31 Jul
Fundraising terms that all entrepreneurs should know
Funding terms that all entrepreneurs should be aware of to improve their chances of raising funds
As an entrepreneur, you should have a clear understanding of the basic fundraising terms. Whether a startup or established business, this understanding will enable you to present yourself as the expert you are.
It is wise to familiarise yourself with key terminologies to be able to converse with key stakeholders professionally. In order to lock down investment as effortlessly as possible whilst leaving an unforgettable impression. The key terms below will help you impress stakeholders and become better at running your business.
Term sheet:
A term sheet is a bullet-point summary that states offers made by potential investors. Moreover, it 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 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 businesses 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 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 which 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. Moreover, they can 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. It 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.
Executive summary:
Your business plan briefly summarises your business idea. 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 is 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 an accountant for help with reviewing your pitch deck and your elevator pitch.
Super Angel:
Super Angels are former entrepreneurs but are now investors in their respective industry. They are the ones who 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. you must 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. It can either done by telling a story and adding elements of interest to get your investors interested.
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 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 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 favour just for the purpose of mitigating their risk of investment.
Cap table:
A capitalization table is for displaying the percentage ownership of the relevant investors and individuals in a tabular format. You can easily identify the changes in the percentage of ownership before and after an investment round through these tables. Meanwhile, 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 are preferable than the common stock due to their higher claim on assets. Moreover, preferred stocks 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 assigned voting rights to preferred stockholders as compared to common stockholders. You can pay dividends through preferred stock on a monthly or quarterly basis.
Anti-dilution protection:
Anti-dilution protection is a clause. It ensures that the shares of the company will not be less when selling as compared to the cost value of buying. This clause provides protection to the investors from equity dilution if the company issues shares to other investors interested to get on-board.
Clear House Accountants are startup accountants, they specialise in working with startups helping them with their company formation, accounting and tax compliance, growth and performance review solutions and other growth-related services.
Author Bio
Jibran Qureshi FCCA is the Managing Director of Clear House Accountants, and has over 10 years of experience in practice and across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guide his cognizant approach to leading Clear House and its clients to the future. It was this dexterity that led him to be Enterprise Nation’s Top 50 Advisors.
Jibran is fueled by his passion for helping businesses. He unequivocally believes that as business advisors and accountants for our clients, it is our responsibility to work with them as business partners. As specialists, it is our duty to help our clients navigate through the complexities of constant change and the implications that come with it.
Over the past decade, innovative disruptions have changed the way businesses work, everything from cloud software, innovative business models, to AI and machine learning, have impacted how businesses operate, grow, and expand.
Jibran recognized the need to manage these disruptions sustainably, early on and shaped Clear House Accountants to not just be compliance specialists, but advisors who help build complex ecosystems around cloud accounting software, provide advice on funding support, help manage innovative tax schemes, set up and implement complex strategic plans, and much more. So, his clients can thrive, not just survive.
Jibran developed his prime role as the Managing Director to build Clear House’s capabilities so it can add value for their clients. He is of firm belief that this can be done through consistent high-level training, building the right tools, and creating roadmaps to help businesses cope with prospective disruptions. He envisages that every client that comes on board, is provided maximum value through onboarding, ongoing services and the right mix of tools to help them become the best in the world.