Article By: Matt Sellers
Understanding basic business terminology is essential for anyone working with a startup. From entrepreneurs, to accountants, lawyers, and investors, or anyone hoping to break into these fields and serve business-oriented clients, being able to converse using business lingo will demonstrate credibility with your potential clients. Below is a list of essential business terms and definitions that Fourscore has compiled to help improve your business vocabulary.
- Board of Directors: The board of directors is a group of people elected by stockholders to provide guidance to the executives and officers of the business at a high level. The board is tasked with the goal of increasing shareholders’ value.
- NDA: An NDA (Non-disclosure agreement) is a formal legal document that is meant to protect intellectual property or other proprietary information from public disclosure. Companies often require potential partners, or employees with access to sensitive, proprietary information to sign NDAs that prohibit the disclosure of secret information and provide for specific remedies in the event of a breach.
- Vesting: Vesting is the process by which equity ownership becomes available to certain people after a predetermined length of time or a certain, predetermined, threshold has been met. Often, companies stipulate that stock will vest after an employee achieves a certain goal.
- Due Diligence: Due diligence is the process by which investors and other business-people research and evaluate companies prior to purchasing or making an investment. Due diligence is a fundamental step that all investors do in the process of purchasing or investing. A note to founders – you should be doing your own due diligence on investors. Too many founders take a check from anyone willing to write it. Not a good idea.
- Angel Investor: An angel investor is a person who researches and invests in early stage businesses. Angel investors are serial investors and come in many shapes and sizes. Some want to be intimately involved with the business going forward while others write a check and walk away to find the next deal. They are helpful for small-scale startups that do not have substantial capital or financial-backing from large banks or investment firms.
- Venture capital: Venture capital refers to funds a business can acquire from an financial institution or independent investment firm, usually in exchange for equity in the business. Angel investors provide a subset of venture capital.
- Term Sheet: A term sheet is a non-binding document that lays out the fundamental terms of an investment in a company prior to attorneys starting the official legal documents that detail and enforce the investment. The term sheet is generally very simple and easy for all parties to read and understand. The National Venture Capital Association provides a form term sheet (and other documents for a Series A Financing) that is widely accepted as the industry standard.
- Seed Round: The seed round is the first official round of financing that a business undertakes. A company can sell convertible notes, SAFEs or preferred stock in its seed round.
- Convertible Note: A convertible note is a right for an investor to obtain equity in the future in exchange for making an investment in a business today. The investment essentially starts as debt, but is later converted into equity at a discount the next time the Company sells preferred stock.
- SAFE: A SAFE (Simple Agreement for Future Equity) is an agreement that stipulates that the investor has a right to preferred stock during a later round of equity financing. A SAFE is normally issued as the first financing during the seed stage and is meant to be a simple and short document that lays out the right to receive equity in the future.
- Equity Financing: Equity financing is a means of raising funds through issuing stock. This method of raising capital is essentially a sale of a minority position in the company. Importantly, the investor is purchasing shares issued from the company, not from a founder. The investment funds go to the company to be used for expansion and growth of the business.
- Liquidation Preference: A liquidation preference is the right of a stockholder or a group of stockholders to be paid before (or in preference to) other stockholders upon liquidation. Investors in most equity financings negotiate for a 1x liquidation preference, which means that those investors will get their money back before any other stockholders receive a penny.
- Exit Strategy: An exit strategy is the method by which the founders hope to leave their business once it matures. Types of exit strategies including selling the business to a strategic buyer or a private equity fund, and taking the company public through an IPO.
- IPO: An initial public offering (IPO) is a process by which a privately-held company “goes public”. This means that the company issues stock to the public (as opposed to private investors) through an exchange, such as the New York Stock Exchange (NYSE), in order to raise more money to help the business grow.