Author: Abu Cassim
18 May 2018
If you’ve read any of our previous blogs you are already familiar with some of the angel investor terms. At times the jargon can be pretty self-explanatory and at other times you may as well be reading a textbook on coding in Python.
This is your A to Z, angel dictionary of investment terms.
Accelerator: A programme where startups accelerate their development. Participants usually work through an incubator (business building programme) before attending an accelerator (scaling up programme).
Advisory board: Consists of a group of external advisors to a startup. Advisors usually earn or are allocated a small percentage of equity in the company. Advisors are not involved in the day-to-day running of the company.
Angel investor: That’s you! It’s an investor in an early stage business. Capital is provided in exchange for equity in the startup.
Board of Directors: A group of people who jointly oversee the activities of an organisation. An important governance layer, essentially its role is to hire the CEO of the business and assess the overall direction and strategy of the business. The chairman of the board is often seen as the spokesperson.
Book value: At an elementary level, it’s a measure of assets against liabilities. The value is determined by adding all the company’s fixed assets and then deducting all debts and liabilities, as well as the liquidation price of any preferred issues. Book value can further be broken down to a value per share by dividing the book value by the number of ordinary shares outstanding.
Burn Rate: A metric that should be tracked closely at the early stage of a company, it is a measure of how quickly money is being spent at the company. Burn rate is expenses less any income received. It’s usually quoted as a measure per month.
Business Plan: A document describing, amongst other things, the startup’s solution, the market, its problems, strategies to tackle the opportunity, team details, the landscape, revenue models and financial forecasts.
Cap Table: A table providing an analysis of a company’s percentages of ownership , equity dilution, and value of equity in each round of investment by founders, investors, and other owners.
Capital Gains: The difference between an assets purchase price and selling price, when the selling price is greater.
Carried interest or “carry”: A fee paid to the lead investor or fund manager. It is calculated as a portion of any gains made by an investment. Carry is usually calculated at a liquidity event. Carry is customary in the venture capital industry, in order to create a significant economic venture incentive for venture capital fund managers to achieve capital gains.
Co-investment: The rounding or investing of funds by multiple investors or partners.
Convertible note: Debt instrument that automatically or voluntarily converts to equity at a trigger event – as stipulated in the agreement.
Corporate Venturing: Venture capital provided by (in house investment funds) large corporations to further their own strategic interests.
Co-Working Space: involves sharing a workplace or office. Unlike in a typical office, those at a co-working space are usually not employed by the same organization.
Customer Acquisition Cost: The CAC can be calculated by simply dividing all the costs spent on acquiring new customers (marketing expenses) by the number of customers acquired in the period the money was spent.
Customer Lifetime Value: The prediction of the net profit attributed to the future relationship with a customer. It takes a number of variables in to consideration, including: average revenue, frequency of purchases, profit margin and the relationship’s likely lifespan.
Down Round: This occurs when a startup raises funding at a valuation lower than the previous round of funding.
Diversification: The process of spreading investments among various types of securities and various companies in different fields or across the investment landscape.
Deal flow: Refers to the number of investment opportunities available at a given time to a particular investor. Angels typically source deal-flow from incubators, accelerators and co-working spaces.
Dilution: A reduction in the percentage ownership of a given shareholder in a company caused the issuance of new shares.
Dilution Protection: A provision that seeks to protect existing shareholders and early investors in a company from a decrease in their ownership position. Anti-dilution protection refers to protection from dilution in a down round.
Drag Along Rights: A majority shareholders’ right, obligating minority shareholders to sell their shares in an offer the majority wishes to execute.
Equity: Ownership in the capital of the company. Can take the form of ordinary or preferred shares.
Exit Strategy: A startup’s intended method for finding a future buyer of all shares. Exit strategies can include an initial public offering (IPO), a sale of the company or management buyout.
Free Cash Flow: The cash flow of a company available to service the capital structure of the firm. Typically measured as operating cash flow less capital expenditures and tax obligations.
Fund size: The total amount of capital from the investors of a venture capital fund.
Incubator: Organisation that helps startups in the business building phase of their life. It involves building their management teams, developing growth strategies and securing early adopter customers.
Institutional investors: Organizations that professionally invest in startups and other businesses.
Initial Public Offering (IPO): The sale or distribution of a stock of a portfolio company to the public for the first time.
Internal Rate of Return (IRR): IRR is technically a discount rate and is the percentage return on investment. It is the rate that equates outflows (investments in to startups) to inflows (proceeds received from the sale of shares).
Issued Shares: The amount of ordinary and preference shares that a corporation has sold/issued.
Lead Investor: This is the member of a syndicate or investment partnership who typically does all the heavy lifting in the investment process. He or she will generally be remunerated for this either through a discounted price on the shares or through carried interest.
Management team: A startup’s management team is one of the most important factors in order to lead your business to success. A management team has to efficiently oversee the activities of a startup.
Market Size: The number of individuals within a certain market who are potential buyers and/or sellers of a product or service.
- Total available market (TAM): refers to the total revenue opportunity available for a product or service. This is the total global opportunity for a particular company.
- Serviceable available market: is part of the TAM that can actually be reached given the current sales channels and capacity of the startup.
- Serviceable obtainable market: portion of the SAM that you can capture.
Mezzanine Financing: Refers to the stage of venture financing for a company immediately before its IPO. Mezzanine-level financing can take the structure of preferred stock, convertible bonds, or subordinated debt.
Net-Asset Value (NAV): Is the value of an entity’s assets minus the value of its liabilities. It is often stated on a per share basis.
Net Income: The net earnings of a corporation after deducting all costs of selling, depreciation, interest expense and taxes.
Net Present Value: Is the value of future cash flows (inflows and outflows) discounted to the present value at an appropriate rate. Outflows are netted off against inflows.
Option: A security granting the holder the right to purchase or sell a specified number of a company’s securities at a designated price at some point in the future.
- Call option: the right to buy a security at a given price/range within a specific time period.
- Put option: the right to sell a security at a given price/range within a specific time period.
- Option Pool: The number of shares set aside for future issuance to employees of a startup.
Partnership: A relationship where each partner shares in the profits, losses, and liabilities of the partnership.
Post-Money Valuation: The valuation of a company immediately after the funding round. This value is calculated by multiplying the company’s total number of shares by the share price or by dividing the amount being raised by the equity being offered in return.
Pre-Money Valuation: The valuation of accompany prior to a round of investment. This amount is determined by calculating the post-money valuation and subtracting the amount being raised.
Preemptive Right: A right extended to certain shareholders to purchase additional shares in the startup prior to shares being made available to outside investors.
Preferred Shares: A class of ownership in a company that has a higher claim on its assets and earnings than ordinary shares.
Return on investment (ROI): The money an investor gets back as a percentage of the money he/she has invested in a venture.
Runway: Refers to the length of time in which a company will remain solvent, assuming that they are unable to raise more money.
Scalability: The capability of a startup to leverage existing infrastructure, assets and networks to grow its business. A scalable startup should have inherent economies of scale, any system bottlenecks hinder its scalability.
Seed Investment: Usually a startup’s first round of external funding. This is often provided by an angel investor or someone in the startup’s network (known as family and friends). This round of funding is typically concluded in the early stages of a startup’s life.
Series A: Part of a naming convention popular in established markets like the US. This is typically the round of funding in a startup’s scaling up phase. It generally follows on from the seed investment and is then followed by Series B, Series C and so on.
Shareholders agreement: An agreement set-up by shareholders of an organisation in order to govern the relationship.
Syndicate: This is when two or more investors co-invest in a startup by clubbing their financial resources, knowledge and networks.
Tag Along Rights/Rights of Co-Sale: A minority-shareholder protection affording the right to include their shares in any sale of control at the terms associated with the sale of a majority shareholder’s shares.
Term Sheet: A summary of the terms the investor is prepared to accept. A non-binding outline of the principal points which the share purchase agreement and related agreements will cover in detail.
Venture Capital (VC) Financing: VC is a type of private equity, a form of financing that is provided by funds to startups that are deemed to have high growth potential. VCs raise capital based on a specified mandate and invest based on this mandate.
Voting Right: The ordinary stockholders’ right to vote on specific matters relating to the operating of a company. Preferred shares usually do not carry voting rights. The right to vote may be delegated by the shareholder to another person.