As with every discipline, venture capital has its distinct terminology and acronyms. If you are a beginner looking to get into the industry or a founder looking to raise your first round of VC funding, here are the most common terms used in the venture capital industry.
We recommend you familiarize yourself with these terms before applying to intern at a venture capital firm or submitting your pitch to a venture capital fund.
If you come across any terms or VC acronyms that need to be added to this list, let us know so we can add them.
Let’s dive in!
Venture Capital Acronyms
ARR: Annual Recurring Revenue MRRx12
ARRG Ratio: Average Recurring Revenue (ARR) / Growth Rate
ARPU: Average Revenue Per User
ACV: Annual Contract Value
AOV: Average Order Value
AUM: Assets Under Management
CAC: Customer Acquisition Cost
CLTV: Customer Lifetime Value
CAGR: Compound Annual Growth Rate
COGS: Cost of Goods Sold
CRC: Customer Retention Cost
CRM: Customer Relationship Management
DAU/WAU/MAU: Daily/Weekly/Monthly Active Users
EBITDA: Earnings Before Interest, Taxes, Depreciation Amortization
FY: Fiscal Year
GDPR: General Data Protection Regulation (EU regulation for data protection and privacy)
GPs: General Partners- the managers of the VC fund that decide the allocation of the investments.
KPI: Key Performance Indicator
LPs: Limited Partners- the investors who invest in VC funds.
LPA: Limited Partnership Agreement- a document between the LPs and the GPs
MRR: Monthly Recurring Revenue
MoM: Month over Month
MOIC: Multiple on Invested Capital
MVP: Minimum viable product
ROAS: Return on Ad Spend
ROI: Return on Investment
SEC: Securities and Exchange Commission
YoY: Year over Year
Venture Capital Terminology
Accelerator: A program designed to provide capital and mentorship to accelerate the growth of an early-stage startup. Most accelerators offer initial capital in exchange for equity in the startup. Popular accelerators include Techstars, Y combinator, and 500.
Accredited Investor is a person or entity that meets specific Securities and Exchange Commission requirements set for income, net worth, or specific professional qualifications. Accredited investors qualify for investing in more restrictive investment opportunities. Traditionally, most angel investors that would like to invest in a startup are accredited, investors.
Angel Investor: High-net-worth individuals who invest in a startup in the early stages of development in exchange for equity. Most of the time, angel investors invest during the seed round.
Anti-dilution Clause: A contractual clause that allows investors the right to maintain their ownership percentages even if new shares are issued.
Board of Directors: A group of people representing the interest of a company’s shareholders. The board’s goal in early-stage companies is to ensure the company achieves its mission. The board is responsible for making fundraising decisions, adopting internal rules, recruiting the management team, etc. While the management team oversees all day-to-day operations, the board supervises the executive team and CEO.
Bridge Loan: A short-term loan startups can use to fund operations until a longer-term financing option is available. Usually used when a startup runs out of cash before being able to close a new funding round.
Bootstrapping: When entrepreneurs don’t want to give their equity to VCs, they can bootstrap or use their resources to launch a startup.
Burn Rate: This is the pace at which a company spends money, usually venture capital, before reaching profitability. Burn rate is an important metric used to measure the company’s runway- the amount of time it has left before running out of money. The burn rate is usually quoted in terms of cash per month.
Carried Interest or Carry: The percentage of a venture capital fund’s profits paid to the fund manager or GP (typically 20%). The profit made from the fund determines how much carry the GP earns.
Capitalization Table: An official document showing a company’s capital structure and the different types of equity securities. Cap tables include the specific ownership level by investor or employee.
Cash Flow: A measure of how much cash a business brought in or spent in total over a period of time.
Convertible Note or Convertible Debt: A type of short-term debt that converts to company equity in conjunction with a future financing round. Like a loan, the investor receives company equity instead of principal plus interest.
Common Stock: A type of company security frequently issued to founders and employees. During a liquidation event, preferred shares take priority over common shares.
Convertible Preferred Shares: A type of share that gives the owner the right to convert these preferred shares to common shares after a predetermined period or specific date. These are the most common type of equity used by VCs to invest in companies.
Come Along Rights: The right of an investor to sell shares if the founder or other key employee of the company sells their shares. This right protects investors from being stuck in an investment after the founders have sold all their stocks.
Crowdfunding: The practice of funding a startup by raising small amounts of capital, usually via the internet, based on donations, lending, or equity model.
Debt Financing: A type of funding provided to startups by a lender or investor such as a bank. Like a traditional loan, a company that takes debt financing borrows money and pays it back with interest. With debt financing, borrowers do not need to offer equity in return.
Dilution: When subsequent funding rounds occur, existing investors will own proportionately less of the company than before since additional capital is issued as part of a new financing round.
Due Diligence: an investigation of a company done by prospective investors to assess the viability of a potential investment and confirm that the information provided by the company is accurate.
Drag Along Rights: A provision found in the term sheet or shareholder rights agreement that allows the majority shareholders of a company to compel the minority shareholders to participate in the sale of the company.
Down Round: A round of fundraising in which the company is valued at a lower valuation than previous rounds.
Equity Stake: The percentage of a company owned by the holder of some shares of stock in that company.
Equity Financing: When companies raise capital through the sales of shares. Equity financing usually comes from venture capitalists during a round of financing.
Elevator Pitch: A short and concise presentation an entrepreneur gives to a potential investor about the investment opportunity. The pitch should be straightforward enough that it can be shared during an elevator ride.
Employee Stock Option Pool: A pool of shares reserved for employee compensation. Employee Stock Option Pools help attract the necessary talent to grow the company.
Friends and Family Round: The initial investment provided to a startup company by the friends and family of the founders. Companies raise Friends and Family rounds to get started before seeking angel investments or a formal seed round.
Fair Market Value: The value of a company based on what investors are willing to pay for it. FMV is usually derived from comparable companies that have recently had a financial transaction associated with them.
Fund of Funds: Are funds that invest in other funds. For many investor this investment vehicle allows them to gain exposure to more venture capital investments. By investing in a fund of funds an investor can gain exposure to much more deals and diversify their portfolio compared to direclty investing in only a few deals.
Full Ratchet: A type of antidilution protection in a venture capital term sheet where if another VC later pays a lower price for shares in a company, the VC that bought shares earlier with the “ratchet” protection gets a price adjustment to that lower price. Ratchets are not standard in typical early stage investments.
Growth Equity: A type of investment opportunity in relatively mature companies that the company will use to expand their operations, acquire a company or enter into new markets. Growth equity investors benefit from high growth potential and less risk than investing in earlier-stage startups.
Initial Public Offering (IPO): A process by which a private company issues stocks to the public markets and gets listed, becoming a public company. When a company IPO’s new disclosures must be filed since the company now needs to adhere to reporting requirements set forth by the Securities and Exchange Commission (SEC).
Incubator: A program that helps entrepreneurs refine their business idea, develop a business plan, and grow their company from the ground up. An incubator differs from an accelerator, where a company has already developed its minimum viable product and is looking to scale growth rapidly.
Internal Rate of Return: A metric to measure the success of an investment. In the context of venture capital, IRR represents the annualized percent return an investor’s fund has earned over the lifetime of the investment. The higher the IRR, the better the investment is performing.
Investment Fund: A pooled investment that allows investors to invest money alongside other investors to invest in various instruments including venture capital, private equity, shares, etc.
Institutional Investors: An entity that accumulates the funds of multiple investors. Examples include mutual funds, hedge funds, pension funds, and insurance companies.
Lead Investor: An investor who leads a group of investors into an investment and takes on the most work in negotiating the investment terms, doing due Diligence, and monitoring the company after the closing. Usually, the lead investor will work with the company to determine the pre-money valuation and spearhead raising the round.
Late Stage Venture Capital: Investments that happen after a venture-backed company has developed its product, proven product market fit, has meaningful revenues, and is close to a potential liquidity event such as an IPO. Compared to early-stage VC investments, later-stage investments have fewer risks.
Liquidation Preference: A provision that gives investors preferential payouts when a company is sold or experiences a liquidity event. For example, a VC investor who holds preferred stock with a liquidation preference might receive their share of returns before common stockholders such as employees, and founders can cash in on their shares.
Management Fees: The fees that a venture capital fund charges its limited partners (LPs) every year. These fees compensate the GPs for the work and cover ongoing expenses related to the fund. Typically a VC fund charges between 1%-3% of committed capital.
Portfolio Company: A company that a private equity or venture capital firm owns or holds an interest in. Investing in a portfolio company aims to increase its value and earn a return on investment via an exit or other liquidity events such as an IPO or sale.
Pro Rata: The Latin for in proportion. In finance, this means prorated.
Post-Money Valuation: The valuation of a company that includes the capital provided during the current round of funding. For example, if a VC firms invests $10 million in a company with a $20 million pre-money valuation, the post-money valuation is $30 million
Private Equity Firms: A type of alternative investment firm that invests in companies that are not publicly listed. Private equity firms raise capital from institutional and high-net-worth accredited investors. For example, leveraged buyouts and venture capital investments are two subfields of private equity.
Recapitalization: A corporate reorganization designed to change a company’s capital structure. This process usually involves exchanging one type of finance for another, such as debt for equity, equity for debt, etc.
Right of First Refusal (ROFR): A provision in the stock purchase agreement that is signed during a venture capital fundraising. a ROFR requires any shareholder who wants to sell stock (common, preferred, etc.) to give the VC the option but not the obligation to buy shares from existing shareholders before they can be sold to an external party.
SAFE (Simple Agreement for Future Equity): Similar to a convertible note, a SAFE is an agreement between an investor and a company that provides the investor with rights for future equity in the company without determining a specific price per share at the time of the initial investment. SAFE investors receive future shares when a priced round of investment or liquidation event occurs.
Series A Round: This is a company’s first significant round of venture funding. Typically, Series A investors purchase 10%-30% of the company in exchange for an investment to capitalize it so it can continue developing and marketing its products. Series A rounds are usually followed by Series B, C, etc.
Seed Round: The earliest round of funding where angel investors, founders, friends, and family invest in a startup. At this point, the company is developing its product and is not yet generating revenue.
Software-as-a-Service (SaaS): A business model in which a company provides its software to the customer as a service with a monthly or annual subscription fee instead of selling a perpetual license and maintenance agreements. SaaS companies have metrics that are different from other types of businesses.
Total Addressable Market (TAM): This represents the total market demand and revenue opportunity for a product or service. TAM is calculated by multiplying the average revenue per user by the total potential customers in the market. In other words, if every single person who could find value in a product or solution would purchase or start using it, how big would that measure be?
Term Sheet: a nonbinding document that includes the basic terms and conditions under which an investment will be executed. Term sheets cover a company’s valuation, investment amount, percentage stake, liquidation preference, voting rights, etc. Once the term sheet is signed, it indicates that the investor and the company would like to proceed with the transaction.
Vesting: When something that is promised is delivered, and ownership is officially granted to the recipient. For example, when startup employees are granted shares, they vest according to a predetermined schedule. Under a vesting schedule, employees only receive their equity compensation after a period of employment to ensure alignment of interest between the employer and the employee.
Warrant: The right to purchase a stock at a later date at a fixed price.