Are you in the process of raising money for your startup? If so, understanding the language of venture capital and startup valuations is important. Here are some common terms you should know.

Common Terms Every Startup Should Know

Below, we define some common terms you should know when valuing your startup.

Accelerator

A startup accelerator is a program designed to help early-stage startups grow quickly while also providing them with access to mentorship, resources, and funding.

Angel Investors

Angel investors are wealthy individuals or companies that provide financial backing to startup companies. They usually provide seed money in exchange for ownership equity or convertible debt. Angel investors can be a great source of funding for startups, as they can provide capital when banks and venture capitalists will not.

Bootstrapping

Bootstrapping is a way of creating a business from nothing. It involves starting your business with very little capital and relying on raw determination and hard work to make it a success. Such founders use their personal resources and network to get their businesses off the ground. Bootstrapped businesses are characterized by a “lean” approach, where founders make tough calls on resources and prioritize innovation over spending.

Comparable Company Analysis

Comparable company analysis is a method of valuing a business by comparing it to similar companies in the same industry. It can be used to determine the market value of a business based on its peers.

Discount

A discount is an amount by which an investor’s stake will be reduced compared to later investors. This is usually given in exchange for taking a higher risk by investing earlier.

Discounted Cash Flow

DCF is a method of valuing a business by estimating its future cash flows and discounting them back to the present value. It is used to determine the intrinsic value of a business, which is often higher than its current market value.

Dilution

Dilution is when existing shareholders have their ownership stake reduced due to the introduction of new investors. Dilution can happen when a company raises money or issues additional shares.

EBITDA

EBITDA is an acronym for Earnings Before Interest, Tax, Depreciation, and Amortization. It is used to measure the profitability of a company without considering certain costs and taxes associated with the company’s operations.

Equity

Equity is the ownership stake that shareholders have in a company. The amount of equity each investor receives will depend on their investment amount and the company’s pre-money valuation.

Fair Market Value

The fair market value of a business is the price at which it would be bought or sold in an arm’s length transaction. It is often used as a benchmark when valuing a business, as it reflects the actual price that buyers and sellers are willing to pay for the company.

Incubator

An incubator is an organization or program that helps new businesses get started. Incubators provide mentorship, resources, and guidance to entrepreneurs at all stages of the business development process. They can also provide access to capital, office space, and networking opportunities.

Intangible Assets

In a company, intangible assets are not physical in nature. Examples of intangible assets include patents, copyrights, trademarks, goodwill, and other proprietary information. Intangible assets are recorded on the balance sheet at cost and amortized over their useful life.

Liquidation Preference

It is the amount of money that investors will be paid before other shareholders if the company is sold or goes out of business. The amount will depend on the size of their investment and the terms of the agreement.

Post-Money Valuation

It refers to the valuation of a startup after it has received funding. Startups calculate it by adding the amount of funding received to the pre-money valuation.

Pre-Money Valuation

It is the valuation of a startup before it receives any funding. Pre-money valuation is used to determine the value of the company before any new investors come in.

Product Market Fit

A product market fit is when the product you are offering meets the target market’s needs. It’s important to have a strong product-market fit to secure funding and to make sure your product will be successful. It can involve market research, developing a customer feedback loop, and understanding what competitors are doing.

Seed

In investments, the seed is the first round of capital a startup receives from angel investors, venture capitalists, or other private sources. It is usually the first external funding a business receives after its founding and can be used to hire employees, purchase equipment, or develop a product. Seed funding is typically followed by larger rounds of venture capital funding.

Startup Valuation

Valuation refers to the process of estimating the current worth of a business or asset. It is an essential step for early-stage startups that may need to raise money from outside investors. A valuation typically involves a thorough analysis of the company’s financials, competitive advantages, and other factors that may impact its value.

Valuation Cap

A valuation cap is used when a startup issues convertible notes or SAFEs. It’s the maximum pre-money valuation at which the investor will receive their shares.

Venture Capital

Venture capital is the money provided by investors to fund new and growing businesses that are deemed to have long-term growth potential. It usually funds early-stage and expansion-phase companies that are too risky for traditional lenders or public markets.

Venture Capitalists

Venture capitalists are investors that specialize in providing capital for startup companies. They usually bring more than just money to the table, leveraging their networks, expertise, and guidance to help young businesses.

Show Your Business Value to Potential Investors

Now that you’ve learned about the common terms used in startup valuation, the next step is to find the best way to tell your brand story to the investors. What better way to do this than make a financial model with projections for the next five years? It will help you demonstrate how your business can generate returns and what that return could look like.

At Numberly, we can help you create just that. Our financial models are tailored to each individual business and can be used to highlight the potential of your venture. Since the model is specific to your business, you can use, update, and understand the model easily. Contact us to talk to a representative.