Startup funding is an integral part of any business, as it helps to scale, improvise, hire better talent, and create new products and services for more impact, and more importantly, more profits. 

Startup Glossary Part 1: Types of Investment - A comprehensive guide to various investment types for startups

To help you decide and understand the terms related to Startup Funding, we have created this Startup Glossary Part 1: Startup Funding.

If you are wondering why we at Mobisoft Infotech created this in-depth, comprehensive and detailed Startup Glossary for Entrepreneurs, then find the reason here.

Our next category is Valuation & Financial Metrics.

Glossary Map:

Angel Group

An angel group is a network of individual angel investors who pool their resources, knowledge, and capital to collectively invest in early-stage startups. These groups often focus on specific industries or regions and provide a structured approach to angel investing. By joining forces, angel investors can share due diligence, diversify their portfolios, and make larger investments than they might individually.

For example, you are a MedTech startup developing an innovative diagnostic tool. You are seeking $500,000 to fund product development and initial market validation. You apply to present at a MedTech-focused angel group’s monthly pitch meeting.

After a rigorous screening process, you are invited to pitch to the group’s members. Following your presentation, several members express interest and decide to work together to conduct due diligence on your startup.

After a thorough review, the angel group decides to invest $500,000 in your company, providing the capital you need to bring your product to market.

Accelerator

A startup accelerator is a fixed-term program that provides early-stage startups with mentorship, education, networking opportunities, and often seed investment. Accelerators help startups refine their business models, build their products, and connect with investors and customers. In exchange for their support, accelerators typically take a small equity stake in the startups they work with.

For example, your healthtech startup has developed an innovative, unique wearable device for kids, in order  to monitor vital signs, location and more. You have a prototype but need help refining your business model and raising funds.

You join a three-month accelerator, which provides a $50,000 investment, workspace, and access to mentors, including successful health entrepreneurs and veterans

Through workshops and mentor meetings, you refine your pitch and connect with potential customers and investors.

At the program’s demo day, you pitch to a group of internal investors. With the knowledge, connections, and traction gained through the accelerator, at this point, you are well-positioned to raise your next funding round and scale your startup.

Angel Investor

An angel investor is a high-net-worth individual who provides early-stage funding to startups in exchange for equity ownership. Angel investors are often experienced entrepreneurs or business professionals who invest their own money, as opposed to venture capitalists who invest on behalf of a fund. In addition to capital, angel investors often provide mentorship, industry connections, and strategic advice to help startups grow.

Imagine you are a fintech entrepreneur with an idea for a revolutionary mobile banking app. You have a solid business plan and a working prototype, but you need $200,000 to bring your product to market and acquire your first customers.

You reach out to a successful fintech entrepreneur who has become an angel investor since exiting her own startup. She is impressed by your vision and agrees to invest $200,000 in exchange for a 10% equity stake in your company.

Beyond the capital, your angel investor becomes a trusted advisor, introducing you to potential partners, helping you refine your go-to-market strategy, and providing guidance as you navigate the challenges of scaling your startup.

Angel Round

An angel round is the first round of external funding a startup raises from individual angel investors, usually in exchange for equity ownership. It provides crucial early-stage capital to build products, hire staff, and fund initial growth before seeking larger investments. Additionally, the startup gets mentorship, industry connections, and valuable advice from the veterans who are powering that angel round. 

For example, you have launched your bootstrapped gaming startup, after consuming your savings, taking loans and favors from friends, family and fools, and took that leap of faith. There has been a buzz among the gamers about your ideas and plans, and now, that tipping point has been reached: Capital. 

You need $100,000 to launch the most stunning gaming environment, and you pitch your idea to a group of angel investors, and several of them agree to invest $10,000 each in your startup. 

This collective investment of $100,000 forms your Angel Round.

Angel Fund

An angel fund is a pooled investment vehicle that allows individual angel investors to combine their capital and invest in early-stage startups collectively. Angel funds are typically managed by experienced investors or investment firms and provide a more diversified and structured approach to angel investing. By pooling resources, angel funds can make larger investments and spread risk across multiple startups.

For example, you are a technology startup developing a cutting-edge artificial intelligence platform for the healthcare industry. You are seeking $1 million in seed funding to expand your team, refine your product, and secure your first paying customers.

You apply to pitch to a prominent angel fund that focuses on investing in healthcare technology startups. The fund’s managers are impressed by your technology and market potential and decide to invest $500,000 in your company.

In addition to the capital, the angel fund provides valuable support and resources. They introduce you to potential customers and partners within their extensive healthcare network, help you recruit top talent to your team, and provide ongoing strategic guidance as you scale your startup.

With the backing of the angel fund, you are able to accelerate your growth and establish your company as a leader in the healthcare AI space, ultimately positioning yourself for a successful Series A funding round.

Venture Capital (VC)

Venture capital (VC) is a form of private equity financing provided by firms or funds to startups and early-stage companies with high growth potential. VC firms invest in these companies in exchange for equity ownership, with the aim of generating high returns through eventual exits, such as IPOs or acquisitions. VC firms also provide strategic guidance and support to help portfolio companies grow and succeed.

For example, you are the founder of a fast-growing e-commerce startup that has reached $1 million in annual revenue. To expand into new markets and scale your operations, you need to raise $5 million in Series A funding.

You pitch to a top-tier venture capital firm that specializes in e-commerce investments. The firm’s partners are impressed by your traction, team, and vision, and they decide to lead your Series A round, investing $3 million in exchange for a 20% equity stake.

With the VC firm’s backing, you are able to hire key executives, invest in marketing and product development, and expand into new geographic markets. The firm’s partners also provide invaluable advice and connections, helping you navigate challenges and capitalize on opportunities as you scale your business.

Corporate Venture Capital

Corporate venture capital (CVC) refers to investments made by established corporations into early-stage startups or funds, typically in industries related to the corporation’s core business. CVC investments allow corporations to gain access to new technologies, markets, and talent, while also providing startups with capital, resources, and strategic partnerships. CVC investments can be made directly or through dedicated corporate venture funds.

Imagine you are the CEO of a promising cleantech startup that has developed a revolutionary battery technology for electric vehicles. You are seeking $10 million in Series B funding to scale your production and secure partnerships with major automakers.

You receive investment interest from a leading automotive corporation’s venture capital arm. The corporation sees your technology as a strategic fit and decides to invest $5 million in your Series B round.

In addition to the capital, the corporation provides access to its extensive manufacturing capabilities, supply chain network, and industry expertise. They also introduce you to key decision-makers at major automakers, helping you secure lucrative contracts and partnerships.

With the corporation’s backing and resources, you are able to scale your production, improve your technology, and establish your company as a leader in the rapidly growing electric vehicle market.

Crowdfunding

Crowdfunding is a method of raising capital by collecting relatively small amounts of money from a large number of people, typically via online platforms. Crowdfunding allows startups and entrepreneurs to raise funds for their projects or ventures from a wide pool of investors, customers, or supporters. There are various types of crowdfunding, including reward-based, equity-based, and debt-based crowdfunding.

Imagine you are an entrepreneur with an idea for a revolutionary new smartwatch that tracks both physical and mental health. You have a working prototype but need $100,000 to fund your first production run and launch your product.

You decide to launch a reward-based crowdfunding campaign on a popular platform. You create a compelling video, offer attractive rewards for different contribution levels, and promote your campaign through social media and email marketing.

Your campaign generates significant buzz, and you quickly surpass your $100,000 goal, raising a total of $250,000 from 1,500 backers worldwide.

The success of your crowdfunding campaign also attracts the attention of retailers and investors, setting the stage for your next phase of growth.

Crowdinvesting

Crowdinvesting, also known as equity crowdfunding, allows startups and early-stage companies to raise capital from a large number of individual investors in exchange for equity shares. Unlike traditional crowdfunding, which typically involves pre-selling products or offering rewards, crowdinvesting enables investors to acquire an ownership stake and potentially benefit from the company’s future success.

For example, you are the founder of a sustainable fashion startup that needs additional capital to expand production and distribution. You launch a crowdinvesting campaign on an equity crowdfunding platform, setting a target of $500,000 for a 10% equity stake.

Your campaign attracts hundreds of investors passionate about sustainability, with investments ranging from $100 to $10,000. You successfully raise $600,000, exceeding your initial target.

With this capital, you upgrade your facilities, hire additional team members, and expand your distribution network. The campaign also helps you build a strong community of investors and brand advocates invested in your company’s success.

Issued Shares

Issued shares represent the total number of shares a company has allocated to its shareholders, including founders, investors, and employees. When a company issues shares, it is essentially dividing its ownership among various stakeholders. The number of issued shares can increase over time as the company raises additional funding or grants equity to employees.

Imagine you are the founder of a SaaS startup that has just raised a $3 million Series A round led by a venture capital firm. As part of the funding agreement, you issue 1 million new shares to the VC firm, representing a 20% ownership stake in your company.

Prior to the Series A, your company had 4 million issued shares, with you and your co-founder each holding 2 million shares (50% ownership each). After issuing the new shares to the VC firm, your company now has a total of 5 million issued shares.

As a result, your ownership and your co-founder’s ownership have each been diluted to 40%, while the VC firm now owns 20% of the company. The issuance of new shares allows you to raise the capital you need to grow your business while giving up a portion of your ownership in exchange.

Accredited Investor

An accredited investor is an individual or entity that meets certain criteria set by securities regulators, such as having a high net worth or income, which allows them to participate in certain private securities offerings. Accredited investors are assumed to have the financial sophistication and risk tolerance to invest in unregistered securities, such as those offered by startups and private companies.

For example, you are a successful serial entrepreneur looking to invest some of your wealth into promising early-stage startups. As an accredited investor, you have access to exclusive investment opportunities that are not available to the general public.

You attend a private investor event where you meet the founder of a cutting-edge AI startup seeking $1 million in seed funding. The startup is not yet generating revenue, and its offering is only open to accredited investors due to the high level of risk involved.

After conducting due diligence and negotiating terms, you decide to invest $200,000 in exchange for a 5% equity stake in the company. As an accredited investor, you are able to provide valuable capital to help the startup grow, while also adding a high-potential company to your investment portfolio.

Your status as an accredited investor allows you to participate in similar early-stage investment opportunities, diversifying your portfolio and potentially generating significant returns if the startups you back succeed.

Accelerated Vesting

Accelerated vesting is a provision in an equity agreement that allows an employee’s unvested shares or options to become fully vested upon the occurrence of certain events, such as a change in company control or termination without cause. Accelerated vesting helps protect employees by ensuring they receive the full benefit of their equity compensation if their employment is terminated under specific circumstances.

Imagine you are a senior software engineer who has been offered a job at a fast-growing tech startup. As part of your compensation package, you are granted 50,000 stock options, which vest over a four-year period, with a one-year cliff.

Your stock option agreement includes an accelerated vesting provision that states if the company is acquired or if you are terminated without cause, 100% of your unvested options will immediately vest.

Two years into your employment, the startup is acquired by a larger tech company. Thanks to the accelerated vesting provision, your remaining 25,000 unvested options immediately become fully vested upon the acquisition.

Private Equity

Private equity refers to investments made by firms or funds into privately held companies, typically with the goal of improving their operations, growth, and profitability before selling the companies or taking them public. Private equity firms often target mature companies with stable cash flows and use a combination of equity and debt to finance their acquisitions. 

For example, you are the founder and CEO of a successful manufacturing company with $50 million in annual revenue. You have grown the company steadily over the past decade but believe that with additional capital and expertise, you could expand into new markets and increase your profitability.

You decide to explore a partnership with a private equity firm that specializes in the manufacturing sector.

The private equity firm acquires a 60% stake in your company for $100 million, providing you with liquidity and growth capital. They also appoint several experienced executives to your board and work closely with you to identify areas for cost savings, process improvements, and strategic expansion.

Over the next five years, the private equity firm helps you streamline your operations, expand into new geographic markets, and make several strategic acquisitions. As a result, your company’s revenue and profitability grow substantially.

Seed Funding

Seed funding is the first official equity funding stage for a startup, typically following pre-seed funding. Seed funding is usually provided by angel investors, early-stage venture capital firms, or accelerators in exchange for equity in the company. The purpose of seed funding is to help startups develop their product, establish market fit, and build a foundation for future growth and funding rounds.

Imagine you are the co-founder of a promising fintech startup that has developed a mobile app to help freelancers manage their finances and taxes. You have bootstrapped the development of your app and have acquired a small user base, but you need additional capital to scale your marketing efforts and hire key team members.

You decide to raise a seed funding round and begin pitching to angel investors and early-stage venture capital firms. After several meetings and negotiations, you secure $1 million in seed funding from a group of angel investors and a specialized fintech VC firm.

With the seed funding, you are able to hire a chief marketing officer and a team of developers to improve your app’s features and user experience. You also launch a targeted digital marketing campaign to acquire new users and build brand awareness.

Pre-seed Funding

Pre-seed funding is the earliest stage of funding for a startup, often preceding formal seed funding rounds. Pre-seed funding typically comes from the founders themselves, friends and family, or small angel investors. The purpose of pre-seed funding is to help founders validate their idea, build a minimum viable product (MVP), and establish initial traction before seeking larger investments from institutional investors.

Imagine you and your co-founder have an idea for a revolutionary e-commerce platform that uses artificial intelligence to personalize product recommendations for each user. You have conducted market research and believe there is a significant opportunity, but you need capital to build your MVP and test your concept with potential customers.

You decide to raise a pre-seed funding round, starting with your own savings and investments from friends and family. You also pitch to a few angel investors who are passionate about e-commerce and artificial intelligence.

Through your pre-seed funding efforts, you raise $200,000, which allows you to hire a small development team and build a basic version of your platform. You also use some of the funds to attend industry conferences and conduct user testing to validate your idea and gather feedback.

Series A Funding

Series A is the first significant round of venture capital financing for a startup, typically following seed funding. Series A funding is usually provided by venture capital firms and is aimed at helping startups scale their operations, further develop their products, and expand their market reach. At this stage, startups are expected to have a proven business model, a strong team, and a clear path to profitability.

Imagine you are the founder of a SaaS startup that has gained significant traction following a successful seed funding round. Your product has been well-received by customers, and you have a growing revenue stream. However, to achieve your vision and capture a larger market share, you need substantial capital to invest in product development, sales, and marketing.

You decide to raise a Series A funding round and begin pitching to venture capital firms that specialize in your industry. After multiple meetings and due diligence, you secure $10 million in Series A funding from a leading VC firm, in exchange for a 20% equity stake in your company.

With the Series A funding, you are able to hire a talented team of engineers to enhance your product, expand your sales and marketing efforts to reach new customers, and scale your infrastructure to support your growing user base. The funding also helps you establish credibility in your market and attracts interest from potential partners and customers.

Series B Funding

Series B is the funding round that follows Series A, typically involving larger investments from venture capital firms and other institutional investors. The purpose of Series B funding is to help successful startups accelerate their growth, expand into new markets, and further develop their products and services. At this stage, startups are expected to have a substantial user base, a proven revenue model, and a clear path to profitability.

For example, you are the CEO of a rapidly growing e-commerce startup that has successfully raised a Series A round and has seen strong growth in revenue and customer acquisition. However, to maintain your competitive edge and expand into new product categories, you decide to raise a Series B funding round and begin discussions with larger venture capital firms and strategic investors. After a competitive process, you secure $30 million in Series B funding from a consortium of investors, led by a top-tier VC firm.

With the Series B funding, you are able to make key hires in executive positions, invest in advanced technology and data analytics to improve your platform, and launch a major marketing campaign to drive brand awareness and customer acquisition. 

Series C Funding

Series C is a later-stage funding round for mature startups that have achieved significant growth and are looking to scale their operations rapidly, expand into new markets, or prepare for an exit strategy, such as an IPO or acquisition. Series C funding typically involves larger investments from venture capital firms, private equity firms, and strategic investors, with a focus on helping startups achieve profitability and long-term success.

Imagine you are the founder and CEO of a successful fintech startup that has raised Series A and B rounds and has achieved significant market adoption and revenue growth. However, to achieve your vision of becoming a global leader in your industry, you need substantial capital to invest in international expansion, strategic partnerships, and product innovation.

You decide to raise a Series C funding round and begin discussions with leading venture capital firms, private equity firms, and strategic investors in your industry. After a rigorous due diligence process, you secure $100 million in Series C funding, led by a prominent growth equity firm.

With the Series C funding, you are able to make strategic acquisitions to expand your product offerings and enter new markets, invest in cutting-edge technology to enhance your platform’s capabilities.

Series D Funding

Series D is a late-stage funding round for mature startups that have already raised significant capital through previous rounds and are looking to further expand their operations, make strategic acquisitions, or prepare for an exit. Series D funding typically involves large investments from venture capital firms, private equity firms, hedge funds, and strategic investors, and is focused on helping startups achieve large-scale growth and market dominance.

Imagine you are the CEO of a leading enterprise software startup that has successfully raised Series A, B, and C rounds and has achieved significant market share and revenue growth. However, to maintain your competitive advantage and pursue ambitious growth plans, you need additional capital to invest in research and development, make strategic acquisitions, and expand your global sales and marketing efforts.

You decide to raise a Series D funding round and begin discussions with top-tier investment firms and strategic partners. After a highly competitive process, you secure $200 million in Series D funding, led by a consortium of leading technology investors and strategic partners.

With the Series D funding, you are able to acquire several complementary startups to enhance your product suite and expand your customer base, invest in cutting-edge AI and machine learning capabilities to improve your software’s performance, and build out a global sales and support network to better serve your enterprise customers. 

Convertible Debt/Equity

Convertible debt/equity is a type of investment that combines features of both debt and equity financing. It typically starts as a loan that can be converted into equity shares of the company at a later date, usually upon the occurrence of a specific event, such as a future funding round or an IPO. Convertible debt/equity is often used by early-stage startups as a way to raise capital without having to determine a precise valuation for the company.

Imagine you are the founder of a promising startup that has developed an innovative mobile app. You need additional capital to fund product development and user acquisition but want to avoid the complexity and cost of a traditional equity funding round.

You decide to raise $500,000 through a convertible debt/equity instrument. You secure investments from several angel investors who agree to provide funding in the form of a convertible note. The note has a maturity date of 18 months and an interest rate of 6%, with a 20% discount on the conversion price when the note converts to equity during your next funding round.

The convertible debt/equity funding provides you with the capital needed to grow your startup and achieve key milestones. When you eventually raise a Series A round at a $5 million valuation, the convertible note automatically converts into equity shares at a 20% discount, giving your early investors a larger stake in the company compared to the Series A investors.

Convertible Note

A convertible note is a type of short-term debt that converts into equity at a later date, typically upon the closing of a future funding round or the achievement of certain milestones. Convertible notes are commonly used by early-stage startups as a way to raise capital quickly without having to determine a specific valuation for the company. They often include a discount rate and/or a valuation cap to provide investors with incentives and protections.

For example, you are the co-founder of a seed-stage startup that has gained initial traction but needs additional funding to accelerate growth. You decide to raise capital through a convertible note and begin reaching out to potential investors.

You secure $750,000 in funding from a group of angel investors through a convertible note with a 12-month maturity date, a 5% interest rate, a 20% discount rate, and a $5 million valuation cap. This means that when the note converts to equity during your next qualified funding round, the investors will receive a 20% discount on the price per share, up to a maximum company valuation of $5 million.

The convertible note funding allows you to hire key team members, invest in marketing, and refine your product offering. When you eventually raise a Series A round at an $8 million valuation, the convertible note converts into equity at a $4 million valuation (due to the valuation cap), resulting in a significant return for your early investors and a larger ownership stake compared to the Series A investors.

Founders Shares

Founders shares, also known as common stock, are the equity shares initially issued to the founders of a startup. These shares represent ownership in the company and are typically issued at a nominal price when the company is first incorporated. Founders shares are distinct from preferred shares, which are typically issued to investors in later funding rounds and carry certain preferential rights and protections.

Imagine you and your co-founder are starting a new technology company. When you incorporate the company, you issue 10 million founders shares, split evenly between the two of you. These shares are issued at a nominal price of $0.001 per share, representing your initial ownership in the company.

As your startup grows and raises additional funding through seed and venture capital rounds, your founder’s shares will be diluted as new shares are issued to investors. However, your founder’s shares still represent a significant portion of the company’s equity and will be valuable if the company achieves a successful exit, such as an acquisition or IPO.

To protect your interests as founders, you may also consider implementing vesting schedules and stock option plans to ensure that your ownership is tied to your ongoing contributions to the company and to incentivize key employees to help drive the company’s success.

Convertible preferred stock

Convertible preferred stock is a type of equity security that combines features of both preferred stock and common stock. Like traditional preferred stock, convertible preferred stock typically carries certain preferential rights, such as liquidation preferences and dividend payments. However, convertible preferred stock also includes the option for holders to convert their shares into a specified number of common shares at a later date, often upon the occurrence of certain events or at the holder’s discretion.

Imagine you are the founder of a growing startup that has already raised a Series A funding round. As you prepare for your Series B, you decide to issue convertible preferred stock to your new investors to provide them with additional flexibility and upside potential.

You raise $20 million in your Series B round by issuing convertible preferred stock at a price of $2 per share. The convertible preferred stock carries a 1x liquidation preference, meaning that investors will receive their initial investment back before common stockholders in the event of a liquidation or sale of the company. The shares also have a conversion ratio of 1:1, allowing investors to convert their preferred shares into common shares at any time.

The convertible preferred stock funding provides your startup with the capital needed to expand your team, invest in research and development, and scale your operations. If your company continues to grow and achieves a successful exit, the convertible preferred stockholders will have the option to participate in the upside by converting their shares to common stock, while still maintaining their preferential rights.

Venture Debt

Venture debt is a type of debt financing provided to venture-backed startups by specialized lenders, such as banks or venture debt funds. Unlike traditional loans, venture debt is typically used to supplement equity financing and provides startups with additional capital to fuel growth without further diluting the ownership stakes of founders and existing investors. Venture debt often includes warrants, which give lenders the right to purchase equity shares in the company at a predetermined price.

For example, you are the CEO of a startup that has recently raised a significant Series B equity round. While the equity funding provides a solid foundation for growth, you identify an opportunity to accelerate your expansion plans by securing additional capital through venture debt.

You approach a venture debt lender and secure a $5 million loan with a 36-month term, a 10% interest rate, and warrants representing 1% of the company’s equity. The venture debt funding allows you to make key hires, invest in sales and marketing initiatives, and expand into new markets without further diluting your existing shareholders.

As your startup continues to grow and generate revenue, you are able to service the debt payments while still maintaining a healthy cash balance. The venture debt ultimately helps you achieve your growth objectives more quickly and efficiently, setting the stage for a successful Series C round and positioning your company for long-term success.

SAFE Note

A SAFE (Simple Agreement for Future Equity) note is an investment instrument that allows early-stage startups to raise capital quickly and easily, without the need for a formal valuation or the complexity of traditional convertible notes. SAFE notes are agreements between investors and startups, in which investors provide capital in exchange for the right to convert their investment into equity at a later date, typically during a future funding round or liquidity event.

Imagine you are the founder of a pre-seed startup with a promising idea but limited resources. You need to raise capital to build your minimum viable product (MVP) and validate your concept with potential customers.

You decide to raise funds through a SAFE note and begin pitching to angel investors and early-stage funds. You secure $500,000 in investment from a group of angel investors through a SAFE note with a 20% discount and a $5 million valuation cap.

The SAFE note funding allows you to build your MVP, gather user feedback, and refine your product offering. As you gain traction and prepare for a seed funding round, the SAFE note automatically converts into equity at a 20% discount to the seed round price, up to the $5 million valuation cap.

Equity Financing

Equity financing is a method of raising capital by selling ownership stakes in a company to investors in exchange for funding. This type of financing is commonly used by startups and growing businesses to secure the necessary capital for operations, expansion, or product development. Equity investors, such as angel investors or venture capital firms, provide funding in exchange for shares of the company, which can appreciate in value as the company grows and becomes more successful.

Imagine you are the founder of a startup that has developed a groundbreaking software solution. To scale your business and capture market share, you need to raise $2 million in funding. You decide to pursue equity financing and begin pitching to venture capital firms that specialize in your industry.

After a series of meetings and due diligence, you secure an investment of $2 million from a leading VC firm in exchange for a 20% equity stake in your company. This funding allows you to hire additional talent, invest in marketing and sales, and accelerate product development. As your company grows and achieves key milestones, the value of the VC firm’s equity stake increases, providing them with a strong return on their investment.

Debt Financing

Debt financing is a method of raising capital by borrowing money from lenders, such as banks, credit unions, or other financial institutions. Unlike equity financing, debt financing does not require businesses to give up ownership stakes. Instead, businesses agree to repay the borrowed funds with interest over a specified period. Debt financing can take various forms, such as term loans, lines of credit, or bonds, and is often used to fund specific projects, purchase assets, or manage working capital.

Imagine you are the owner of a successful restaurant chain looking to expand to new locations. To fund the expansion, you decide to pursue debt financing and approach your local bank for a term loan.

After reviewing your business plan, financial statements, and credit history, the bank approves a $1 million term loan with a 5-year repayment period and a 6% annual interest rate. This funding allows you to secure new leases, renovate the new restaurant spaces, and purchase necessary equipment and inventory.

As your new locations open and generate revenue, you make monthly loan payments, gradually paying down the principal and interest. The debt financing enables you to expand your business without diluting your ownership, and the predictable repayment schedule helps you manage your cash flow effectively.

Equity Grants

Equity grants are a form of compensation given to employees, directors, or advisors of a company in the form of shares or stock options. These grants are designed to align the interests of the recipients with those of the company and its shareholders, incentivizing them to contribute to the company’s long-term success. Equity grants can take various forms, such as restricted stock units (RSUs), incentive stock options (ISOs), or non-qualified stock options (NSOs), each with its own vesting schedules, exercise prices, and tax implications.

Imagine you are a talented software engineer who has been offered a position at a fast-growing tech startup. As part of your compensation package, the company offers you an equity grant of 10,000 RSUs, which will vest over a four-year period with a one-year cliff.

This means that 25% of your RSUs will vest after you complete one year of employment, and the remaining RSUs will vest in equal quarterly installments over the following three years. As the company grows and its stock price increases, the value of your equity grant appreciates, providing you with a significant financial incentive to contribute to the company’s success.

After four years, when your RSUs are fully vested, you can choose to hold the shares for potential long-term gains or sell them for a cash payout, subject to the company’s stock plan and any applicable trading restrictions.

Micro-VC

Micro-VC, or micro venture capital, refers to a segment of the venture capital industry that focuses on making smaller investments in early-stage startups. Micro-VCs typically invest between $25,000 to $500,000 in seed or pre-seed rounds, filling the funding gap between angel investors and larger, traditional VC firms. These firms often specialize in specific industries or geographies and provide hands-on support to help their portfolio companies grow and succeed.

Imagine you are the founder of a promising fintech startup that has developed an innovative payment processing solution. You are seeking $250,000 in seed funding to launch your product and acquire your first customers.

You connect with a micro-VC firm that specializes in fintech investments and has a strong track record of supporting early-stage startups. After pitching your business plan and demonstrating your product’s potential, the micro-VC firm agrees to invest $250,000 in your company in exchange for a 10% equity stake.

In addition to the funding, the micro-VC firm provides valuable mentorship, helping you refine your go-to-market strategy, make key hires, and connect with potential partners and customers. With their support and the seed funding, you successfully launch your product, gain market traction, and position your startup for future growth and follow-on funding rounds.

Monetize

To monetize means to generate revenue from a product, service, or asset. In the context of startups and businesses, monetization refers to the various strategies and tactics used to convert a company’s offerings into a sustainable and profitable revenue stream. This can involve selling products or services directly to customers, offering subscriptions or licenses, earning advertising revenue, or leveraging data and insights to create value for partners or clients.

For example, you are the founder of a mobile app that helps users track their fitness goals and connect with like-minded individuals. While your app has gained a significant user base, you have not yet implemented a monetization strategy.

After analyzing your options, you decide to monetize your app through a combination of approaches. First, you introduce a premium subscription tier that offers users advanced features, personalized coaching, and ad-free experience for a monthly fee. Second, you partner with health and wellness brands to offer sponsored content and in-app purchases, earning a commission on each transaction.

Finally, you anonymize and aggregate your user data to create valuable insights for healthcare providers and insurers, which you license on a subscription basis. By implementing these monetization strategies, you transform your popular app into a profitable business, generating multiple revenue streams and ensuring long-term sustainability.

Revenue-based financing

Revenue-based financing is an alternative funding model that allows businesses to raise capital by selling a portion of their future revenue to investors. In this model, investors provide funding to the company in exchange for a percentage of the company’s ongoing gross revenues until a predetermined return on investment is achieved. Revenue-based financing is often used by companies with predictable and stable revenue streams, such as SaaS businesses or e-commerce platforms, as it allows them to access growth capital without diluting equity or taking on debt.

Imagine you are the founder of a successful e-commerce store that specializes in eco-friendly home goods. You have identified an opportunity to expand your product line and increase your marketing efforts, but you need additional capital to fund these initiatives.

You decide to explore revenue-based financing and connect with a firm that specializes in this funding model. After reviewing your financial statements and growth plans, the firm agrees to provide you with $500,000 in funding in exchange for 10% of your monthly gross revenues until they have received a total return of $750,000.

Revenue-based financing proves to be a flexible and efficient way to fuel your e-commerce store’s expansion without giving up equity or taking on burdensome debt.

Active Buyer

An active buyer is an individual or organization that is actively seeking to acquire or invest in businesses or assets. In the context of startups and venture capital, active buyers may include larger corporations looking for strategic acquisitions, private equity firms seeking to expand their portfolios, or venture capital firms aiming to deploy capital into promising startups. Active buyers are typically well-funded, have a clear investment thesis, and are proactively searching for opportunities that align with their goals and criteria.

Imagine you are the founder of a rapidly growing SaaS startup that has developed a cutting-edge customer relationship management (CRM) platform. Your startup has gained significant traction in your target market, with a growing customer base and impressive revenue growth.

At a technology conference, you are approached by a representative from a large enterprise software company that has been an active buyer in the CRM space. The company has been monitoring your startup’s progress and is impressed by your technology and market position.

After a series of meetings and due diligence, the active buyer presents an acquisition offer of $100 million to purchase your startup. The offer includes a combination of cash and stock, as well as retention incentives for you and your key team members to continue driving the growth of your platform within the larger company.

Bridge Financing

Bridge financing is a type of short-term funding that helps companies bridge the gap between their current financing needs and a larger, future funding round or liquidity event. This type of financing is often used by startups that have already raised some capital but require additional funds to reach their next milestone, such as completing product development, achieving key sales targets, or preparing for an IPO. Bridge financing can take the form of debt, equity, or a combination of both, and is typically provided by existing investors or specialized lenders.

Imagine you are the CEO of a biotech startup that is developing a promising new drug for treating a rare genetic disorder. Your startup has successfully completed preclinical trials and has raised a Series A funding round to support the initial phases of clinical development.

However, as you progress through the clinical trials, you realize that you will need additional capital to complete the final phase and prepare for regulatory approval. You estimate that you will need an additional $10 million to bridge the gap until your planned Series B funding round.

You decide to pursue bridge financing and reach out to your existing investors and a network of biotech-focused lenders. After presenting your progress and plans, you secure a $10 million bridge round, consisting of $6 million in convertible debt from your existing investors and $4 million in venture debt from a specialized lender.

This bridge financing allows you to complete the clinical trials, gather the necessary data for regulatory submission, and prepare your pitch for the Series B round. By successfully bridging the gap, you maintain your startup’s momentum and position yourself for the next stage of growth and value creation.

Bridge Loan

A bridge loan is a short-term loan that helps companies bridge the gap between their immediate financing needs and a future financing event, such as a long-term loan, equity financing, or sale of the company. Bridge loans are typically used to cover working capital needs, fund acquisitions, or support a company until it secures more comprehensive financing. These loans are usually provided by banks, private lenders, or existing investors and are secured by the company’s assets or future equity.

Imagine you are the owner of a real estate development company that has identified an attractive opportunity to purchase a prime piece of land for a new project. However, you need to act quickly to secure the land before other bidders, and your company’s cash reserves are insufficient to cover the purchase price.

You decide to seek a bridge loan to fund the land acquisition while you work on securing long-term financing for the development project. You approach a private lender that specializes in real estate financing and present your plans and projections.

The lender approves a 6-month bridge loan for 70% of the land purchase price, with an interest rate of 10% and a 2% origination fee. This bridge loan allows you to acquire the land and begin the permitting and design process while you finalize the long-term financing package, which will be used to repay the bridge loan and fund the construction of the project.

Grants

Grants are a form of financial assistance provided by government agencies, foundations, or corporations to support specific projects, research, or initiatives that align with the granting organization’s mission or objectives. Unlike loans, grants do not need to be repaid and are often awarded based on the merits of the proposed project or the qualifications of the applicant. Grants can be used to fund a wide range of activities, such as scientific research, community development, artistic endeavors, or social services.

For example, you are the founder of a nonprofit organization that provides after-school tutoring and mentoring services for underprivileged youth in your community. Your organization has been operating successfully for several years, but you want to expand your programs to reach more students and provide additional resources.

You learn about a federal grant program that supports educational initiatives for disadvantaged youth and decide to apply. You spend several weeks preparing a comprehensive grant proposal, outlining your organization’s track record, the need for your services, and your plans for using the grant funds to enhance and expand your programs.

After a competitive review process, your organization is awarded a $500,000 grant over three years to support your after-school tutoring and mentoring services. This grant funding allows you to hire additional staff, purchase new learning materials and technology, and extend your programs to serve more students in need, ultimately creating a positive impact on your community.

Flat Round

A flat round is a financing round in which a company raises capital at the same valuation as its previous round. This means that the price per share for the new investors is the same as the price paid by investors in the prior round. Flat rounds can occur when a company’s growth or performance has not met expectations, market conditions have changed, or the company needs additional capital to reach its next milestone. While flat rounds do not increase the company’s valuation, they can provide necessary funding to support continued operations and growth.

Imagine you are the CEO of a tech startup that raised a Series A funding round two years ago at a valuation of $50 million. Since then, your company has made progress in product development and customer acquisition, but growth has been slower than anticipated due to market challenges and increased competition.

As you approach the end of your cash runway, you decide to raise a new funding round to support your ongoing operations and marketing efforts. However, given the current market conditions and your company’s performance, you find it challenging to justify a higher valuation.

You engage with your existing investors and new potential investors and ultimately decide to pursue a flat round. You raise $10 million in new funding at the same $50 million valuation as your Series A round, with a mix of existing and new investors participating.

This flat round provides your startup with the capital needed to continue executing your business plan, refine your product offering, and accelerate your customer acquisition efforts, albeit without the validation of an increased valuation.

Loan

A loan is a financial agreement in which a lender provides money to a borrower with the expectation that the borrower will repay the principal amount plus interest over a specified period. Loans can be secured (backed by collateral) or unsecured and are commonly used by individuals and businesses to finance various expenses, such as purchasing assets, covering operational costs, or funding growth initiatives. Borrowers are obligated to repay loans according to the terms and conditions agreed upon with the lender.

Imagine you are the owner of a small manufacturing company that has an opportunity to expand its production capacity by purchasing new equipment. The equipment costs $200,000, and while your company has stable cash flow, you don’t have enough cash reserves to cover the entire purchase price.

You decide to approach your local bank to inquire about a loan. After reviewing your company’s financial statements, business plan, and credit history, the bank approves a 5-year term loan for $200,000 with an annual interest rate of 6%.

Under the loan agreement, you are required to make monthly payments that cover both principal and interest, with the loan fully amortized over the 5-year term. The loan allows your company to purchase the new equipment and expand its production capacity without depleting your cash reserves, enabling you to take advantage of the growth opportunity while managing your cash flow effectively.

Investment

An investment is the allocation of capital or resources with the expectation of generating a profit or achieving a specific objective. Investments can take many forms, such as purchasing stocks, bonds, real estate, or other assets, or providing funding to startups or businesses in exchange for equity or debt. Investors aim to earn returns through capital appreciation, dividends, interest, or other forms of income generated by their investments. Investment decisions are based on factors such as risk tolerance, time horizon, and financial goals.

For example, you are a young professional looking to start investing for your long-term financial goals, such as retirement or buying a home. After researching various investment options and assessing your risk tolerance, you decide to create a diversified investment portfolio.

You allocate a portion of your savings to a mix of stocks and bonds through a low-cost index fund that tracks the overall market. This investment provides exposure to a broad range of companies and sectors, with the potential for long-term capital appreciation.

Additionally, you invest in a rental property in a growing urban area, using a combination of your own funds and a mortgage. The rental income from the property covers the mortgage payments and expenses, while the property itself appreciates in value over time.

By making these investments, you are putting your capital to work in order to grow your wealth over the long term, while managing risk through diversification and careful selection of investment opportunities.

Buyout

A buyout is a transaction in which an investor, group of investors, or a company acquires a controlling stake in another company, often with the goal of improving its operations, expanding its market share, or realizing value through a future sale or IPO. Buyouts can be friendly (with the support of the target company’s management) or hostile (without management’s support) and are typically financed through a combination of equity and debt. Buyouts are common in the private equity industry, where firms raise capital from investors to acquire and restructure companies.

Imagine you are the founder and CEO of a successful software company that has grown steadily over the past decade. Your company has a strong market position and a loyal customer base, but you believe that it has the potential to expand even further with the right resources and strategic direction.

A private equity firm approaches you with a proposal to acquire a majority stake in your company through a buyout. The firm has experience in the software industry and believes that it can help your company accelerate its growth through operational improvements, strategic acquisitions, and access to additional capital.

After careful consideration and negotiation, you agree to the buyout. The private equity firm acquires a 60% stake in your company for $500 million, with a mix of equity and debt financing. You retain a significant ownership stake and continue to lead the company as CEO, working closely with the private equity team to execute the growth strategy.

With the infusion of capital and expertise from the private equity firm, your company is able to expand into new markets, develop new products, and make strategic acquisitions, ultimately creating significant value for all stakeholders.

Buy Sell Agreement

A buy-sell agreement is a legally binding contract among the owners of a company that establishes the terms and conditions for the transfer of ownership interests. The agreement specifies the circumstances under which an owner can sell their stake, such as retirement, disability, or death, and outlines the process for determining the price and terms of the sale. Buy-sell agreements are designed to provide a clear framework for ownership transitions, minimize disputes, and ensure the continuity and stability of the business.

For example, you and two partners have started a successful consulting firm. As the business grows and becomes more valuable, you recognize the need to have a formal plan in place for handling ownership changes in the future.

You and your partners work with an attorney to draft a buy-sell agreement. The agreement stipulates that if any of the partners want to sell their ownership stake, they must first offer it to the other partners at a price determined by a pre-agreed valuation formula. If the other partners decline to buy, the selling partner can then offer their stake to a third party, subject to the approval of the remaining partners.

The agreement also includes provisions for the transfer of ownership in the event of a partner’s death or disability, with the deceased or disabled partner’s stake being purchased by the company or the remaining partners according to a specified formula.

By having a clear and comprehensive buy-sell agreement in place, you and your partners can ensure a smooth and orderly transition of ownership in various scenarios, protecting the interests of all parties and maintaining the stability of your consulting firm.

Recapitalization

Recapitalization is the process of restructuring a company’s capital structure by altering the mix of equity and debt. This can involve issuing new shares, buying back existing shares, or exchanging debt for equity or vice versa. Companies may pursue recapitalization to optimize their capital structure, reduce their cost of capital, improve their financial flexibility, or achieve specific strategic objectives. Recapitalization can be initiated by the company’s management, shareholders, or creditors and can take various forms depending on the company’s financial situation and goals.

Imagine you are the CFO of a mature manufacturing company that has a strong market position but has been struggling with high debt levels and limited financial flexibility. Your company’s current capital structure consists of 60% debt and 40% equity, which has made it difficult to invest in new projects or respond to market challenges.

To address these issues, you propose a recapitalization plan to your board of directors. The plan involves issuing new equity to raise capital, using the proceeds to pay down a portion of the company’s debt, and negotiating more favorable terms with creditors for the remaining debt.

After securing board approval, you execute the recapitalization plan. Your company issues new shares, raising $100 million in equity capital. You use $75 million of the proceeds to repay a portion of the company’s high-interest debt and negotiate an extension and lower interest rate on the remaining debt.

As a result of the recapitalization, your company’s debt-to-equity ratio improves to 40% debt and 60% equity, reducing your interest expenses and improving your financial flexibility. The new capital structure allows your company to invest in growth initiatives, modernize its operations, and better withstand market fluctuations.

Leveraged Buyout

A leveraged buyout (LBO) is a type of acquisition in which a significant portion of the purchase price is financed through debt. In an LBO, the acquirer (often a private equity firm) uses a combination of equity and borrowed funds to acquire a controlling stake in a target company, with the intention of improving the company’s operations, financial performance, and value. The target company’s assets and cash flows are used as collateral for the debt, and the acquirer aims to repay the debt and realize a return on their equity investment through cost savings, revenue growth, and an eventual sale or IPO.

For example, you are a partner at a private equity firm that specializes in leveraged buyouts. Your firm has identified a potential target: a manufacturer of industrial components with stable cash flows and a strong market position, but with room for operational improvements and growth.

After conducting due diligence and negotiating with the company’s owners, your firm agrees to acquire the manufacturer for $500 million. You structure the deal as an LBO, with your firm investing $150 million in equity and borrowing $350 million from a group of lenders.

Upon closing the acquisition, your firm works closely with the company’s management team to implement a value creation plan. This includes streamlining operations, reducing costs, expanding into new markets, and making strategic acquisitions.

Over the next five years, the manufacturer’s profitability and cash flows improve significantly under your firm’s ownership. The company’s enhanced performance allows it to pay down a substantial portion of the acquisition debt ahead of schedule. Your firm ultimately sells the company to a strategic buyer for $800 million, realizing a significant return on your equity investment and generating attractive returns for your limited partners.

Fund of Funds

A fund of funds (FoF) is an investment vehicle that allocates capital to a portfolio of other investment funds rather than investing directly in stocks, bonds, or other securities. FoFs can invest in various types of funds, such as mutual funds, hedge funds, private equity funds, or venture capital funds, depending on their investment strategy and objectives. The primary benefits of FoFs include diversification, professional fund selection, and access to a broader range of investment opportunities. However, FoFs also have some drawbacks, such as additional fees and potential redundancy in holdings.

Imagine you are an investor looking to gain exposure to the private equity asset class but lack the expertise, time, or capital to directly invest in individual private equity funds. You also want to diversify your private equity investments across different strategies, sectors, and geographies to manage risk.

After researching various options, you decide to invest in a private equity fund of funds managed by a reputable investment firm. The FoF has a well-defined investment strategy, focusing on buyout and growth equity funds across North America and Europe.

You allocate a portion of your investment portfolio to the FoF, which pools your capital with that of other investors. The FoF’s management team conducts thorough due diligence on potential underlying funds, selecting a diverse group of top-tier private equity managers with proven track records and complementary strategies.

By investing in the FoF, you gain exposure to a diversified portfolio of private equity investments, managed by experienced professionals. While you pay an additional layer of fees to the FoF manager, you benefit from their expertise, access to top-tier funds, and the ability to spread your investment across a range of private equity strategies and geographies, potentially enhancing your risk-adjusted returns over the long term.

Secondary Purchase

A secondary purchase refers to the acquisition of existing shares in a company from current shareholders, such as founders, employees, or early investors, rather than purchasing newly issued shares directly from the company. In a secondary purchase, the proceeds from the sale go to the selling shareholders, not to the company itself. Secondary purchases are common in later-stage startups and private companies, allowing early investors and employees to liquidate some of their equity holdings while enabling new investors to acquire ownership in the company.

Imagine you are an early employee at a successful tech startup that has grown rapidly over the past five years. As part of your compensation package, you were granted stock options, which you have since exercised, and now hold a significant number of shares in the company.

Although the company is still privately held, there is strong interest from new investors who want to acquire a stake in the business. The company’s board decides to facilitate a secondary purchase, allowing existing shareholders to sell a portion of their shares to these new investors.

You decide to participate in the secondary purchase and sell 30% of your shares at a price that values the company at $500 million. This transaction allows you to realize a substantial return on your early equity, while still retaining a significant ownership stake in the company.

The secondary purchase also enables the company to bring on new investors who can provide additional strategic value and support the company’s continued growth, without diluting the existing shareholders or requiring the company to issue new shares.

Secondary market

A secondary market is a financial market where investors buy and sell securities that were previously issued, such as stocks, bonds, or other financial instruments. Unlike the primary market, where securities are sold directly by the issuer to investors, the secondary market facilitates the trading of existing securities among investors. The most common examples of secondary markets are stock exchanges, such as the New York Stock Exchange (NYSE) or Nasdaq, where investors can buy and sell shares of publicly traded companies.

For example, you are an investor who believes that a particular technology company, which is already publicly traded, has strong growth potential. You decide to invest in the company by purchasing shares through your brokerage account.

You log into your account, search for the company’s stock symbol, and place an order to buy 100 shares at the current market price. Your order is executed on the stock exchange, where your broker matches your buy order with a sell order from another investor who is willing to sell their shares at the same price.

Once the trade is settled, you become a shareholder in the company, owning a small fraction of the business. As the company’s performance and prospects change over time, you can choose to hold your shares for the long term, sell them to other investors in the secondary market, or buy additional shares if you believe the company’s value will continue to increase.

The secondary market provides liquidity for investors, allowing them to easily buy and sell securities based on their investment goals and market conditions, without directly interacting with the issuing company.

Secondary Public Offering

A secondary public offering (SPO) is a public sale of a large block of shares in a publicly traded company by existing shareholders, such as company founders, executives, or early investors. Unlike an initial public offering (IPO), where a company offers shares to the public for the first time, an SPO involves the sale of previously issued shares. The proceeds from an SPO go to the selling shareholders, not to the company. SPOs can be used by existing shareholders to diversify their holdings, liquidate their positions, or raise capital for other ventures.

Imagine you are the founder of a successful e-commerce company that went public through an IPO three years ago. Since the IPO, the company’s stock price has appreciated significantly, and you have retained a substantial ownership stake in the business.

To diversify your personal wealth and fund a new philanthropic initiative, you decide to sell a portion of your shares through a secondary public offering. You work with an investment bank to structure the SPO, which will involve selling 2 million of your shares, representing 5% of the company’s outstanding stock.

The investment bank markets the SPO to institutional investors and the public, setting a price for the shares based on market demand and the current trading price of the company’s stock. The SPO is successfully completed, and you receive the proceeds from the sale, minus the fees paid to the investment bank.

The SPO allows you to monetize a portion of your equity in the company, while still maintaining a significant ownership stake. The company’s operations and capital structure are not directly affected by the SPO, as the sale involves only existing shares and does not dilute the ownership of other shareholders.

Initial Public Offering (IPO)

An initial public offering (IPO) is the process by which a private company offers shares of its stock to the public for the first time. Through an IPO, a company raises capital by selling a portion of its equity to investors in the form of shares. The shares are then listed on a stock exchange, allowing them to be traded freely in the secondary market. IPOs are typically conducted by companies that have reached a stage of growth and maturity where they require substantial capital to expand their operations, pay off debt, or provide liquidity for existing shareholders.

For example you are the CEO of a rapidly growing technology company that has achieved significant success in its industry. To fuel further expansion and provide liquidity for early investors and employees, you and your board of directors decide to take the company public through an IPO.

You engage an investment bank to underwrite the IPO and guide you through the process. The investment bank conducts due diligence on your company, helps you prepare a prospectus detailing your business and the offering, and markets the IPO to potential investors.

On the day of the IPO, your company offers 10 million shares to the public at a price of $20 per share, raising a total of $200 million in new capital. The shares begin trading on the stock exchange under your company’s ticker symbol, and the stock price fluctuates based on market demand and investor perception of your company’s prospects.

As a result of the IPO, your company has access to new capital to fund its growth initiatives, and your early investors and employees have the opportunity to sell their shares in the public market. Your company is now subject to increased public scrutiny and regulatory requirements but has the potential to access a broader pool of capital and enhance its brand recognition as a publicly traded entity.

Initial coin offering (ICO)

An initial coin offering (ICO) is a fundraising method used by blockchain and cryptocurrency startups to raise capital by selling digital tokens to investors. These tokens are typically created on a blockchain platform, such as Ethereum, and can represent various rights or utilities within the startup’s ecosystem, such as access to a product or service, voting rights, or a share in the project’s revenue. ICOs are often compared to IPOs in the traditional financial world, but they are largely unregulated and involve the sale of tokens rather than shares in a company.

Imagine you are the founder of a blockchain-based gaming platform that allows players to earn and trade in-game assets as non-fungible tokens (NFTs). To fund the development and launch of your platform, you decide to conduct an initial coin offering.

You create a new cryptocurrency token called “GameCoin” on the Ethereum blockchain. GameCoin will serve as the primary currency within your gaming ecosystem, allowing players to purchase in-game items, trade NFTs, and participate in tournaments.

You publish a whitepaper outlining your project’s goals, technical architecture, and token economics. You then launch a website for your ICO, where interested investors can purchase GameCoin tokens using other cryptocurrencies, such as Bitcoin or Ethereum.

During the ICO, you raise $10 million worth of cryptocurrency by selling 50% of the total GameCoin token supply. The funds raised through the ICO are used to finance the development of your gaming platform, hire additional team members, and market your project to potential users.

As your gaming platform launches and gains traction, the value of GameCoin tokens may appreciate, providing a return for your ICO investors. However, ICOs are highly speculative and are subject to significant regulatory uncertainty, so investors should carefully consider the risks before participating.

Public Offering

A public offering is the process by which a company offers securities, such as stocks or bonds, for sale to the general public. Public offerings can take several forms, including initial public offerings (IPOs), follow-on offerings, and debt offerings. The primary purpose of a public offering is to raise capital for the issuing company by allowing investors to purchase ownership or debt stakes in the business. Public offerings are subject to regulatory requirements and oversight by securities regulators, such as the Securities and Exchange Commission (SEC) in the United States.

Imagine you are the CFO of a well-established consumer goods company that has been privately held for many years. To raise capital for a major expansion initiative and provide liquidity for existing shareholders, you and your board decide to conduct a public offering.

You engage an investment bank to underwrite the offering and assist with the regulatory filings and marketing process. The investment bank helps you determine the type and size of the offering, which in this case is a combination of common stock and convertible bonds.

After filing a registration statement with the SEC and conducting a roadshow to market the offering to potential investors, your company successfully raises $500 million through the public offering. This includes $300 million in common stock sold at $30 per share and $200 million in convertible bonds with a 5-year maturity and a 3% annual interest rate.

The proceeds from the public offering provide your company with the capital needed to fund its expansion plans, which include acquiring a complementary business and investing in new product development. As a result of the offering, your company’s shares are now traded on a major stock exchange, providing liquidity for existing shareholders and exposing the company to a broader base of potential investors.

PIPE (Private Investment in Public Equity)

A Private Investment in Public Equity (PIPE) is a type of investment transaction in which a publicly traded company raises capital by selling its securities directly to a select group of institutional investors or accredited investors. PIPE transactions are typically faster and more flexible than traditional public offerings, as they involve a smaller number of investors and are subject to fewer regulatory requirements. PIPEs can be used for various purposes, such as funding acquisitions, financing growth initiatives, or providing liquidity for existing shareholders.

Imagine you are the CEO of a publicly traded biotech company that has recently made a promising discovery in the field of cancer treatment. To fund the clinical trials and commercialization of this new therapy, you need to raise a significant amount of capital quickly.

Instead of conducting a traditional public offering, which could be time-consuming and subject to market volatility, you decide to pursue a PIPE transaction. You engage an investment bank to help you identify potential investors and structure the deal.

The investment bank reaches out to a select group of healthcare-focused institutional investors, such as venture capital firms and hedge funds, to gauge their interest in the PIPE. After negotiating the terms of the investment, you secure commitments from a group of investors to purchase $100 million worth of your company’s common stock at a slight discount to the current market price.

The PIPE transaction is completed within a matter of weeks, providing your company with the necessary capital to advance your cancer treatment through clinical trials and prepare for commercialization. The investors in the PIPE benefit from acquiring a significant stake in your company at an attractive price, with the potential for substantial returns if your therapy proves successful.

Reg A

Regulation A (Reg A) is an exemption from the registration requirements of the Securities Act of 1933, which allows small and medium-sized companies to raise capital from the public through a streamlined offering process. Reg A offerings are often referred to as “mini-IPOs” because they share some similarities with traditional IPOs but have less stringent disclosure and reporting requirements. There are two tiers of Reg A offerings: Tier 1, which allows companies to raise up to $20 million in a 12-month period, and Tier 2, which allows companies to raise up to $75 million.

For example, you are the founder of a regional restaurant chain that has experienced significant growth in recent years. To fund your expansion into new markets and upgrade your existing locations, you decide to raise capital through a Reg A offering.

You choose to conduct a Tier 2 Reg A offering, which will allow you to raise up to $75 million from the public. You engage a financial advisor to help you prepare the necessary offering documents, including an offering circular that describes your business, financial performance, and growth plans.

After filing your offering circular with the SEC and obtaining approval, you launch your Reg A offering. You market the offering through a combination of online advertising, social media, and investor events, targeting both institutional and individual investors.

Over the course of several months, you successfully raise $50 million from a diverse group of investors, including restaurant industry veterans, local community members, and online investors. The proceeds from the Reg A offering provide you with the capital needed to open new restaurant locations, renovate existing ones, and invest in marketing and technology initiatives.

As a result of the Reg A offering, your company has access to a broader pool of capital and a larger base of investors, setting the stage for continued growth and success in the competitive restaurant industry.

Reg CF

Regulation Crowdfunding (Reg CF) is an exemption from the registration requirements of the Securities Act of 1933, which allows early-stage companies to raise capital through crowdfunding campaigns. Under Reg CF, companies can raise up to $5 million in a 12-month period from a large number of investors, including non-accredited investors. Reg CF offerings are conducted through online crowdfunding platforms that are registered with the SEC and provide investors with access to information about the offering and the issuing company.

For example, you are the co-founder of a startup that has developed an innovative mobile app for personal finance management. To fund the launch and marketing of your app, you decide to raise capital through a Reg CF offering.

You partner with a leading equity crowdfunding platform that specializes in Reg CF offerings. You create a detailed campaign page that showcases your app’s features, target market, and growth potential, as well as your team’s background and expertise.

Your Reg CF campaign seeks to raise $1 million by offering equity stakes in your company to a wide range of investors. You leverage your professional network and social media presence to promote the campaign, while the crowdfunding platform markets the offering to its extensive user base.

Over the course of your 60-day campaign, you attract investments from hundreds of individual investors, ranging from $100 to $10,000 per investor. You successfully reach your $1 million funding goal, providing your startup with the capital needed to finalize your app, hire additional team members, and execute your go-to-market strategy.

As a result of the Reg CF offering, your startup not only secures the necessary funding but also gains a large group of enthusiastic supporters and brand ambassadors who are invested in your success. This engagement helps drive initial adoption of your app and sets the stage for future growth and fundraising efforts.

Reg D

Regulation D (Reg D) is a series of exemptions from the registration requirements of the Securities Act of 1933, which allows companies to raise capital by selling securities to accredited investors and a limited number of non-accredited investors. Reg D offerings are often used by startups and private companies to raise capital more quickly and with fewer regulatory requirements than traditional public offerings. The most commonly used exemptions under Reg D are Rule 506(b) and Rule 506(c), which allow companies to raise an unlimited amount of capital from accredited investors.

For example, you are the CEO of a rapidly growing software company that has developed a cloud-based platform for enterprise resource planning (ERP). To fund your company’s expansion and product development efforts, you decide to raise capital through a Reg D offering.

You choose to conduct a Rule 506(c) offering, which allows you to raise an unlimited amount of capital from accredited investors through general solicitation and advertising. You engage a placement agent to help you identify potential investors and market the offering.

Your placement agent reaches out to a network of family offices, venture capital firms, and high-net-worth individuals who are interested in investing in technology startups. You provide these potential investors with a private placement memorandum (PPM) that details your company’s business model, financial performance, and growth plans.

After a series of meetings and due diligence sessions, you secure commitments from a group of accredited investors to purchase $20 million worth of your company’s preferred stock. The investors include a mix of strategic partners, industry veterans, and growth-focused venture capital firms.

The proceeds from the Reg D offering provide your company with the capital needed to expand your sales and marketing efforts, invest in research and development, and pursue strategic partnerships and acquisitions. The offering also helps you establish relationships with key investors who can provide valuable guidance and support as your company continues to grow.

SPAC (Special Purpose Acquisition Company)

A Special Purpose Acquisition Company (SPAC) is an investment vehicle that raises capital through an initial public offering (IPO) to acquire or merge with an existing private company. SPACs, also known as “blank check companies,” do not have an existing business or assets at the time of their IPO. Instead, the SPAC’s sponsors use the proceeds from the IPO to identify and acquire a target company, typically within a specified timeframe. Once the SPAC completes an acquisition or merger, the combined entity becomes a publicly-traded company. SPACs have gained popularity as an alternative to traditional IPOs, providing private companies with a faster and potentially less expensive path to going public.

Imagine you are an investor interested in the electric vehicle (EV) industry. You learn about a newly formed SPAC called “Green Mobility Acquisition Corp.” that has raised $250 million through its IPO.

The SPAC’s sponsors, experienced investors and executives in the automotive and clean energy sectors, state in their prospectus that they intend to target a company in the EV or related technology space within the next 18 to 24 months.

As an investor, you decide to buy shares in the SPAC, knowing that your investment will ultimately be tied to the success of the target company once the acquisition is complete.

Eighteen months later, Green Mobility Acquisition Corp. announces that it has entered into a merger agreement with “Electra,” a privately-held developer of advanced EV battery technology. The merger values Electra at $1 billion, and the combined entity will be listed on the stock exchange under the ticker symbol “ELEC.”

By investing in the SPAC, you have effectively participated in taking Electra public, and the value of your investment will now be linked to the performance of the combined company in the growing EV market.

Warrants

Warrants are financial instruments that give the holder the right, but not the obligation, to buy (call warrant) or sell (put warrant) a specific number of shares of an underlying security at a predetermined price (strike price) within a set time frame (expiration date). Warrants are often issued by companies as a sweetener to attract investors during fund-raising events, such as IPOs or debt offerings. 

They can also be traded on exchanges separately from the underlying security. Warrants offer investors the potential to benefit from price movements in the underlying security without having to purchase the shares outright, thus providing leverage. However, warrants also carry a higher level of risk, as they can expire worthless if the underlying security’s price does not move in the desired direction before expiration.

For example, you are considering investing in a small-cap biotech company that is currently raising capital through a public offering. As part of the offering, the company is issuing one call warrant for every two shares purchased.

Each warrant gives the holder the right to purchase one additional share of the company’s stock at a strike price of $10 per share, with an expiration date of three years from the issue date. The current market price of the company’s stock is $8 per share.

You decide to participate in the offering and purchase 1,000 shares at $8 per share, receiving 500 warrants as part of the deal. This gives you the right to purchase an additional 500 shares at $10 per share over the next three years.

If the company’s stock price rises to $15 per share within the next three years, you could exercise your warrants, buying 500 shares at $10 each, and then sell all 1,500 shares at the market price of $15, realizing a significant profit.

However, if the company’s stock price does not exceed $10 per share before the warrants expire, the warrants will become worthless, and you will lose the potential benefit they offered.

Options

Options are financial derivatives that grant the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price (strike price) on or before a specific date (expiration date). The buyer pays a premium to the seller for this right. Options are used for various purposes, including hedging, speculation, and income generation. They allow investors to manage risk, profit from price movements in either direction, or generate income through strategies like covered call writing. Options can be based on various underlying assets, such as stocks, bonds, commodities, or currencies. The value of an option is influenced by factors such as the price of the underlying asset, the strike price, the time to expiration, and market volatility.

For example, you own 100 shares of XYZ stock, which is currently trading at $50 per share. You are concerned about potential short-term market volatility and want to protect your position against a decline in the stock price.

To hedge your position, you decide to buy a put option on XYZ stock with a strike price of $45 and an expiration date of three months from now. The premium for this put option is $2 per share, or $200 for one contract (which represents 100 shares).

If XYZ stock price falls to $40 within the next three months, you can exercise your put option and sell your 100 shares at the strike price of $45 per share, limiting your loss to $500 (100 shares x $5 per share) plus the $200 premium paid, instead of the $1,000 loss you would have incurred without the put option.

However, if XYZ stock price remains above $45 during the option’s term, you will choose not to exercise the put option, and it will expire worthless. In this case, your loss is limited to the $200 premium paid for the put option, and you will continue to hold your 100 shares of XYZ stock.

Stock Options

Stock options are a type of employee compensation that gives the recipient the right to buy a specified number of shares in the company at a predetermined price (strike price) within a set time frame (vesting period). Stock options are often used by startups and growing companies to attract and retain talented employees, as they provide the potential for significant financial upside if the company’s stock price increases. There are two main types of stock options: incentive stock options (ISOs), which offer tax advantages but are subject to certain restrictions, and non-qualified stock options (NSOs), which have fewer restrictions but less favorable tax treatment. Stock options help align the interests of employees with those of the company and its shareholders, encouraging employees to work towards the company’s long-term success.

Imagine you are a software engineer who has been offered a job at a promising tech startup. As part of your compensation package, the company offers you 10,000 stock options with a strike price of $2 per share and a four-year vesting period.

Under the terms of the option grant, 25% of your options will vest after one year of employment (the “cliff”), and the remaining options will vest in equal monthly installments over the following three years. Once vested, you have the right to exercise your options and purchase shares at the strike price of $2 per share.

Fast forward four years, and the company has grown significantly, with its stock now trading at $20 per share on the public market. Because your options are now fully vested, you decide to exercise all 10,000 options, paying $20,000 to purchase the shares at the strike price of $2 per share.

Immediately after exercising your options, you sell all 10,000 shares on the public market at the current price of $20 per share, receiving $200,000. Your net profit from this transaction is $180,000 (before taxes), representing the difference between the market price and the strike price multiplied by the number of shares.

This example illustrates how stock options can provide significant financial rewards for employees who contribute to a company’s long-term success, helping to align their interests with those of the company and its shareholders.

End

We hope that this comprehensive and detailed Startup Glossary for Entrepreneurs Part 1: Startup Funding helped you to understand and decode the terms and phrases related to funding. 

Here is the reason why we created this Startup Glossary For Entrepreneurs.

Here is the next category: Valuation & Financial Metrics

In case you find any definition as incorrect or incomplete, or if you have any suggestions to make it better, feel free to reach out to us at info@mobisoftinfotech.com. We will surely appreciate your help and support to make this Startup Glossary as the best resource for all entrepreneurs and business owners, all across the globe.

Author's Bio

Nitin-Lahoti-mobisoft-infotech
Nitin Lahoti

Nitin Lahoti is the Co-Founder and Director at Mobisoft Infotech. He has 15 years of experience in Design, Business Development and Startups. His expertise is in Product Ideation, UX/UI design, Startup consulting and mentoring. He prefers business readings and loves traveling.