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Learning new things isn’t easy, and understanding useful financial terms, most of which you can find on this list, can get stressful to put it mildly. Now, in this adventure through the funding ins and outs, let’s begin breaking down the 12 terms you absolutely need to know. From the basics of seed funding to planning your big exit, you will get everything you need to be successful.
The finance world is not about snagging some cash and then biting your nails nervously because you have no idea what to do next. You need to understand the game without losing your sanity. So, let’s begin this funding conversation that will leave you fluent when it comes to speaking the language of success.
12 Terms You Should Know As A Founder
Without further ado, let’s help you get a handle on fundraising without diving into the deep end of buzzwords. So, grab a coffee, take a seat, and let's break down these terms:
1. Seed Funding
Imagine you have this fantastic idea, and someone gives you the cash to kickstart it. This is what turns your innovative idea into a startup reality. Seed funding is the initial investment that will slowly sprout your entrepreneurial skills.
2. Bootstrapping
Imagine building your startup from the ground up with your own resources, without any external funding. Bootstrapping is all about self-sufficiency. The most skilled and dedicated businessmen are those who turn any obstacles and limitations into opportunities in order to carve their path through the harsh finance world.
3. Pitch Deck
Your pitch deck tells your startup's story. It narrates the tale of your passion and shows people why they should be as excited as you are about your startup. It is your chance to show not only your product but the passion and purpose that, alongside long work hours, hold your dreams afloat.
4. Equity
Financing In the world of equity financing, you are inviting partners to join your startup journey. And, if you are persuasive and passionate enough, these investors will become stakeholders who will help you by sharing all the risks, but they will also be there to reap the rewards when they come.
5. Convertible Notes
Convertible notes are the chameleons of fundraising in every way. Although you’ll probably notice that they initially resemble a loan, they actually have the magical ability to transform into equity as your startup expands. They are this superhero that will join your team in the future.
6. Venture Capital
Venture capital is basically like having high-net-worth fairy godparents for your startup. These investors inject significant capital into your venture. They are genuinely invested in your business dreams. Aside from money, it is important to mention that they also bring valuable experience and mentorship to help you personally. You will be surprised when you see how much the networks they bestow on you will propel your business forward.
7. Pre-Money And Post-Money Valuation
Simply speaking, valuation measures your startup's worth in pure numbers. So, pre-money is the evaluation that happens before external investment, while post-money reflects the value after the infusion of funds. Its main job is to depict the evolution of your startup's perceived value.
8. Cap Tables
Cap tables are the family album of your startup. They are depicting who is who in the ownership story and how exactly their roles in your company changed with time.
9. Dilution
Dilution is what happens when more investors join the party. It is the slight reduction in the ownership percentage of existing shareholders that happens because new contributors come on board. But don’t worry, it is a small price to pay for bringing in new experts that will help you shake things up.
10. Term Sheet
The term sheet outlines the basic terms of a potential investment before diving into a formal contract. It is the mutual understanding between you and your investors that will be your map for the journey that’s ahead of you.
11. Due Diligence
Before investors commit, due diligence is their thorough investigation into the nuts and bolts of your startup. Through this detailed background check, they’re making sure that your business is as promising as it appears on the surface.
12. SAFE Agreement
The SAFE (Simple Agreement for Future Equity) is a pact of trust. Investors give you the funds today and they expect future equity when your startup hits its stride.
Conclusion
Raising money for a startup is no easy feat. Founders should keep these top tips in mind to ensure adequate funding for their startups.
