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:
- Valuation: The company’s worth, determining the investment amount and equity stake.
- Equity Stake: The percentage of ownership in the company.
- Return on Investment (ROI): Expected financial returns on the investment.
- Exit Strategy: Plans for exiting the investment, such as IPO, merger, or acquisition.
- Vesting Period: Timeframe for investors to earn their equity stake.
- Anti-Dilution Protection: Safeguards against decreased equity value due to future funding rounds.
- Liquidation Preference: Priority in receiving assets during liquidation or bankruptcy.
For Startups:
- Pre-Money Valuation: Company valuation before investment.
- Post-Money Valuation: Company valuation after investment.
- Dilution: Reduction in ownership percentage due to new investments.
- Cap Table: A table showing ownership stakes and equity distribution.
- Convertible Notes: Short-term debt converting to equity in future funding rounds.
- Warrants: Options to purchase additional equity at a predetermined price.
- Drag-Along Rights: Forced sale of shares if majority investors decide to sell.
Common Terms:
- Term Sheet: A document outlining investment terms and conditions.
- Due Diligence: Thorough examination of the company’s financials, operations, and legal structure.
- Investment Round: A funding cycle, such as seed, series A, or series B.
- Lead Investor: The primary investor in a funding round.
- Follow-On Investment: Additional investment in subsequent investment round .
