Angel investor. Crowdfunding. Incubator. Anyone new to the startup world quickly encounters a dizzying array of jargon. To bring your vocabulary up to speed as quickly as your company, here is a quick guide to some common startup terms:
Accelerator – A program, normally lasting a few months, designed to help startups grow rapidly. Accelerators usually require startups to apply for acceptance into a “class,” which consists of a group of startups who will proceed through the program together, folliowing a schedule with fixed beginning and ending dates. Accelerator programs typically provide startups with some combination of business education, mentoring, office space and funding, often, but not always, in exchange for stock in the startup.
Accredited Investor – A type of investor defined by the federal securities laws to include certain institutional investors, such as banks, insurance companies and employee benefit plans, as well as a natural person: (a) who has an individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million, excluding the value of the primary residence of such person; or (b) a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
Angel Investor – A high net-worth individual who invests in a startup, seed-stage or early-stage company in return for an ownership stake. Angel investors usually invest their own money (unlike venture capital firms, who, for the most part, invest other people’s money) and may do this individually or as part of an angel group. According to the Angel Capital Association, the amount a typical angel invests in a single company ranges from $5000 to $100,000.
Angel Round – A round of startup financing received from angel investors.
Benefit Corporation or Public Benefit Corporation – A new type of corporation created by state statutes to use private enterprise to create a public benefit. Unlike traditional corporations, benefit corporations must consider non-financial, as well as financial, interests when making decisions and must report on their overall social and environmental performance using accepted standards. According to the Benefit Corp Information Center website, the District of Columbia and nineteen states, including Delaware and Illinois, have already enacted benefit corporation statutes, and eight other states have benefit corporation legislation pending. Wisconsin does not yet have a benefit corporation statute.
Bootstrapping – Using personal assets and operating revenues to found and build a company.
Bridge Loan – A short-term loan, usually provided by the underwriter of a company’s IPO, to pay operating expenses and/or the costs of the IPO.
Certified B Corp – A corporation that has been certified by a non-profit called “B Lab” as meeting certain standards of social and environmental performance, accountability and transparency. According to the B Lab website, “B Corp certification is to sustainable business what Fair Trade certification is to coffee…” Note that Certified B Corps are not the same as benefit corporations. B Corp certification is granted by a private non-profit, while benefit corporations are created by state law. For example, a Wisconsin corporation could not be a benefit corporation, since benefit corporations do not exist under Wisconsin law, but a Wisconsin corporation could be a Certified B Corp. In states with benefit corporation statutes, a corporation could be both a benefit corporation, under state law, and a “B” Corp, as certified by B Lab.
Common Stock – A class of stock in a company. Holders of common stock have the right to receive dividends and, in a liquidation, the right to share in the assets of the company, but only after other claims (such as those of preferred stockholders) have been paid. Holders of common stock have voting rights, unlike holders of preferred stock, who usually do not have the right to vote.
Convertible Debt – A debt obligation that may be exchanged, by the lender, for an equity interest in a company, usually at the time of a future financing.
Convertible Preferred Stock – Preferred stock that may be converted by the holder into a fixed number of common shares.
Coworking Space – A workspace shared by unrelated businesses, often with shared equipment, conference rooms and support services.
Crowdfunding – Financing a project with small amounts of capital obtained from a large number of individuals, usually via the Internet.
Down Round – A round of financing for which the share price is lower than it was for the previous round, usually because the company is not performing well.
Early-Stage Funding – A startup’s first round of substantial funding. Early-stage funding is usually provided by venture capital firms and generally consists of two parts — Series A financing and Series B financing.
Elevator Pitch – A short speech describing an idea for a business or project. The term “elevator pitch” comes from the idea that the pitch is so brief that you could give it to someone you met in an elevator, during the time it takes to complete the ride.
Founder – A person who founds a startup.
Friends & Family Round or F&F Round – A round of startup financing in which seed funding is received from friends and family members.
Incubator – A for-profit or not-for-profit company that assists early-stage businesses by providing any or all of the following: (a) physical space in which to operate the business; (b) shared facilities and services, such as conference rooms and receptionists; (c) training and/or mentoring; (d) financing; and (e) access to resources available through relationships with local universities, government agencies and business networks. Although some incubators provide these services in exchange for stock in a startup, many simply charge a fee for the services used. In addition, in contrast with accelerators, which only provide space to a startup while they are part of a “class” that is participating in an accelerator program, incubators are often more flexible, allowing businesses to remain in incubator space for varying terms, depending on the needs of the company.
Initial Public Offering or IPO – The first public sale of stock by a company.
Lean Startup – A method for developing startups proposed by Eric Ries and discussed in his book, The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses.
Mezzanine Financing – Debt financing that may be converted to an equity interest in the debtor company, if it is not repaid when required by the terms of the loan documents. Mezzanine financing is usually used to finance the expansion of an existing company, not as seed-stage or early-stage funding.
Micro Venture Capitalists – Venture capitalists who focus on seed-stage startups.
Peer-to-Peer Lending – Loans (usually unsecured) made to unrelated individuals using online peer-to-peer lending company websites, rather than banks and other traditional lenders.
Pivot – To change a company’s direction quickly, based on what the company has learned about its customers, its technology and the business environment.
Preferred Stock – A class of stock in a company. Holders of preferred stock have a preferential claim to company dividends and, in the event of a liquidation of the company, to the assets of the company, but they usually have no voting rights.
Scalable Business – (1) Any business with a potential for substantial growth, especially beyond a local market; or (2) A business for which profit margins are likely to increase often dramatically, as sales increase.
Seed Funding – The initial funding used to start a business, usually one that has not yet started to produce revenues. Seed funding often comes from the assets of the founders and their friends and families but may also come from other sources, such as seed accelerator programs, angel investors, micro VC’s and private equity funds. Banks do not usually provide seed funding because of the high risk of default.
Series A Financing – The first financing after seed funding, it usually involves the sale of preferred stock in the company to venture capitalists. Series A financing usually occurs after a startup has begun generating revenue, but generally prior to the point at which the startup begins to generate profits.
Series B Financing – The financing stage following Series A financing, it usually takes place after a startup has achieved certain business milestones.
Series-Seed Round – Seed financing provided by angel investors or venture capitalists prior to the Series A financing stage.
Social Entrepreneur – An entrepreneur whose primary goal is to use an innovative idea to improve society, rather than to earn a profit.
Social Lending – See Peer-to-Peer Lending.
Stock Option – A right to buy or sell the stock of a company at a set price on a certain date or within a certain period of time.
Stock Warrant – An instrument issued by a company (usually together with a bond or preferred stock) that grants a long-term option to buy stock in that company at a fixed price. Also known as a “subscription warrant” or a “warrant.”
Super Angel – A hybrid of an angel investor and a venture capitalist. A super angel raises money, like a venture capitalist, rather than just investing his or her own funds, but invests early, like an angel investor. The amount invested by a super angel is usually larger than the amount invested by a typical angel investor but less than the amount normally invested by a venture capital firm.
Venture Capital – Money provided by professional, third-party investors to innovative start-up firms and small businesses that have high potential for growth, usually in exchange for preferred stock. Venture capital firms invest other people’s money (raised from institutional investors and high net worth individuals), unlike angel investors, who invest their own money. According to the National Venture Capital Association, venture capital firms typically invest at least $1,000,000 in a company and are long-term investors who take an active role in management. Venture capital funding is often done in several rounds, each identified by a letter of the alphabet, such as “Series A,” “Series B,” “Series C,” etc. A startup will have a different valuation at the time of each round of venture capital financing, so later rounds usually have a higher share price than earlier rounds. If a startup has not done well, and a later round has a lower share price, this is known as a “down round.”
This article was written by Janice L. Gauthier, Esq. Ms. Gauthier has an A.B. from Harvard University and a J.D. from Harvard Law School. She is the founder of The Gauthier Law Group, LLC, a boutique law firm that represents startups in Wisconsin and Illinois. You can contact Ms. Gauthier at 414-270-3855, ext. 101 or by email. To learn more about Ms. Gauthier’s background and experience, visit her Google or LinkedIn profiles.
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© 2013 The Gauthier Law Group, LLC