27 venture capital terms that help startups and investors understand each other

Although some of these terms are borrowed from English, each concept has a specific meaning in the venture capital market. Below, we explain 27 key terms frequently encountered in the startup fundraising process.

Pitch — a startup’s brief and clear presentation of its project to an investor. The founder/co-founder explains the problem, solution, market, business model, team, and investment needs.

Investment Presentation/Pitch Deck — the main presentation of a startup for investors. It includes the problem, product, market size, business model, team, achievements, financial metrics, and the amount of investment the company is seeking.

Fundraising — the process by which a startup raises capital from investors. This can take several months and involves finding investors, meetings, creating presentations, and investment negotiations.

Due Diligence — a comprehensive review conducted by an investor before investing in a startup. The company’s finances, legal documents, technology, team, clients, market, and other key indicators are examined.

Term Sheet — a document outlining the main terms of a future investment deal between an investor and a startup. It specifies the investment amount, company valuation, the investor’s stake, and other important conditions.

Cap Table — a table showing who owns shares in the company. It may display the stakes of founders, investors, and employees in the company.

Investment Memorandum — a document summarizing key information about a company or investment fund. It describes the business, market, financial metrics, risks, and the rationale for the investment.

Investment Thesis — the core principles that determine which startups an investor will fund and why. For example, a fund may invest only in startups in the fields of artificial intelligence, fintech, or climate technology.

Valuation — determining the monetary value of a startup in the market. During an investment round, the company’s valuation is crucial for calculating the investor’s stake.

Pre-money valuation — the company’s value before the new investment is received.

For example, if a startup has a pre-money valuation of $8 million and raises $2 million in investment, its post-money valuation will be $10 million.

Post-money valuation — the company’s value after the investment has been received. It is usually calculated as the sum of the pre-money valuation and the new investment amount.

Equity — a portion of the company’s capital owned by an investor or founder. By investing money in a startup, an investor can acquire a certain stake in the company.

Shareholder Stake — the ownership share of an individual or organization in the company’s capital. It is expressed as a percentage.

Option — the right to purchase company shares or a stake in the future, provided certain conditions are met.

In startups, options are often used to retain key employees and align their interests with the company’s long-term results.

ESOP (Employee Stock Option Plan) — a program that allows employees to acquire company shares or a stake under certain conditions.

Convertible Note — an investment type initially provided as a loan that can later convert into a stake or shares in the company once certain conditions are met.

SAFE (Simple Agreement for Future Equity) — an agreement that gives the investor the right to receive a stake in the company in the future. It is used to simplify the investment deal compared to the classic process of issuing shares.

Equity Financing — when an investor puts money into a company in exchange for a stake. In this case, the startup does not repay the funds like a traditional loan, but a certain portion of the company belongs to the investor.

Co-investment — when multiple investors invest together in a single startup within the same deal.

For example, a venture capital fund and a business angel can invest simultaneously in the same startup during one round.

Investment Syndicate — a group of investors joining forces to invest together in a single startup. This approach allows investors to share risks and participate in larger deals.

Lead Investor — the primary investor in an investment round. They participate in negotiating the deal terms and may attract other investors to the round.

Anchor Investor — a lead investor who enters the investment round early and contributes a significant amount of capital. Their participation may signal confidence in the company to other investors.

Strategic Investor — an investor interested not only in financial profit but also in establishing a strategic partnership with the startup.

For example, a large technology company may not only invest in a promising startup but also utilize its technology, product, or customer network.

Institutional Investor — a large professional investor managing funds belonging to other individuals or organizations. These include investment funds, pension funds, insurance companies, and other financial institutions.

Limited Partner (LP) — an investor who contributes capital to a venture capital fund. LPs do not invest directly in startups; instead, the fund’s management team uses their funds to invest in startups.

Conclusion

A startup’s fundraising process is not just a single “money-raising” phase. First, the founder presents the project through a pitch, prepares a Pitch Deck, and seeks investment. Investors conduct Due Diligence and determine the company’s valuation. Then, the main terms of the deal are agreed upon via a Term Sheet, and the investor receives a certain stake in the company.

Terms such as Pre-money valuation, Post-money valuation, Dilution, SAFE, ESOP, Lead Investor, Co-investment are frequently encountered in this process.

Understanding these concepts not only helps in following startup news but also provides a better grasp of how investment deals are structured in the venture capital market.