Let’s learn more about the widely used startup terminologies that every founder or startup enthusiast should know about. This is just a partial list but covers most of the relevant terms.
What is a Startup?
Wikipedia defines Startup as “A startup company or startup (sometimes referred as an innovative SME) is a business in the form of a company, partnership or temporary organisation designed to search for a repeatable and scalable business model. These companies, generally newly created, are in a phase of development and research for markets.
The term became popular internationally during the dot-com bubble when a great number of dot-com companies were founded. Due to this background, many consider startups to be only tech companies, but as technology is becoming a normal factor, the essence of startups has more to do with innovativeness, scalability and growth.
- Angel investor : An angel investor or angel (also known as a business angel or informal investor or angel funder) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. In other words an investor that provides financial backing for small startups or entrepreneurs.
Angel investors usually give more favourable terms than other lenders and invest smaller amounts in startups at an earlier stage than a venture capitalist would.
- Acqui-hired (Acquire intellectual capital/people): When a small, failing company is purchased solely for its staff. It’s kind of like acquiring the intellectual capital of a ready-made, talented crew.
- Business Valuation: Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to effect a sale of a business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners’ ownership interest for buy-sell agreements, and many other business and legal purposes such as in shareholders deadlock, divorce litigation and estate contest.
- Business Incubator: Startup incubators are groups that support chosen entrepreneurs and/or their businesses with mentorship and funding. In exchange, the incubator takes an equity stake in the company. Increasingly popular and competitive in the tech world, incubators have been touted as the new business schools. Business incubators are organizations geared toward speeding up the growth and success of startup and early stage companies. They’re often a good path to capital from angel investors, state governments, economic-development coalitions and other investors.
- B2B: Short for business-to-business. Typically refers to companies that sell their products to other companies rather than consumers.
- B2C: Short for business-to-consumer. Typically refers to companies that sell their products to consumers rather than businesses.
- Bootstrap: To build a company without the use of outside capital. A framework for organizing the code that creates the user interface of web applications, originally developed by Twitter.
- Balance Sheet: A summary of financial balances of a company at a single point of time. Includes information on the company’s assets, liabilities, and equity.
- Burn rate: The rate at which a new company spends its initial capital.
- Convertible note or convertible bond: A convertible note is short-term debt that converts into equity. In the context of a seed financing, the debt typically automatically converts into shares of preferred stock upon the closing of a Series A round of financing. In other words, investors loan money to a startup as its first round of funding; and then rather than get their money back with interest, the investors receive shares of preferred stock as part of the startup’s initial preferred stock financing, based on the terms of the note.It is also considered to be a note is worth a percentage of equity ownership in a company. Some business owners use convertible notes if they want to attract angel investors without having to put a valuation on the company. The note turns into equity as soon as another investor comes in.
- Cliff Vesting: The process by which employees earn the right to receive full benefits from the employee’s qualified retirement plan account at a specified date, rather than becoming vested gradually over a given period of time. Cliff vesting happens when employees are considered vested in an employer benefits plan once they have earned the right to receive plan benefits.Vesting can occur gradually, where the employee becomes partially vested after each X years of service. For example, the employee could be 20% vested after two years of employment, 30% vested after three years of employment and so on until becoming fully vesting.
- Disrupt/Disruptive Innovation: A disruptive innovation is an innovation that helps create a new market and value network, and eventually disrupts an existing market and value network (over a few years or decades), displacing an earlier technology.
- Deck: A slide-based presentation that can be transferred digitally. Typically associated with investment pitch presentations.
- Equity / Shareholders Equity: A stock or any other security representing an ownership interest. On a company’s balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). Also referred to as “shareholders’ equity”.
- Early Stage: To build a company without the use of outside capital. A framework for organizing the code that creates the user interface of web applications, originally developed by Twitter.
- Exit strategy : In other words, the exit strategy is a way of “cashing out” an investment. Examples include an initial public offering (IPO) or being bought out by a larger player in the industry. Also referred to as a “harvest strategy” or “liquidity event”.
- Going Public: The process of selling shares that were formerly privately held to new investors for the first time. Otherwise known as an initial public offering (IPO).
- Kickstarter: Kickstarter is a global crowdfunding platform based in the United States. The company’s stated mission is to help bring creative projects to life. Kickstarter has reportedly received more than $1.5 billion in pledges from 7.8 million backers to fund 200,000 creative projects, such as films, music, stage shows, comics, journalism, video games, technology and food-related projects. People who back Kickstarter projects are offered tangible rewards and one of a kind experiences in exchange for their pledges. This model traces its roots to subscription model of arts patronage, where artists would go directly to their audiences to fund their work.
- Letter of Intent: Typically used interchangeably with term sheet. A document that outlines the specifics of a transaction that two parties are planning to conduct. Terms sheets outline major terms of the transaction, timing of the process, and conditions under which either party could back out of the deal. A letter of intent is usually not a legally binding contract.
- MVP (Minimum Viable Product): A slide-based presentation that can be transferred digitally. Typically associated with investment pitch presentations.
- Nondisclosure agreement (NDA): A non-disclosure agreement (NDA), also known as a confidentiality agreement (CA), confidential disclosure agreement (CDA), proprietary information agreement (PIA), or secrecy agreement (SA), is a legal contract between at least two parties that outlines confidential material, knowledge, or information that the parties wish to share with one another for certain purposes, but wish to restrict access to or by third parties. It is a contract through which the parties agree not to disclose information covered by the agreement.An NDA creates a confidential relationship between the parties to protect any type of confidential and proprietary information or trade secrets. As such, an NDA protects nonpublic business information. NDAs are commonly signed when two companies, individuals or other entities (such as partnerships, societies, etc.) are considering doing business and need to understand the processes used in each other’s business for the purpose of evaluating the potential business relationship. NDAs can be “mutual”, meaning both parties are restricted in their use of the materials provided, or they can restrict the use of material by a single party. It is also possible for an employee to sign an NDA or NDA-like agreement with an employer.In fact, some employment agreements will include a clause restricting employees’ use and dissemination of company-owned confidential information.
- Pivot: A course correction for startups based on findings in user testing and analysis.
- Red Herring: A clue that misleads a person into focusing on the wrong thing.
- Run Rate: The result of extrapolating the current period’s financial results over a longer period of time. Most often used in the context of extrapolating the current month into an annual number by multiplying by twelve.
- Seed Capital Or Seed Money: Seed money, sometimes known as seed funding or seed fund, is a form of securities offering in which an investor purchases part of a business. The term seed suggests that this is a very early investment, meant to support the business until it can generate cash of its own, or until it is ready for further investments. Seed money options include friends and family funding, angel funding, and crowd-funding.In other words the definition of ‘Seed Capital’ is the initial capital used to start a business. Seed capital often comes from the company founders’ personal assets or from friends and family. The amount of money is usually relatively small because the business is still in the idea or conceptual stage. The first round of venture capital funding for a business venture. This is for the development stage, just past the angel round, and can be up to $1 million of capital. Subsequent rounds are referred to in terms of Series (Series A, B, C, D, E) or stages (startup stage, formative stage, mezzanine stage).
- Series A: Typically refers to the first major round of VC funding taken on by a company; name is derived from the class of stock issued to the investors in that round.
- Valuation (pre-money valuation, post-money valuation): How much your company is worth. But that’s putting it simply. There are several different formulas for determining the valuation of your company when you plan to sell shares. Pre-money valuation is how much a startup company is worth before funding, post-money valuation is the value for the company plus the funding. Again, sounds simple, but how you value your company compared to the size of the investment can quickly dilute your shares. Valuation happens at every round or stage of funding.
- Venture Capital: Investment capital that is put into a startup company in exchange for an ownership stake in the company.
- Venture capitalist (VC): An investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to public funding. Venture capitalists are willing to invest in such companies because they can earn a massive return on their investments if these companies are a success.
- Vesting: In law, vesting is to give an immediately secured right of present or future deployment. One has a vested right to an asset that cannot be taken away by any third party, even though one may not yet possess the asset. In other words, the schedule under which founders and employees must remain in the company before receiving their full share of the equity.For example, if you have a five-year vesting schedule you may get access to 0% in year one, 25% in year two, 50% in year three, 75% in year four, and 100% in year five. A vesting schedule helps to instill staff loyalty and keep the company together for a certain period of time. Cliff vesting is when someone becomes fully vested on a specified date.
- Wireframe: Low resolution descriptions of a user interface or website. Used to formulate high level functionality and layout before the full design effort is completed.
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Pushpendra Sharma is the founder & CEO of the Singapore based startup SpacesGenie.com. Asia’s first online listing marketplace for commercial spaces, which connects brands, concepts, ideas with Pop Up spaces. It is the go-to marketplace for everything related to Pop Ups, offering unique end to end solutions.
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