Venture Capital

A non-binding agreement outlining the key terms and conditions of a venture capital investment. It covers valuation, investment amount, equity stake, governance rights, liquidation preferences, and other deal terms that will be formalized in the final legal documents.

Pre-money valuation is the value of a company immediately before it receives a new investment, while post-money valuation equals the pre-money valuation plus the new investment amount. These figures determine what percentage of the company the investor receives.

The comprehensive investigation and analysis a venture capital firm conducts before making an investment. This includes evaluating the founding team, market opportunity, product-market fit, financials, competitive landscape, intellectual property, legal matters, and customer references.

The fundamental economic principle of venture capital stating that returns are not normally distributed but follow a power law, where a small number of investments generate the vast majority of returns. Most startups fail, a few return capital, and very few become massive successes.

A clause in the investment agreement that determines the payout order and amount investors receive in a liquidation event such as an acquisition. Common structures include 1x non-participating (investors get back their money or convert to common shares) and participating preferred (investors get their money back plus share in remaining proceeds).

The reduction in an existing shareholder's ownership percentage that occurs when new shares are issued during a subsequent funding round. Anti-dilution provisions in investment agreements can protect investors from excessive dilution in down rounds.

The share of profits that the venture capital fund's general partners receive as compensation, typically 20% of the fund's gains above the invested capital. This aligns the interests of fund managers with their limited partners, as carry is only earned if the fund is profitable.

A detailed spreadsheet or ledger that records the equity ownership structure of a company, including shares held by founders, employees (through stock options), and investors across all funding rounds. It tracks how ownership percentages change as new rounds are raised.

The sequential rounds of financing a startup typically goes through as it grows. These generally include pre-seed (idea stage), seed (early product), Series A (product-market fit), Series B (scaling), and Series C and beyond (expansion and market dominance). Each stage involves larger amounts at higher valuations.

The method by which a venture capital investor realizes a return on their investment. The two primary exit paths are an initial public offering (IPO), in which the company lists its shares on a public stock exchange, and an acquisition (M&A), in which another company purchases the startup. Secondary sales, in which investors sell their shares to other private investors, provide an additional liquidity option.