Want to launch a startup but have no idea how to fund it?
Lucky for you, Technical.ly wants to help you solve that problem. While we report on startups, nonprofits, government and more as they pertain to local tech economies, we also recognize that much of our financial reporting centers on venture capital, plus the occasional philanthropic grants. The former has become one of the most common financial tools used in the startup world — check out the record-breaking VC numbers for 2021. But that doesn’t mean it’s right for everyone.
So, in honor of January as Startup Health Month, 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 more in mind? Email email@example.com and we’ll add it to the list.
An organization that accelerates 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. In Pittsburgh, Innovation Works‘ AlphaLab programs are examples of accelerators.
An individual who is allowed to trade securities that don’t always have to be 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.
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.
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 might be a good idea for young companies looking to maintain founder control, as it doesn’t involve debt or equity.
A form of debt financing from a bank or other entity or individual that must be paid back.
A document that breaks down a company’s shareholders’ equity across common equity shares, preferred equity shares, warrants and convertible equity as relevant. This table can help a company determine its market value and aid in decisions around equity ownership.
A type of security and equity representative of ownership of a company. Shareholders of common stock are take a greater risk than those of debt or preferred stock, as common stock is only paid off after creditors, bondholders and preferred shareholders in the event of company bankruptcy.
A form of funding that starts as short-term debt and later converts into equity, often after certain company milestones such as a future funding round. Convertible notes are essentially a loan from investors to grow the company, but the return for the loan will be equity. 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.
A form of funding that involves raising small amounts of money from a large number of people to support a company. Crowdfunding usually takes place online, with links that can easily be passed around a network through social media. This gives anyone the chance to invest as little or as much as the want to, depending on some restrictions. Examples of popular crowdfunding sites include Kickstarter, Indiegogo and GoFundMe. (Note: If a crowdfunding campaign involves equity, it will be regulated by the SEC in the US.)
Debt financing involves taking a loan from a bank or other lending entity or individual with the promise to pay it back in full. Debt financing leaves control in the hands of business owners, rather than lenders, but puts companies on the hook for repayment, which can be a difficult commitment for risky early-stage companies.
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 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. Whereas debt financing puts the company on the hook for repayment, equity financing puts all of the financial risk on the investor. However, because investors incur that risk, their partial ownership of the company often entitles them to input on larger company decisions, and gives them a long-term financial tie to the company.
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 in the company. 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. (Read Pittsburgh-based serial entrepreneur Michele Migliuolo’s advice on making the investment ask of friends and family.)
A financial gift to a company, individual or organization such as research funding or donations from philanthropic organizations, which do not need to be paid back. Grants can sometimes include vesting or waiting periods before recipients are given access to the full amount of the money.
An organization that provides startups or early-stage ideas with the resources needed to grow into companies with solid business models. Incubators will typically charge a fee for their services or take an equity stake in the companies they help to grow. In Pittsburgh, Ascender is an example of an incubator.
A lead investor is the individual or organization leading a funding round for a company. Typically, the lead investor provides the largest amount of money in a round and sets the basic terms of the deal.
Somewhat self-explanatory, a competition for business pitches is often a good chance for networking and company exposure as well as financial awards for winners. However, winnings from these competitions are typically nowhere near the sums of average VC rounds.
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.
Created by prestigious accelerator Y Combinator in 2013, 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. Originally advertised as an alternative to convertible notes, a SAFE note doesn’t include the accrued interest and maturity dates involved with convertible notes. A SAFE note is considered one of the quicker and easier ways to get early-stage funding into a company, and was the financial tool used by Pittsburgh’s own Agot AI in a $10 million raise last year.
A seed round is typically the first equity-based funding stage for a company, sometimes preceded by pre-seed funding from family and friends or a founder’s own money. A seed round is followed by Series A, B, C and more trajectory growth funding rounds as needed, each typically larger than the previous one.
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.
Similar to incubators and accelerators, a startup studio helps grow startups, typically at the idea stage, into stable companies with solid business plans. But 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. In Pittsburgh, brand-new org Hooman is an example of a startup studio.
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 that 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.
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.
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, like 412 Venture Fund or Black Tech Nation Ventures in Pittsburgh, manage a pool of money from accredited investors. While venture capital is a popular funding option in the startup world, its use of equity means that investors gain some control of the company, thus causing the founders to relinquish some.
Sophie Burkholder is a 2021-2022 corps member for Report for America, an initiative of The Groundtruth Project that pairs young journalists with local newsrooms. This position is supported by the Heinz Endowments.