Looking for startup funding? Here are 28 terms to know

Want to launch a startup but have no idea how to fund it?

The first step is learning to speak the language — and Technical.ly is here to help.

While we report on all kind of organizations as they pertain to local tech economies, from established corporations to nonprofits to government and more, a lot of our coverage centers on startups. Our reporters and editors might not be experts in running these companies, but we are experts in talking about them.

Below is a short glossary of terms related to all routes of funding for the early-stage entrepreneur. From debt financing to bootstrapping to sweat equity, here are the terms you should know to understand raising money for your company.

Have another in mind? Suggest it to info@technical.ly; we might add it to the list.

Accelerator

A program that works to speed up or advance the go-to-market strategy of an established early-stage company.

Companies in accelerators typically already have a defined product and business plan, and will use an accelerator’s resources to grow further. Accelerators often provide a small amount of funding in exchange for equity.

Accredited investor

An individual allowed to trade securities that aren’t registered with financial authorities. In the US, requirements for someone to become an accredited investor include an annual income of at least $200,000 or a net worth of more than $1 million.

Accredited investors are able to access investment options like venture capital, hedge funds and angel investments.

Angel investor

An individual typically with high net worth who uses their own money to invest in early-stage companies. Angel investors are usually actively involved in providing guidance and help in growing the startups they invest in.

Board of directors

A group of individuals elected to represent shareholder interests. The board of directors typically plays a role in decisions around key hiring, firing and compensation of top employees at a company, as well as determination of dividend policies and payouts.

Bootstrapping

A form of funding that involves launching and running a company based on the use of personal finances or reliance on the general operating revenue of the company, as opposed to infusions of outside cash.

Though this option on its own has the potential to create personal financial difficulties if the company doesn’t produce enough of its own revenue, it can be a good option for young companies looking to maintain founder control, as it doesn’t involve debt or sharing equity.

Business loan

A form of debt financing (see below) from a bank or other entity or individual that must be repaid. Interest rates can vary widely, depending on the type of loan, or whether it is government-backed.

Capitalization table

A document that breaks down a company’s shareholders across the various types of holdings, which can include common equity shares, preferred equity shares, warrants and convertible equity.

This table can help a company determine its market value and aid in decisions around equity ownership.

Common stock

A type of security and equity representative of ownership of a company. Shareholders of common stock take a greater risk than those of debt or preferred stock; in case of a bankruptcy, common stock is only paid our after creditors, bondholders and preferred shareholders.

Convertible notes

A form of funding that starts as short-term debt and later converts into equity, often after certain company milestones such as an additional funding round.

Convertible notes are essentially a loan from investors to grow the company, but the return for the loan will be equity instead of cash. Because of this, convertible notes often have very specific terms around interest rates, maturity date, valuation cap and valuation discount. This form of funding is typically used in early-stage raises.

Crowdfunding

A form of funding that involves raising small amounts of money from a large number of people. It usually takes place online, with links that can easily be passed around a network or through social media. This gives anyone the chance to invest as little or as much as the want to, depending on some restrictions.

Popular crowdfunding sites include Kickstarter, Indiegogo and GoFundMe. (Note: If a crowdfunding campaign involves equity, it falls under SEC regulation in the US.)

Debt financing

Debt financing involves taking a loan from a bank or other lending entity or individual with the promise to pay it back in full. Unlike equity financing (see below), it leaves control in the hands of business owners, rather than lenders, but leaves companies on the hook for repayment, which can be a difficult commitment for risky early-stage companies.

Dilution

A reduction in current stockholders’ equity ownership of a company with the issuance of new shares, typically occurring with a new equity-based funding round.

Equity financing

Equity is the opposite of debt. Instead of lenders, equity financing involves investors, who provide capital for a company in exchange for equity, or partial ownership, of that company.

While debt financing puts the company on the hook for repayment, equity financing puts all of the financial risk on the investor. That partial ownership often entitles investors to have input on larger company decisions, and gives them a long-term financial tie to the company.

Exit

An event that enables a company’s founders and/or owners to sell full or partial ownership in the company to investors or other firms. Common exits include initial public offerings (IPOs), special purpose acquisition company (SPAC) deals and mergers and acquisitions.

Friends and family round

Often one of the earliest sources of capital for a startup or young company, a friends and family round involves the founders asking for investment in a company from those communities in exchange for a stake.

A friends and family round is typically seen as a good option when a startup is too early to attract capital from accredited investor or firms.

Grants

A financial gift to a company, individual or organization that does not need to be paid back. Grants can come from philanthropic foundations, government agencies or individuals. They sometimes include “vesting” or waiting periods before recipients are given access to the full amount.

Incubators

A program that provides startups or entrepreneurs with early-stage ideas with the resources needed to grow into companies with solid business models.

Incubators typically charge a fee for their services or take an equity stake in the companies they help grow.

Lead investor

A lead investor is the individual or organization that typically provides the largest amount of money in a funding round and sets the basic terms of the deal, including valuation.

Pitch competitions

A competition where entrepreneurs pitch their startup idea. The ostensible goal is to win a monetary prize or investment deal, but these events are often a good chance for networking and company exposure in addition to the potential financial award. Winnings are typically on the smaller side, nowhere near the amounts of a VC round.

Preferred stock

A type of security and equity similar to common stock, but with a greater claim over dividends and asset distribution.

The combination of dividends and potential for stock price appreciation make preferred stock a combination of both debt and equity, which can be attractive to more risk-averse investors. Preferred stockholders are paid off ahead of common stockholders but after bondholders in the event of company bankruptcy.

SAFE notes

Created in 2013 by influential accelerator Y Combinator, a simple agreement for future equity (SAFE) note is a sort of contract between a company and an investor where the investor promises to purchase a certain number of shares for a previously agreed upon price at a given point in the company’s future.

Put forth as an alternative to convertible notes, a SAFE note doesn’t include the same accrued interest and maturity dates, and is considered one of the quicker and easier ways to get early-stage funding into a company.

Seed round

A seed round is typically the first equity-based funding stage for a company, sometimes preceded by pre-seed funding from angel investors, friends and family or a founder’s own money.

A seed round is followed by Series A, B, C and more trajectory growth funding rounds (see below) as needed, each typically larger than the previous one.

Silent partner

An alternative to venture capital, a silent partner is someone who is involved with a company largely for the purpose of providing capital. A silent partner is typically not involved in daily operations, but can play a role in providing big-picture guidance.

Startup studios

Similar to incubators and accelerators, a startup studio helps grow startups, typically at the idea stage, into stable companies with solid business plans. Startup studios often take a partial founder position in the companies they work with and take larger equity stakes in return for larger sums of capital in early-stage investments.

Sweat equity

Unpaid or minimally compensated work that employees and entrepreneurs put into a business venture in exchange for a stake in the company.

Sweat equity is common among early-stage companies with limited cash but high growth potential, so its employees are willing to work at lower or no salary in exchange for a potential financial return on their efforts.

Trajectory growth funding

Following a seed round, this funding involves the continuation of funding Series A, B, C and more equity-based rounds, each typically increasing in capital.

Valuation

The economic value of a company. This is typically an important calculation in equity-based fundraising as it plays a part in determining dilution, eventual share price and more.

Venture capital

A form of funding through private equity provided to startups and early-stage companies with expectations of high growth and return on investment. Venture capital funds manage a pool of money from accredited investors.

While venture capital is a popular funding option in the startup world, use of equity typically means founders must relinquish some control to investors.