Venture capital glossary

Venture capital has its own vocabulary. Much of it is borrowed from law and finance. This glossary gives short definitions in plain English. It is meant for first-time founders, students and new angels who want to follow a conversation on Sand Hill Road without stopping to look things up. Definitions are simplified. Real deals depend on the exact contract language, so read our term sheet basics and have a lawyer review anything you sign.

A and B

• Accelerator. A program that gives young startups a short burst of mentoring, often with a small investment and a demo day at the end. See our accelerators guide.
• Accredited investor. A person or entity that meets SEC income, net worth or license tests and may buy most private startup shares. Our angel investors guide explains the tests.
• Angel investor. An individual who invests personal money in early startups.
• Anti-dilution protection. A clause that adjusts an investor's conversion price if the company later sells shares at a lower price. "Broad-based weighted average" is the common, milder version. "Full ratchet" is the harsh one.
• Bridge round. A small financing that carries a company to its next major round, often from existing investors.
• Board of directors. The group that oversees the company and approves major decisions. Venture investors often get a seat from Series A onward.
• Burn rate. How much cash a company spends each month beyond what it earns.

C

• Cap table. Short for capitalization table. A spreadsheet showing who owns what: founders, employees, investors and the option pool.
• Carried interest. Often called carry. The share of a fund's profits kept by its general partners, commonly around 20 percent.
• Common stock. The basic shares held by founders and employees. It sits behind preferred stock when money is paid out.
• Convertible note. A loan that turns into shares at a later financing, usually with an interest rate, a maturity date and often a cap or discount.
• Corporate venture capital. Investing by an operating company's venture arm. See our corporate venture capital guide.
• Cliff. A waiting period, often one year, before any shares under a vesting schedule are earned.

D and E

• Data room. A shared folder of company documents that investors review during due diligence.
• Demo day. An event where a group of startups pitch to invited investors, usually at the end of an accelerator program.
• Dilution. The drop in an owner's percentage when new shares are issued.
• Down round. A financing at a lower share price than the previous round.
• Drag-along right. A clause that lets a majority of shareholders require the others to join in selling the company.
• Dry powder. Money a fund has raised but not yet invested.
• Due diligence. The investigation an investor does before committing, from customer calls to legal checks.
• Evergreen fund. A fund with no fixed end date that can hold investments indefinitely and recycle returns.
• Exit. The event that turns shares into cash, usually an acquisition or an IPO.

F to I

• Follow-on investment. An investor putting more money into a company it already backs, in a later round.
• Fully diluted. A share count that includes all options, warrants and convertible securities as if they had become shares.
• General partner (GP). A partner who manages a venture fund and makes investment decisions.
• Growth equity. Investment in later stage companies with real revenue, often to fund expansion.
• Information rights. An investor's right to receive regular financial statements and other company information.
• IPO. Initial public offering. The first sale of a company's shares on a public stock exchange.

L to O

• Lead investor. The investor that sets the terms of a round, usually writes the largest check and does the most diligence.
• Limited partner (LP). An investor in a venture fund, such as a pension fund, endowment or family office, that does not manage the fund.
• Liquidation preference. The right of preferred shareholders to get their money back before common shareholders when the company is sold or wound down. "1x non-participating" is the most founder-friendly common form.
• Lockup. A period after an IPO, often several months, when insiders may not sell their shares.
• Management fee. The annual fee a fund charges its LPs to pay salaries and costs, commonly around 2 percent of committed capital.
• Most favored nation (MFN). A clause giving an investor the right to the better terms if the company later gives someone else a better deal on a similar instrument.
• NVCA. The National Venture Capital Association, the U.S. industry group formed in 1973. It publishes widely used model legal documents.
• Option pool. Shares set aside for future employee stock options.
• Ownership target. The percentage of a company a fund aims to own after investing. Many venture firms have a target in mind for each stage.

P

• Pay-to-play. A clause requiring existing investors to keep investing in future rounds or lose some preferred rights.
• Post-money valuation. The company's value immediately after a new investment, including the new money.
• Power law. The pattern in which a small number of investments produce most of a fund's returns.
• Pre-money valuation. The company's value immediately before a new investment.
• Preferred stock. The class of shares investors usually receive, with rights such as liquidation preference and certain votes.
• Pro rata right. An investor's right to buy enough shares in future rounds to keep its ownership percentage.
• Protective provisions. Decisions the company cannot make without approval from preferred shareholders, such as selling the company or issuing a senior class of stock.

R and S

• Right of first refusal (ROFR). The right to buy shares on the same terms before an outside buyer can.
• Runway. How many months a company can operate before it runs out of cash at its current burn rate.
• SAFE. Simple Agreement for Future Equity. A short contract, created at Y Combinator in 2013, where an investor pays now for shares issued at a later priced round.
• Secondary sale. The sale of existing shares from one holder to another. The company itself does not receive the money.
• Seed round. The first meaningful outside round, usually from angels and seed funds. See our seed funds guide.
• Series A, B, C. Successive priced rounds of preferred stock, each usually larger and at a higher valuation than the last.
• Signaling risk. The worry that other investors will read meaning into an existing investor's decision not to invest again.
• Syndicate. A group of investors who back a deal together, often through a single entity led by one angel.

T to Z

• Tag-along right. Also called co-sale. The right of a shareholder to join a sale on the same terms when another shareholder sells.
• Term sheet. A short, mostly nonbinding document that sets out the main terms of an investment before the full legal documents are drafted.
• Tranche. A slice of an investment released only when a milestone or date is reached.
• Unicorn. A private startup valued at $1 billion or more.
• Valuation cap. The maximum valuation at which a SAFE or note converts into shares, which protects early investors if the company's value rises sharply.
• Vesting. The schedule by which founders and employees earn their shares over time, commonly four years with a one-year cliff.
• Vintage year. The year a fund starts investing. Funds are often compared with others of the same vintage.
• Warrant. A right to buy shares at a set price in the future, sometimes attached to loans.
• Zombie fund. A fund that is still managing old investments but cannot raise a new fund.

A worked example

Here is how several of these terms fit together in one simple, made-up case. A startup has a pre-money valuation of $8 million and raises $2 million in a seed round. The post-money valuation is $10 million. The new investors own 20 percent. If the founders owned 100 percent before, they now own 80 percent. That drop is dilution.

Now suppose the company later sells for $5 million, less than the post-money value. If the seed investors hold a 1x non-participating liquidation preference, they can take their $2 million back first instead of their 20 percent share of $5 million, which would be $1 million. The remaining $3 million goes to common shareholders. This is why the terms of a round can matter as much as the valuation.

Where to learn more

The NVCA publishes free model legal documents that define many of these terms in full. Y Combinator posts its SAFE documents with a user guide. For local context, our history of venture capital on the Peninsula shows where many of these practices began. Founders flying in for meetings can compare hotels near Sand Hill Road to keep drive times short.

Frequently asked questions