VC Terminology: Hustle Fund's Top 100 Terms Aspiring Angel Investors Should Know
At Angel Squad, we’re all about breaking down barriers so that everyone can participate in startup investing. Historically, one of the main barriers keeping laypeople from investing in the startup ecosystem has been language. From “carry” to “liquidity,” “ARR” to “ROFR,” there’s no shortage of jargon in venture capital that can confuse, frustrate, and overwhelm even experienced VCs.
To ensure all Angel Squad members can approach startup investing confidently, we’ve prepared this glossary of 100 terms you’ll likely encounter as an angel investor. Let this guide serve as a reference as you learn the ropes of VC.
- Venture capital: A form of private equity in which investors provide funding to high-risk early-stage and emerging startups with large growth potential.
- Angel investor: An individual investor who provides capital to startups in exchange for equity in the business. Read our guide on how to become an angel investor >>>
- Equity: In venture, equity is ownership units in a business. Most venture deals are an exchange of cash for equity.
- Funding round: An initiative by a startup to raise capital from investors to support business growth. Funding rounds typically happen in stages, with younger businesses raising smaller “pre-seed” or “seed” rounds, and more mature businesses raising larger Series A, B, C, and D rounds.
- Venture firm: A business that raises funds from investors to invest in a series of startups. Hustle Fund is a venture firm.
- Venture fund: An investment vehicle that enables a group of investors to pool their capital together to invest in a portfolio of startups.
- Special purpose vehicle (SPV): A pooled investment vehicle used to make an investment into a singular startup. For more, read our blog post on SPVs >>>
- General partner (GP): Sometimes referred to as the fund “lead”, the GP is the manager of a venture fund. GPs are responsible for raising capital for the fund, making investment decisions, and supporting portfolio companies.
- Limited partner (LP): Investors in a venture fund or SPV. Aside from fulfilling their capital commitments, LPs typically hold few responsibilities. Angel investors can be LPs if they invest in a fund or SPV, rather than investing directly in a startup.
- Investment thesis: A reasoned argument for a particular investment approach. Most GPs have an investment thesis they use to market the fund to investors and inform investment decisions. For more, read our blog post on investment theses >>>
- Due diligence: The process by which investors evaluate a business to determine whether or not to make an investment. Due diligence may include evaluating business performance metrics, meeting with organizational leadership, or speaking with the business’s customers. For more, read our blog post on due diligence >>>
- Unicorn: A startup with a post-money valuation in excess of $1B.
- Decacorn: A startup with a post-money valuation in excess of $10B.
- Term sheet: A document issued by investors to founders indicating an interest in making an investment in their business. Term sheets contain all the major details of a proposed investment, but are non-binding, meaning neither party is required to follow through on the proposed terms. Generally, the term sheet kicks of a broader due diligence process that concludes with a legal investment agreement. For more, read our blog post on term sheets >>>
- Common shares: A class of startup equity typically granted to founders and employees of the business.
- Preferred shares: A form of startup equity granted to investors of the business that typically comes with additional rights and protections beyond what’s provided by common shares.
- Bridge round: Interim funding rounds between larger funding rounds. Startups may raise a bridge round if they’re facing financially difficulty, although this is not always the case.
- Capital call: The process by which a fund manager asks the fund’s investors to contribute a portion of their fund commitment (i.e., the capital they’ve agreed to invest). Capital calls are necessary because a fund’s LPs don’t often have to contribute all their capital upfront. Instead, the fund’s GP “calls” the capital in installments over the first 2-3 years of the fund.
- Simple agreement for future equity (SAFE): A form of financing that allows investors to convert their investment into equity at a future priced funding round or liquidation event. SAFEs were invented by Y Combinator as a way to streamline early-stage financing deals.
- Convertible note: A form of debt financing that allows investors to convert their loan into equity in the event of a priced financing round or liquidation event.
- Uncapped note: A convertible note without a valuation cap (the maximum price at which the security will convert to equity). Startups issue uncapped notes when they’re raising financing without a formal valuation. With an uncapped note, shares will convert into equity at whatever valuation is set at the next priced round. For more, read our blog post on uncapped notes >>>
- Pro rata rights: An investment term that provides the investor the right, but not the obligation, to participate in a future financing round of the business. Pro rata rights allow investors to maintain their equity stake as the business expands. For more, read our blog post on pro rata rights >>>
- Dilution: A phenomenon in which existing investors of a business see their equity stake decrease when the startup goes out to raise a new round of financing. Dilution occurs because the business needs to issue additional shares to attract new investment, which decreases the percent ownership stake of existing investors. For more, read our blog post on dilution >>>
- Drag along rights: An investment term that gives the majority shareholders in a business the power to compel the minority shareholders to participate in an acquisition on equal terms. Drag along rights prevent minority shareholders from blocking a liquidity event.
- Right of first refusal (ROFR): An investment term that gives the holder an opportunity to match a third-party offer on the sale of stock by other investors. ROFRs provide founders and investors control over who can become an investor in the business.
- Protective provisions: A series of terms designed to protect the interests of minority shareholders by allowing them to veto or block certain corporate actions.
- Side letter: A contract between a startup’s founders and investors that provide the investors with certain rights and privileges beyond the standard investment terms. Side letter agreements are usually designed to limit an investor’s downside risk or ensure the fund operates in a way that meets their unique needs.
- Advisory shares: A type of equity compensation granted to a business’s advisors as compensation for their contribution to the business.
- No shop clause: A term in a term sheet forbidding a founder from disclosing the details of an offer with other investors in order to leverage a better offer.
- Clawback provision: A provision between a fund’s LPs and its GPs that requires the GP to return money already paid to the GP if the fund fails to meet a certain rate of return. Clawback provisions ensure a GP won’t earn their portion of carry if the fund underperforms. This can help better align incentives between the GP and the LPs.
- Redemption rights: A term that requires a company to repurchase investors’ shares if the company fails to achieve a liquidity event after a predetermined period of time. Redemption rights are designed to protect investors in the event a company isn’t making progress towards an exit, but also isn’t at risk of failing.
- Most favored nation (MFN) clause: A term that allows early investors to receive the same terms as later investors if the later investors invested on “better” terms than the earlier investors.
- Stock warrant: A security that gives an investor the right to purchase company stock at a specified price within a specified time period.
- Restricted stock: Unregistered shares of stock that have restrictions on the transfer or sale of the security. Also referred to as RSUs (restricted stock units), most equity in private startups is restricted stock.
- Registration rights: A right that entitles an investor who owns restricted stock to require the company list their shares publicly in the event of an IPO so that the investor can liquidate their position.
- Lead investor: The investor in a deal that contributes the largest amount of capital and does a majority of the work negotiating investment terms and performing due diligence. Other investors typically invest on the terms negotiated by the lead investor.
- Allocation: An invitation to invest a certain amount in a funding round. VCs often compete for allocation in popular startups.
- Secondary: When an investor in a startup sells their shares to another investor, this is considered a secondary market transaction. The secondary market provides holders of illiquid securities the opportunity to liquidate some or all of their shares.
- Special purpose acquisition company (SPAC): A publicly traded shell company created for the purposes of acquiring a private company as a means of taking it public without going through the traditional IPO process. Many startups in recent years have become publicly traded entities via SPACs.
- Syndicate: A term for a group of investors that pool their money together to invest in a startup. Most of these investors invest using an SPV. For more, read our blog post on syndicates >>>
- Qualified small business stock (QSBS): Stock that meets certain qualifications that allow investors to exclude or defer federal capital gains upon a stock sale. VCs generally require startups they invest in to meet QSBS standards.
- Liquidity event: An instance where a startup’s equity can be converted into cash or liquid securities. Examples of liquidity events include a startup acquisition, merger, wind down, or IPO. Liquidity events are sometimes referred to as “exits.”
- Liquidation preference: When there’s a liquidity event, the liquidation preference dictates the order and amount investors in the business get paid.
- Distribution: The process by which a fund returns capital to its investors. This usually happens after a startup in the fund’s portfolio has a liquidity event.
- Management fee: A fee paid by a fund’s investors to the fund’s GP as compensation for overseeing fund operations. The management fee typically ranges from 0-2% of an LP’s committed capital.
- Pre-money valuation: A valuation of a business prior to outside investment. This valuation is negotiated between founders and VCs and informs how much the investors will need to put in to purchase their desired equity stake. For more, read our blog post on startup valuations >>>
- Post-money valuation: A valuation of a business after receiving outside investment. The formula for post-money valuation is: pre-money valuation + investment amount = post-money valuation. An investor’s ownership stake is based on the post-money valuation. For more, read our blog post on startup valuations >>>
- Carried interest: The portion of a fund’s profits paid to the fund’s GP. The standard carried interest (sometimes abbreviated to “carry”) rate in VC is 20%. The GP only earns carry after the fund’s LPs have been repaid their principal investment amount. For more, read our blog post on carried interest >>>
- Total value to paid in capital (TVPI): A metric that calculates the total value—both realized profits and unrealized future profits—that a fund has produced for investors relative to the amount of money contributed. A TVPI above 1.00x means the fund’s investments, on aggregate, have grown in value. A TVPI below 1.00x means a fund’s aggregate investments have decreased in value. The formula to calculate TVPI is: total value / paid-in capital.
- Internal rate of return (IRR): Another performance metric that shows the annualized percent return an investor’s portfolio company or fund has earned (or expects to earn) over the life of an investment. The higher the IRR, the better the investment is performing. VCs like IRR because it allows them to compare their fund’s performance to funds in other vintage years.
- Vintage: The year in which a fund starts making investments. Vintage is useful for benchmarking and identifying trends.
- Schedule K-1: A tax document issued by venture funds to their LPs to help them understand their tax obligation for a given year. K-1s generally include information about interest income, dividends, and short- and long-term capital gains.
- 409A valuation: An independent third-party valuation of a company’s common stock. Startups need to receive periodic 409A valuations to be able to grant employee stock options on a tax-free basis.
- Initial public offering (IPO): The process by which a formerly private company goes about issuing its stock to the public. For VCs, an IPO is a desirable outcome, as it usually means they’ll see a strong ROI. Once a company IPOs, it must adhere to more onerous reporting requirements.
- Assets under management (AUM): The total amount of capital managed by a fund’s GP that they can use to invest.
- Dry powder: A term that refers to the AUM that has yet to be deployed into startups.
- Institutional investor: A term for a large investor (typically an entity) that invests money on behalf of others. Examples of institutional investors include retirement plans and university endowments.
- Lock up period: The period after a business IPOs during which the business’s investors and employees are not allowed to redeem or sell their shares. A typical lock up period is between 90-180 days. Lock up periods prevent a company’s shares from flooding the market at once, which can harm the stock price.
- Markup: An increase in the value of an investment. Investments are typically marked up when the business raises money at a higher post-money valuation than the previous financing round’s post-money valuation.
Legal / regulatory terms
- Exempt reporting advisor: A status that allows qualifying venture capital funds to not register with the SEC, lessening their regulatory burden.
- Blue sky laws: State-level regulations that require certain securities issuers to register and disclose the details of the security offering. Most venture funds are exempt from blue sky laws, but need to make notice filings to the state. More information on blue sky laws can be found here.
- 506(c) fund: A type of venture fund exempt from SEC registration under Rule 506 of Regulation D that can publicly advertise its offering (i.e., promote the fund on social media, in the press, etc.).
- 506(b) fund: A type of venture fund exempt from registration under Rule 506 of Regulation D that cannot publicly advertise its offering (i.e., only raise capital from investors they know personally).
- Accredited investor: An individual deemed financially sophisticated enough to handle the risks associated with certain kinds of investments, including early-stage startups. To qualify as an accredited investor, an individual must meet certain income, net worth, licensure, or professional expertise criteria. For more, read our guide on accredited investors >>>
- Qualified purchaser: An different designation for an investor deemed financially sophisticated enough to invest handle the risks associated with certain kinds of investments, including early-stage startups. Qualified purchaser status requires an investor to meet certain criteria related to the size of the investment portfolio they either have or manage on behalf of others. For more, read our guide on accredited investors >>>
- ASC 820: An accounting guideline that sets out how fair values for venture fund holdings should be estimated and reported.
- Limited partnership agreement: A document outlining the roles and responsibilities of the limited partners in a venture capital fund.
Startup evaluation terms
- Employee option pool: The portion of a startup’s shares reserved for employees.
- Capitalization table: A document that represents a detailed breakdown of a startup’s ownership, including common shares, preferred shares, SAFEs, and convertible notes. Sometimes referred to simply as the “cap” table, it’s an important document for investors to review when performing their due diligence on a business.
- Minimum viable product (MVP): A product with just enough utility to be usable by customers and help inform further product development. Early-stage investors evaluate the MVP of a business as part of their due diligence process.
- Profit margin: The amount of revenue remaining after the business accounts for all operating and non-operating expenses.
- Churn: The percentage of existing customers who stop doing business with a company over a given period of time. Successful SaaS startups have an annual churn rate between 5-7%.
- Product-market fit (PMF): A phenomenon by which a business starts to see strong demand for their product or services from their target market. PMF is the goal of every early-stage startup.
- Cash flow: The amount of money moving into and out of a business at any given time.
- Burn rate: A measurement of how quickly a company is spending its cash. For startups, this cash is usually its venture capital. Burn rate is a measure of negative cash flow.
- Bootstrapping: A business strategy by which the startup’s owners self-finance the operation, alleviating the need for venture financing. Many early-stage startups bootstrap to the point where they have an MVP, and then go out to raise venture capital.
- Customer acquisition cost (CAC): A metric that measures how much an organization needs to spend to acquire a new customer for their product or service. CAC is typically tied to sales and marketing spend.
- Run rate: The predicted financial performance of a business based on currently available financial information. VCs try to understand a business’s run rate to help them make an investment decision.
- Vesting: A schedule upon which employees receive their equity compensation. Typically, after an employee is at the business for one year, they reach their vesting “cliff” and gain access to 25% of their equity compensation. The remaining equity vests monthly over 36 months until the employee is “fully vested.” Once shares vest, the employee has the right to purchase them. A vesting schedule can be an important employee retention tool.
- Strike price: The price at which employees can purchase their equity compensation. The strike price is determined by the 409A valuation.
- EBITA: Earnings before interest, taxes, and amortization. EBITA measures the profit of a company, and is one of the metrics considered by investors when performing due diligence.
- Revenue multiple: The value of the equity relative to the revenue the business generates. Revenue multiples are often used to value startups that are not yet profitable.
- Lifetime value (LTV): The projected value of a customer to a business. LTV is used to measure growth potential of a company. A common way to measure LTV is to multiply average sale value by number of transactions by average customer retention. For more, read our blog post on lifetime value >>>
- Total addressable market (TAM): The size of a product’s potential users. Investors evaluate TAM to determine the upside potential of a business.
- Annual recurring revenue (ARR): The annual revenue generated by subscriptions, contracts, memberships, and other recurring billing cycles. For more, read our blog post on ARR >>>
- Cost of goods sold (COGs): How much it costs to make a product or service. COGs typically factors in direct costs (materials) and indirect costs (labor). For more, read our blog post on COGs >>>
- Market pull: How quickly customers adopt a product. Market pull is a velocity metric that can help you evaluate startup success. For more, read our blog post on market pull >>>
- Retention rate: The percentage of customers who continue to pay for a product or service over a specified timeframe. A high retention rate indicates the business has loyal customers. Investors consider a startup’s retention rate when performing due diligence. For more, read our blog post on retention rate >>>
- Runway: How long a business can sustain itself based on current income and expenses with the capital it has on hand. Generally, when a startup has less than a year of runway left, it goes out to raise new funding.
- Fund of funds: A venture fund that invests in other venture funds.
- Down round: An instance in which a startup raises a new round of financing at a post-money valuation that is lower than its previous funding round’s post-money valuation. A down round could signal the startup is struggling to meet its goals.
- Flat round: A instance in which a startup raises a new round of financing at the same post-money valuation as its previous funding round. A flat round could signal the startup is struggling to meet its goals.
- Parallel fund: Investment entities set up to invest side-by-side based on the same investment thesis. Parallel funds are a way to raise capital from more investors without exceeding limitations on fund size.
- Crowdfunding: A method of fundraising by which a large group of investors contributes capital to help fund the business’s operations. Crowdfunding can be a donation, debt financing, or equity investment. Oftentimes, investors participating in crowdfunding need not meet accreditation requirements. However, there are limitations on the total amount of capital they can contribute in a crowdfunding round.
- Friends and family round: Before founders go out to raise capital from investors, they may solicit capital from their inner circle. This type of fundraise, common amongst early-stage startups, is known as a friends and family round.
- Dealflow: A term that represents the number of investment opportunities a VC receives. VCs aim to have a high volume of deal flow so they can find the best investment opportunities. Deal flow is typically achieved through network connections or investment platforms like AngelList. For more, read our blog post on deal flow >>>
- Value-add investor: A term used to describe investors in startups who provide value beyond just capital. Examples of additional value investors can provide include advice and expertise or connections to other investors, customers, and employees. For more, read our blog post on being a value-add investor >>>
- Venture scout: An individual that scouts out good investment opportunities for venture funds. Scouts are typically compensated for their efforts by receiving a portion of the carry if the investment pans out.
- Rolling Fund: A special kind of 506(c) venture fund that allows LPs to commit capital on a flexible, quarterly investment schedule rather than a lump sum. To learn more about Rolling Funds, visit the AngelList website >>>
- Roll Up Vehicle (RUV): A special kind of SPV that allows founders to raise from a group of LPs and add all of them as a single line on their cap table. RUVs allow founders to raise capital from small check investors while keeping their cap table clean. To learn more about RUVs, visit the AngelList website >>>
Speak the language of VC
We hope you’ve found this glossary helpful in teaching you the lingo of venture investing. If you think there’s a term we missed, feel free to chirp at us at @hustlefundvc on Twitter.
Ready to accelerate your venture education? Hustle Fund’s Angel Squad allows anyone with an interest in startup investing to learn directly from experienced investors while participating in deals sourced from Hustle Fund VCs. To learn more, visit our website >>>