Basic Startup terminology | Know these terms before starting your Startup!

Hello readers,

Welcome to another Bizzbucket article.

If you have ever started to learn something you start with its fundamentals because it’s a must to excel in any area. So, if you are planning to work on an idea for your startup brush up your basics before starting!

In this article, we will see all the basic startups terminologies which you should be aware of as an Entrepreneur.

Index:

What are Startups?

A Startup is a company build to grow at an accelerated rate. A high growth company sustains on capital investment prior to profitability. A Startup can be compared to a seed which initially needs proper care to develop into a mature tree so that it can beer fruits and attain huge heights later.

What is an idea Validation?

Idea Validation is one of the most important parts of startups in the early stages. One should validate their idea before investing time, energy, and capital on their startup. Idea validation can be done either offline or online via a google form, twitter, or any other source depending upon your startup idea.

Why Pitch your Startup idea?

If you are among the founders of your company you have to pitch your startup idea a thousand times before investors, friends, and family. Pitch is a kind of professional presentation where you present a problem on which you are working and what kind of unique solution you as a company are providing to the given problem.
Pitch also includes all the numbers of your startup like the customers, sales, revenue, expenses, funding, valuation, etc.

It’s very important to pitch your idea in front of the market leaders to get the proper advice and feedback on your idea/work as a company.

What is funding?

As startups are high paced companies, therefore, it requires external funding options to survive apart from their founders’ investment. Cash not only allows startups to survive but also provide a competitive advantage from competitors by hiring key staff, marketing, public relation, and sales.

Who all are Angel investors and Venture Capitalist (VCs)?

Angels and VCs both invest money in startups but in a different way. Angels generally invest their own money on their own term while VCs invest other people money and requires a lot of meetings and discussions before making an investment. VCs see lots of deals on a daily basis, therefore, one has to stand out among the crowd to grab the funding. On the other hand, Angels majorly have limited reach and their decision takes less time compared to VCs.

How to calculate your startup Valuation?

Some companies find their valuation at about $1mn and some at $5mn it depends on what investors see its valuation in the present or in the near future. In some situations, it’s difficult to find an investor to know your company’s exact value, in that case, one should choose valuation by looking at comparable companies in their market.

What are incubators and accelerators?

Incubators provide more of a help to founders to transit their idea into a company. They work on an open timeline and some time takes even more than a year for mentoring startups.

While accelerators work with mature stage companies and accelerate their growth with a business model in place. They work on a period of 3-4 months under the mentorship and capital provided by the accelerator and at the end of the program, they have the opportunity to pitch in front of investors.

What is Cap / Target Valuation?

The maximum effective valuation for an investor in a convertible note.

What is Convertible Note?

This is a debt instrument that will convert into stock; usually preferred stock but sometimes common stock.

What is Common Stock?

Capital stock typically issued to founders and employees, having the fewest, or no, rights, privileges, and preferences.

What is Preferred Stock?

Capital stock issued in a company that has specific rights, privileges, and preferences compared to the common stock. Convertible into common stock, either automatically (e.g., in an IPO) or at the option of the preferred stockholder (e.g., an acquisition).

What is Dilution?

The percentage of an ownership share is decreased via the issuance of new shares.

What is Discount?

A percentage discount from the pre-money valuation to give safe or noteholders an effectively lower price.

What is Equity Round?

A financing round in which the investor purchases equity (stock) in the company.

What is Fully Diluted Shares?

The total number of issued and outstanding shares of capital stock in the company, including outstanding warrants, option grants, and other convertible securities.

What is an IPO (Initial Public Offering)?

The first sale of stock by a private company to the public.

What is Liquidation Preference?

A legal provision in a company’s charter that allows stockholders with preferred stock to get their money out of a company before the holders of common stock in the event of an exit.

What is Maturity Date?

The date at which a promissory note becomes due (or at which it will automatically convert to stock in the case of a convertible note)

What is Equity Incentive Plan / Option Pool?

The shares allocated and set aside for grants to employees and consultants.

What is Pre-money Valuation?

The value of a company prior to when investor money is added.

What is Pro-rata rights (aka pre-emptive rights)?

Contractual rights that allow the holder to maintain their percentage ownership in subsequent financing rounds.

What is Protective Provisions?

Provisions in a company’s charter that give exclusive voting rights to holders of preferred stock. For example, the approval of these stockholders, voting separately from other stockholders, may be required for an acquisition.

What is Safe?

Simple Agreement for Future Equity – Y Combinator’s replacement for convertible debt.

What is TAM?

Total Available Market. In pitches, this is the estimated total revenue available for the
product(s) you are selling.

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