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Essential Financial Terms Every Entrepreneur and Angel Investor Should Know for Successful Equity Deals

When seeking or giving equity and angel investments, it’s essential to understand key financial terms to ensure a fair and successful deal. Here are some crucial terms to consider:

For Investors:

  1. Valuation: The company’s worth, determining the investment amount and equity stake.
  2. Equity Stake: The percentage of ownership in the company.
  3. Return on Investment (ROI): Expected financial returns on the investment.
  4. Exit Strategy: Plans for exiting the investment, such as IPO, merger, or acquisition.
  5. Vesting Period: Timeframe for investors to earn their equity stake.
  6. Anti-Dilution Protection: Safeguards against decreased equity value due to future funding rounds.
  7. Liquidation Preference: Priority in receiving assets during liquidation or bankruptcy.

For Startups:

  1. Pre-Money Valuation: Company valuation before investment.
  2. Post-Money Valuation: Company valuation after investment.
  3. Dilution: Reduction in ownership percentage due to new investments.
  4. Cap Table: A table showing ownership stakes and equity distribution.
  5. Convertible Notes: Short-term debt converting to equity in future funding rounds.
  6. Warrants: Options to purchase additional equity at a predetermined price.
  7. Drag-Along Rights: Forced sale of shares if majority investors decide to sell.

Common Terms:

  1. Term Sheet: A document outlining investment terms and conditions.
  2. Due Diligence: Thorough examination of the company’s financials, operations, and legal structure.
  3. Investment Round: A funding cycle, such as seed, series A, or series B.
  4. Lead Investor: The primary investor in a funding round.
  5. Follow-On Investment: Additional investment in subsequent investment round .
Fitenue News
Author: Fitenue News

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