As your legal buddy in the startup ecosystem, we have compiled a list of terms every startup founder should be familiar with. We believe our community should not be taken by surprise when they come across some of these terms.
This is not an exhaustive list as we will continue to update it to help you have confident conversations.
Accelerator
This is a program also referred to as a seed accelerator that supports early-stage, and growth-driven companies through mentorship, networking, education, and financing for a while, usually three months. Accelerators are for startups that already have an MVP (Minimum Viable Product) with some sort of validity — e.g., a group of free users or a few paying customers or early signs of strong product-market fit. Some of the notable accelerator programs include Y Combinator and Techstars. Companies like Airbnb (a YCombinator company) and Sendgrid (a Techstars company) are examples of companies that have been backed by some accelerators in the ecosystem.
Agile
This is a method where startups make short production cycles that encourage ideas to be quickly implemented and tested to accumulate feedback to enable data-informed decisions to be made. Hence, an agile company can quickly adapt to changes.
Angel Investor
Angel investors are individuals who offer promising startup companies funding in exchange for a piece of the business as convertible debt or ownership equity. These are usually high-net-worth individuals in society who invest their funds in startups. Typically, a group of angel investors invest online through equity crowdfunding or organize themselves into angel groups or angel networks to share investment capital, as well as provide advice to their portfolio companies. Forbes in a 2018 publication listed Fabrice Grinda, Paul Buchheit, Wei Guo, and Alexis Ohanian as some of the 50 Angel Investors Based On Investment Volume And Successful Exits.
B2B
This is an acronym for business-to-business. It is the exchange of products and services or even information between businesses as opposed to the usual businesses and customers. Summarily, it is a transaction between two companies.
Balance Sheet
This is a financial statement of a startup at a particular point in time that depicts the value of that organization. It is calculated by subtracting the company’s liabilities and shareholders’ equity from its total assets.
Business Advisors
A business advisor is a professional who works with a startup to help with planning, financing, and other capacity-building activities. An advisor might be investors, serial entrepreneurs, or seasoned experts in a specific field.
Bridge Loan
This is a short-term loan received by startup companies to solve various short-term cash flow problems. Usually, startup businesses receive a short-term loan to help them reach the next round of funding on the basis that it will be repaid as quickly as possible. The interest rate of a bridge loan is unusually low. Consequently, to compensate the lender, these bridge loans offer the option to convert the loans into equity.
Bootstrapping
This term describes a situation when an entrepreneur Funds his company without external help or capital. One of the advantages of bootstrapping is that the entrepreneur has full control over his company and does not have to worry about queries from investors. Bootstrapping is suitable for startups that do not need a lot of capital to build and test their product.
Bubble
A bubble describes an economic situation where a startup company is overvalued and over-inflated by investors or venture capitalists. This mostly happens during the private phase of these companies or in an initial public offering.
Burn Rate
Burn rate, also referred to as a negative cash flow, describes the rate at which a startup company spends cash reserves to cover expenses in a loss-generating scenario. Hence, the burn rate is usually applied to a company with little or no revenue.
Business Plan
A business plan is essentially a roadmap for your startup, a written document describing a company’s core business activities, objectives, and how it plans to achieve its goals. It describes business objectives and the plan to achieve them. Good business plans should include an executive summary, products and services, marketing strategy and analysis, financial planning, and a budget.
A lengthier traditional business plan or a shorter lean startup business plan can be used to attract investors during the early stages before a company has established a proven track record.
Cap Table
A cap table is a document that shows all the securities a startup company has issued and its owner. Securities include stock, convertible notes, warrants, and equity grants.
Capital
Startup capital is the money needed to start a new business. The capital includes funds held in deposit accounts or funds obtained from special financing sources used to run a company. A startup capital may be used to pay for office space, permits, licenses, inventory, product development, manufacturing, marketing, or any other expense that results from starting a new business.
Convertible Note
This is a type of convertible debt instrument used to fund early and seed-stage startups. The investor loans money to a startup instead of a return in the form of principal plus interest, the investor would receive equity in the company.
Corporate Venture
This is an investment sourced directly from corporate funds into external startup companies.
Crowdfunding
This describes a means of generating capital from the public instead of giving away equity, usually via a third-party platform. Crowdfunding involves raising funds for a project or cause through a large group of people online. Individuals or small businesses may optimize crowdfunding to get early-stage support for their ideas. Examples of online platforms for crowdfunding include; Kickstarter, Indiegogo, Patreon, Gofundme among others.
Crowdsourcing
This is a term that refers to obtaining information or opinions into a task or project by enlisting a large number of people, generally for free and mainly via the internet.
Data Room
This is a space or an online repository of information used to store and distribute documents to enable efficient protection of private and sensitive information. Usually, a data room houses documents relating to due diligence in funding rounds.
Debt Capital
This refers to borrowed funds needed to start up a company that must be repaid at a later date, and usually with interest.
Demo Day
A demo day is a pitch event for a group of startups, where the founders of startups pitch their business to potential investors in attendance. A demo day may be organized by an incubator, accelerator, or Venture capital firm. Some of the popular demo days within the space include those organized by 500 Startups and YCombinator.
Due Diligence
This term defines the process whereby both an investor and an entrepreneur have the opportunity to analyze and assess each other’s financial record, structure, mode of operation, and credibility for the potential of an investment opportunity and partnership. Due diligence helps parties to make informed decisions.
Duty of Care
Duty of care refers to a fiduciary responsibility legally imposed on the board of directors, expecting them to reasonably avail themselves of all material information before making a business decision.
EBITDA
This is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. This provides investors an overall snapshot of the short-term operational efficiency of a company.
Ecosystem
An ecosystem is a community or group of diverse living organisms that live in and interact with each other in a specific environment. Essentially, a tech ecosystem refers to an interconnected and interdependent network of diverse entities to spur innovation in the tech environment sustainably. It comprises tech-focused startups, accelerators, tech communities, and established businesses in the community.
Elevator Pitch
An elevator pitch is a much shorter, refined version of a regular pitch about your startup that could be effectively given to an investor during a short elevator ride.
Equity
Equity defines a shareholder’s amount of ownership in a startup. It is the percentage of the company’s shares that are held by shareholders.
Equity Financing
Equity financing is the process of raising capital by selling shares. Angel investors, VCs, and crowdfunding are sources of equity financing.
Exit
An exit defines a situation in which a company is either acquired for cash, sold during a public offering, or abandoned as a failed venture.
Founder
A founder is an individual who establishes a startup company and takes the risk and reward of the establishment.
Fundraising
Fundraising is the process of raising capital for a startup company.
Founders Stock
Founders stock refers to the shares issued to the originators of a company. Often, the stock does not receive any returns up to the point that a dividend is payable to the common stockholders.
Funding Platform
A funding platform is a software that allows you to securely collect and process donations.
Grant
This is a term that refers to funds provided by an entity, usually a government agency or other organization or even persons, that does not need to be repaid and does not purchase equity.
Hedge Fund
A hedge fund is a pooled investment set up by a hedge fund manager that trades in relatively liquid assets. It is designed to make returns using different investment strategies.
Hockey Stick Growth
Hockey stick growth is sudden and extremely rapid growth after a long period of linear growth. The term is often used to describe what happens when a startup business finds its market niche and market conditions are positive.
Ideation
This is the process of generating ideas and solutions through brainstorming, prototyping, and sketching sessions which a team. The idea is to define a problem that you’re aiming to solve and come up with ideas to determine how your product or service will solve that problem.
Incubator
An incubator which is often referred to as a startup incubator is a collaborative program for startup companies designed to help startups in their early stage succeed by providing workspace, seed funding, mentoring, and training.
Independent Contractor
An independent contractor is a self-employed person or entity contracted to perform work for or provide services to another entity as a nonemployee.
Intellectual Property
This refers to the creations of the mind, such as inventions; literary and artistic works; designs; symbols, names, and images used in commerce. Summarily, it includes intangible assets or the creation of the human intellect. Examples include copyright, trademark, and patent.
Initial Public Offering
This refers to the process whereby the shares of a private company are issued to the public.
Investment Readiness
Investment Readiness means that a business can understand and meet the needs and expectations of investors, this includes but is not limited to management and leadership, legal structure and financial records, legal documents among others.
Investment Round
This is also known as a capital round refers to the rounds of funding that startup companies go through to raise capital.
Investment Syndicate
An investment syndicate is a special purpose vehicle established to make an investment decision. Here, investors co-invest.
Joint Venture
This term refers to a commercial agreement where two or more businesses pool their resources together, to achieve specific business goals such as launching a new type of business or selling products into a new market while still maintaining their separate business structure and legal status.
Key Performance Indicator (KPI)
This refers to a set of quantifiable measurements used to determine the company’s overall long-term performance. KPIs may be financial, including net profit, revenues minus certain expenses, or the current ratio (liquidity and cash availability). Hence, Using KPIs involves setting targets, and tracking progress against that target
Lead Investor
A lead investor is an investor who will be the first to fund a financing round. They are usually the biggest investor in a fundraising round. In the early stages, they typically take on more responsibilities than other investors.
Lock Up
This is a time usually after an Initial Public Offering or an acquisition of a startup by a public company during which certain shareholders are not allowed to sell their stock. Often 90 or 180 days, but could be a year. Lock up aims to protect investors from excessive selling pressure by insiders.
Micro VC
A micro VC is a smaller venture firm that primarily invests in seed-stage emerging growth companies, often have a fund size of less than $50M, and typically invest between $25K to $500K in a given company.
Minimum Viable Product
A minimum viable product (MVP) is a basic version of a product with just enough features to be usable by early customers who can then provide feedback for future product development.
Non-disclosure Agreement
A Non-disclosure agreement is a legally binding agreement between two or more parties prohibiting them from disclosing confidential information. A startup company about to pitch its product to investors should ensure the parties involved sign this agreement to make sure that any confidential information you share about your business model is not disclosed to anyone else without your due authorization.
Patent
A patent is an aspect of intellectual property rights that grants exclusive rights to an invention, which is a product or a process that provides, in general, a new way of doing something, or offers a new technical solution to a problem. The right excludes other people from others from making, using, or selling the invention for a limited period.
Pitch Deck
A pitch deck is a brief presentation that gives potential investors or clients an overview of one’s business plan, products, services, and growth traction to secure funding.
Portfolio Company
A portfolio company is one in which a venture capital firm, buyout firm, or holding company owns equity. It describes a company in which investors own equity.
Post money Valuation
This term describes the worth of a startup company immediately after external investments or the latest round of funding. Post money valuation includes the total pre-money valuation and the amount of investment received from investors.
Pre-money Valuation
This term describes the worth of a company before external investments or the latest round of funding.
Pre Seed Funding
This is the earliest stage of funding. The most common “pre-seed” funders are the founders themselves, as well as close friends, supporters, and family.
Private Equity
This refers to the ownership or interest in a company yet to be publicly traded or listed on the stock. Here, investors directly invest in companies.
Product-Market Fit
Product-market fit is a term credited to investor and entrepreneur, Marc Andreessen, who describes it as a “Product/market fit means being in a good market with a product that can satisfy that market.”
The concept describes a scenario in which a company’s products are bought and used by its target customers who in turn tell others about the company’s product in numbers large enough to sustain that product’s growth and profitability.
Profit Margin
Profit margin is a ratio or percentage that measures profitability relative to business costs and expenses. Where the ratio/percentage is high, the interpretation is that the business is profitable. e business.
Profit Margin = ((Sales – Total Expenses) / Revenue) x 100
Return on Investment (ROI)
This is the amount of money or net benefit generated from an investment.
SAFE
This is an acronym for Simple Agreement for Future Equity. It is an agreement between a company and an investor. Here, the investors invest money in the company using a SAFE in exchange for the right to purchase stock in a future equity round (when one occurs) subject to some conditions set in advance in the SAFE.
Seed Funding
A seed funding is a financing round that involves raising initial capital to start a business, seed capital can come from the Founders’ pocket, angel investors, and Venture Capital firms. In the seed stage round, there may be little data on the business’s success.
Series A
A series A round (also known as series A financing or series A investment) is the name typically given to a company’s first significant round of venture capital financing.
Series B
A series B round is the second stage of venture capital financing. Usually, the round features many of the same investors from the previous round, Series A, but may bring in additional prospects.
Series C
A series C round is the third stage of venture capital financing. Here, the company may be ready for expansion into another market and maybe preparing themselves to go public or for acquisition.
Series D
A series D round is the fourth stage of venture capital financing. By this time, a company preparing for this round should be a dominant market leader, generating tens of millions if not hundreds of millions in annual revenue, and working towards an exit (IPO or acquisition).
Shareholders Agreement
A shareholders agreement is an agreement between the shareholders of the company, setting out their rights and obligations. The agreement aims to protect the shareholders’ investment in the company while establishing a fair relationship between them.
Soft Landing
This is a term that refers to a controlled launch into the market. It is a program for international companies who have launched and gained traction abroad and want to expand to a new market without investing all of their resources at first. Soft landing helps companies to take calculated risks.
Startup
A Startup is a young company founded to develop a unique product or service. Usually, startups are established on the basis of innovation to address the deficiencies of existing products or create entirely new products and services. Examples of African start-ups shaking up the global tech ecosystem include; 54gene, mPharma, Kuda, Sokowatch, among others.
Target Market
This refers to the defined group of people to whom a startup wants to sell their business’s products or services. Some of the common ways to define the target market are by demographic, geographic, psychographic, and behavioral categories.
Term Sheet
A term sheet is an agreement that shows the basic terms and conditions of an investment. It is an agreement between a business owner/CEO of a startup and an investor.
Trademark
A trademark is an aspect of intellectual property that typically differentiates the goods and services of one business from another. They are any word, phrase, design, or combination that identifies your goods or services, distinguishes them from the goods or services of others.
Unicorn
Unicorn refers to privately held startups valued at over $1 billion. Examples include Uber, Airbnb, and Robinhood.
Valuation
This describes the calculation of the present or projected worth of a company.
Venture Capitalist
A venture capitalist is an investor that provides capital to companies exhibiting high growth potential in exchange for an equity stake. Some examples of VC firms include Future Africa, Greentree Investment Africa, Ventures Platform, Oui Capital, Microtraction, Tiger Global, among others.
Venture Capital Fund
Venture capital funds are funds given by venture capital firms to fund and mentor startups or young businesses that have long-term growth potential.
Vesting Schedule
A vesting schedule describes when and how shareholders become entitled to shares. Hence, the schedule represents the years or timeline over which the rights of shareholders accrue to make them entitled to shares of a company. Vesting schedules may vary by company, both in terms of duration and the percentage of shares vested each year. A common vesting schedule is as follows: the shares will vest according to the following schedule: a 12-month vesting cliff to commence January 23, 2022, wherein 25% shall vest upon the expiration of said cliff, thereafter 100% of the balance shall vest in equal installments over the next four years.
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