownership of individuals before and after an investment round can easily be identified through these tables whilst it may also display the value of the equity and data related to equity dilution as well. Preferred stock: Preferred stock, as the name suggests, is given preference over common stock due to their higher claim on assets, and are the first ones to receive dividends on the stock. These stocks include the feature of debt that allows the prices of the shares to appreciate, however, there are no voting rights assigned to preferred stockholders as compared to common stockholders. Dividends through preferred stock can be paid on a monthly or quarterly basis. Anti-dilution protection: Anti-dilution protection is a clause that ensures that the shares of the company are not sold at a value that is less than the value at which it was bought in the first place. This clause provides protection to the investors from equity dilution if the company issues shares to other investors that are interested to get on-board.