Keywords: venture capital terms, startup financing glossary, investment terminology
Target Audience: new and aspiring venture capitalists, angel investors, startup founders seeking to speak the VC language
If you’re stepping into the fast-paced world of venture capital, here’s one unshakeable truth: words matter. 🧠 Whether you're sitting across from a startup founder in a pitch meeting or reviewing a term sheet in your inbox, knowing the right investment terminology isn't just helpful — it's essential.
So buckle up. We’re diving into the startup financing glossary every venture capitalist (or founder negotiating with one) should know by heart. No fluff. No corporate-speak. Just clear, actionable definitions — with a side of wit — to make you sound like the sharpest VC in the room. 😎
1. Term Sheet 📝
This is the VC-world equivalent of an engagement ring 💍 — it’s not legally binding (except a few clauses), but it signals serious intent. The term sheet outlines the key financial and legal terms of the investment, including valuation, ownership percentage, liquidation preferences, and more.
👉 Pro Tip: If you don’t understand everything in a term sheet, you shouldn’t be signing one. Period.
2. Pre-Money Valuation vs. Post-Money Valuation 💵
Ah, the two most misunderstood twins in startup investing.
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Pre-money valuation: The value of the startup before the investment.
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Post-money valuation: The value after the investment is added.
Example:
If you invest $1M into a startup valued at $4M pre-money, the post-money valuation is $5M. You now own 20% of the company.
🚨 Why it matters: Your ownership percentage is based on post-money valuation, not pre-money.
3. Cap Table (Capitalization Table) 📋
A spreadsheet (usually cursed) showing who owns what — and how much. It breaks down the equity ownership structure of a startup, including founders, investors, employee stock options, and other stakeholders.
💡 As a VC, the cap table tells you where your money fits into the pie… and whether there’s still pie left.
4. Convertible Note vs. SAFE 📄
Two popular early-stage funding instruments — simple on the surface, tricky in the details.
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Convertible Note: A loan that converts into equity later, usually at the next funding round.
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SAFE (Simple Agreement for Future Equity): Similar concept, but not debt — no interest, no maturity date.
🎯 VCs love SAFEs for their simplicity. Founders love them because they delay valuation negotiations.
5. Liquidation Preference 🚪
Ever heard the phrase “last one in, first one out”? That’s liquidation preference.
It determines who gets paid first (and how much) when a company exits — whether through acquisition or IPO. Most common is 1x liquidation preference, meaning investors get their money back before anyone else sees a dime.
🚫 But beware the multiple liquidation preference (like 2x or 3x)… it can skew the deal heavily in favor of VCs.
6. Dilution 📉
Every time a startup raises money and issues new shares, the existing shareholders’ percentage ownership gets smaller. That’s dilution.
👀 Keep your eyes on the pro-rata rights — they give investors the option to invest more in future rounds to maintain their ownership percentage.
7. Runway ✈️
No, we’re not talking fashion. In VC-speak, runway refers to how long a startup can operate before it runs out of cash.
🧮 Formula:
Cash in bank ÷ Monthly burn rate = Runway (in months)
VCs need to know how much time their portfolio companies have before they need to raise again (or become profitable — but let’s not get crazy).
8. Burn Rate 🔥
How fast a startup is spending money.
There are two types:
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Gross burn: Total monthly expenses
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Net burn: Expenses minus revenue
📉 High burn rate + short runway = VC heart attack
9. Due Diligence 🔍
This is your background check before committing cash. VCs conduct due diligence on the startup’s business model, team, product, financials, legal standing, and more.
⚠️ Skip it, and you might end up investing in the Theranos of 2025.
10. Exit Strategy 🏁
How do you get your money back? That’s the exit strategy. Most common routes:
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Acquisition (Google buys the startup)
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IPO (startup goes public)
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Secondary sale (sell your stake to another investor)
🚪 No clear path to exit? Might want to exit now — before your money disappears into startup limbo.
11. Vesting Schedule 🧓
Founders and employees don’t get all their shares on Day 1. A vesting schedule releases equity over time (usually 4 years with a 1-year cliff).
📆 VCs love vesting because it keeps the team committed. Founders should too — it protects against a co-founder disappearing with 25% of the company after 3 months.
12. Down Round 📉😬
When a startup raises a new round at a lower valuation than the previous one. It dilutes early investors and is often a red flag.
VCs typically try to avoid these unless they see massive turnaround potential — or negotiate anti-dilution clauses to protect themselves.
13. Unicorn 🦄
A startup valued at $1 billion or more. Once a rare species, now a bit more common — but still a bragging right.
🚀 Fun Fact: Most unicorns are still private. That doesn’t mean they’re profitable — just hyped.
14. IRR (Internal Rate of Return) 📈
The holy grail metric for VC performance. It measures the annualized return on your investment.
IRR helps investors compare different opportunities and determine if the risk is worth the reward.
⚠️ Don’t confuse it with ROI — IRR accounts for time. Timing matters in VC. A 5x return in 2 years is not the same as 5x in 10.
15. Dry Powder 💣
No, it’s not gunpowder — it’s cash on hand that hasn’t been deployed yet. Every VC fund wants a healthy amount of dry powder to:
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Jump on new opportunities
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Follow on in future rounds
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Stay flexible when the market gets weird (and it always does)
Speak Fluent VC 🗣️📚
Venture capital isn’t just about having money — it’s about knowing how to use it wisely. Whether you're a first-time investor or a founder navigating funding rounds, fluency in venture capital terms is your superpower.
You don't need to memorize the entire Wall Street dictionary, but understanding this startup financing glossary gives you a massive edge — especially in 2025’s competitive, jargon-filled investment landscape.
🔔 Bookmark this guide. Study it. Refer back when the term sheet lands in your inbox.
And if you're ready, let’s build your custom VC cheat sheet or printable glossary next. Just say the word!