How to start a company

Accounts payable-- Amount owing to creditors for goods and services on an open account.

Accounts receivable-- Amount due from customers for merchandise or services purchased 

Accredited Investor: A high net worth investor (see About Accredited Investors in the Startup 

Angel Investor: an individual who provides capital to one or more startup companies.

Asset-- Anything owned by a business or individual that has commercial or exchange value.

Balance sheet-- Financial statement that presents a snapshot of what the business owns, 

Black-Scholes-Morton Formula: stock option valuation model

Bridge Financing: Short-term financing provided to a company in expectation of some larger 

Bridge Loan: Bridge financing in the form of a loan (often a Convertible Note).

Broad Based Weighted Average: an investor protection provision which specifies that 

BSM - Black-Scholes-Morton Formula: stock option valuation model

Capital expenditures-- Purchases of long-term assets such as equipment, used in 

Capital-- See Equity.

Cash flow-- Incoming cash to the business less the outgoing cash during a given period. 

CDA: Confidential Disclosure Agreement

Closing: the final event to complete the investment, at which time all the legal documents 

Collateral-- Assets pledged to secure a loan.

Collection period ratio-- Indicates how quickly your customers pay you. Average accounts 

Community Reinvestment Act (CRA) -- Under provisions of the Community Reinvestment Act 

Compensating Balance-- Money a bank requires a company to leave in a deposit account as 

Convertible Note – a form of debt that can be converted into stock. Frequently used in bridge 

Corporation-- Form of business ownership that is a legal entity on its own and puts 

Cox-Ross-Rubinstein Binomial Model: stock option valuation model

Cost of goods sold-- Figure representing the cost of buying raw materials and producing 

Current assets-- Cash or other assets you expect to use in the operation of the firm within 

Current liabilities-- Debts you expect to pay within one year.

Current ratio-- Shows firm's ability to pay its current obligations from current assets. Current 

D&O Insurance: Liability insurance for directors and officers

D&O: Directors and Officers

Days purchases in account payable ratio-- Indicates how quickly you pay your suppliers for 

Days to sell inventory ratio-- Indicates the firm's efficiency at matching purchases to expected 

Deal Flow: the rate at which investment offers are presented to funding institutions.

Debt ratio-- Indicates the firm's debt level, or leverage. Total liabilities divided by total 

Depreciation-- Amortization of the cost of a fixed asset, i.e., plant and equipment, over 

Dividend-- Distribution of earnings to shareholders.

Due Diligence: the process of investigation and evaluation, performed by investors, into the 

Equal Credit Opportunity Act (Federal Reserve Regulation B)-- Prohibits lenders from 

Equity Financing: issuance (sale) of shares of common or preferred stock to raise money.

Equity-- The ownership interest in a business remaining after its liabilities are deducted. 

Exit Strategy: the way in which an investor or business owner will get out of (and get a return 

Extraordinary items-- Unusual or nonrecurring event that must be explained to shareholders 

FASB - Financial Accounting Standards Board; The designated private sector organization in 

FASB 123R - Establishes standards for the accounting for share-based compensation for 

Finance company-- Competitors of commercial banks in providing credit to households and 

Financial projections -- Estimates of the future financial performance of a firm.

Financial statements-- Written record of the financial status of an individual or organization. 

Fixed assets-- Long-term assets (i.e., buildings, equipment, property) that are not expected 

Fixed costs -- costs of doing business such as rent, utilities, depreciation, taxes, etc., that 

Full Ratchet: an investor protection provision which specifies that options and convertible 

Gross income-- Net sales less cost of goods sold.

Gross profit-- Indicates the revenues of the firm before consideration of its operating 

Gross profit margin-- Measures a firm's profitability. Gross profits divided by net sales.

Guarantee -- promise by an individual or organization to repay a loan in the event of default.

Income statements -- financial statement showing a company's sales, expense and net 

Incubator: a company or facility designed to foster entrepreneurship and help startup 

Initial Public Offering: The first sale of stock by a private company to the public.

Internal Rate of Return: The implied interest rate of a sequence of cash inflows and 

Inventory-- Value of a firm's raw materials, work in process, supplies used in operations, 

Investor-- An individual who takes an ownership position in a company, thus assuming risk 

IRR: Internal Rate of Return

ISO: Incentive Stock Option

Lead Investor: The venture capital firm that leads an investment round by structuring the 

Leverage-- Measures the firm's use of borrowed funds versus those funds provided by the 

Leveraged Buy Out (LBO): an acquisition of a business using mostly debt and a small 

Liabilities -- debt owed by the company such as bank loans or accounts payable.

Line of credit-- Although not a contract, a bank's promise to lend to a specific borrower up to 

Liquid assets-- Those assets that can be readily turned into cash.

Liquidation Preference: The preference given to Preferred investors at a liquidity event. 

Liquidity Event: the way in which an investor or business owner will get out of (and get a 

Liquidity-- Gauges firm's ability to quickly turn assets into cash.

Lock Up Provision: Prevents transfer of stock for some period of time after a public stock 

Marketable securities-- Securities that are easily sold.

Maturity -- the date when payment of principal on a loan is due.

Mezzanine Financing: late-stage venture capital, usually the final round of financing prior to 

NDA: Non Disclosure Agreement

Net income-- The sum remaining after all expenses have been met or deducted. Also called 

Net sales-- Gross sales minus returns and allowances.

Net worth-- Excess of assets over debt.

Niche-- Particular specialty in which a firm has gained a large market share.

NSO: Non Qualified Stock Option

Operating expenses-- Those costs associated with the day-to-day activities of the business.

Operating profit (loss) -- Income or loss before taxes and extraordinary items resulting from 

Operating profit margin-- Measures a firms profitability by examining the pre-tax profit 

Pari Pasu: in term sheet use, this indicates that one series of equity will have the same 

Partnership-- Can be general or limited, but in either case the general partners are in 

Pay-to-Play: Provision that encourages existing investors to participate pro-rata in the next 

Piggy Back Registration: Gives investors the right to participate in any stock registration 

Preferred Stock: Stock (ownership) shares in a Corporation that have special privileges (as 

Preferred Shareholders may, voting as a group, have the right to veto certain corporate 

IPO, Preferred Shares are converted to Common Shares.

Pro forma financial statements-- Financial statements for a business where certain 

Profit and loss statement-- Summary of the revenues, costs, and expenses for a business 

Profit-- Compensation an entrepreneur receives for the assumption of risk a business 

Pro-rata – “In proportion”. Typically refers to an existing investor investing in the next round in 

Quick ratio-- Liquidity ratio that focuses on the firm's most liquid assets by excluding 

Retained earnings -- Net profits kept to accumulate in a business after dividends are paid.

Return on Investment: The implied interest rate of an investment. Often estimated using IRR 

Round of Funding: the stage of financing a start-up company is in. The usual progression is 

Seasonal loan-- A loan made for the purpose of meeting predictable and periodic funding 

Seed Capital: money used to purchase equity-based in a new or existing company. This 

Series A Preferred Stock: the first round of Preferred Stock offered during the seed or early 

Sole proprietorship-- A type of business where the owner has full control and unlimited 

Term Sheet: non-binding agreement setting forth the basic terms and conditions under 

Triple Net: Term used in office leases that indicates that the lease expense does not 

Variable costs -- those costs of doing business such as cost of goods, shipping, handling 

Warrants (Stock Warrants): A right to purchase some number of shares of stock at some