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
on an open account.
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,
what it owes, and what equity it has on a given date.
Black-Scholes-Morton Formula: stock option valuation model
Bridge Financing: Short-term financing provided to a company in expectation of some larger
financing in the near future.
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
options and convertible securities may be exercised relative to the broad based weighted
average at which securities were issued since the issuance of the option or convertible
security. This reduces investor dilution. It is generally preferred by entrepreneurs, as
opposed to the Full Ratchet.
BSM – Black-Scholes-Morton Formula: stock option valuation model
Capital expenditures– Purchases of long-term assets such as equipment, used in
manufacturing a product.
Capital– See Equity.
Cash flow– Incoming cash to the business less the outgoing cash during a given period.
Also used to refer to the figure derived from net income plus non-cash items charged off in
the accrual accounting process.
CDA: Confidential Disclosure Agreement
Closing: the final event to complete the investment, at which time all the legal documents
are signed and the funds are transferred.
Collateral– Assets pledged to secure a loan.
Collection period ratio– Indicates how quickly your customers pay you. Average accounts
receivable divided by net sales, multiplied by 365.
Common Stock: Stock (ownership) shares in a Corporation that do not have special
privileges (as opposed to Preferred Stock)
Community Reinvestment Act (CRA) — Under provisions of the Community Reinvestment Act
of 1977, banks and thrift institutions seek opportunities to help meet the credit needs of their
local communities, including low and moderate-income neighborhoods, consistent with
safe and sound operation of the institutions.
Compensating Balance– Money a bank requires a company to leave in a deposit account as
part of a loan agreement.
Convertible Note – a form of debt that can be converted into stock. Frequently used in bridge
financing. See “Convertible Notes” in the Startup Roadmap.
Corporation– Form of business ownership that is a legal entity on its own and puts
stockholders and the board of directors in control. Owners have limited liability for the
corporation’s actions. A corporation as unlimited life and in most cases is taxed as an entity
on its own.
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
assets divided by current liabilities.
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
inventory purchases. Average accounts payable divided by the cost of goods sold plus
change in inventory; multiplied by 365.
Days to sell inventory ratio– Indicates the firm’s efficiency at matching purchases to expected
sales. Average inventory divided by the cost of goods sold, multiplied by 365.
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
liabilities plus capital.
Depreciation– Amortization of the cost of a fixed asset, i.e., plant and equipment, over
several years, or the depreciable life.
Dividend– Distribution of earnings to shareholders.
Due Diligence: the process of investigation and evaluation, performed by investors, into the
details of a potential investment, such as an examination of operations and management
and the verification of material facts.
Equal Credit Opportunity Act (Federal Reserve Regulation B)– Prohibits lenders from
denying your application on the basis of race, color, religion, national origin, sex, marital
status, or age, or from discouraging you from applying, or giving you less favorable terms
than any other applicant, on such a basis. Regulation B also contains rules governing credit
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.
Also known as stock plus retained earnings, or capital.
Exit Strategy: the way in which an investor or business owner will get out of (and get a return
on) an investment that he/she has made. Exit Strategy is also called liquidity event. Typically
an acquisition or public stock offering.
Extraordinary items– Unusual or nonrecurring event that must be explained to shareholders
or investors, such as a manufacturer’s sale of a building.
FASB – Financial Accounting Standards Board; The designated private sector organization in
the US that establishes financial accounting and reporting standards
FASB 123R – Establishes standards for the accounting for share-based compensation for
employees. This includes guidelines as to when such compensation creates a liability, and
how such transactions result in P&L impact
Finance company– Competitors of commercial banks in providing credit to households and
firms. Unlike banks, they do not accept deposits.
Financial projections — Estimates of the future financial performance of a firm.
Financial statements– Written record of the financial status of an individual or organization.
Commonly includes profit and loss, or Income, Statement; the Balance Sheet, which
includes a statement of the company’s retained earnings; and the Cash Flow Statement.
Fixed assets– Long-term assets (i.e., buildings, equipment, property) that are not expected
to be converted to cash in the near future.
Fixed costs — costs of doing business such as rent, utilities, depreciation, taxes, etc., that
remain generally the same regardless of the amount of sales of goods or services.
Full Ratchet: an investor protection provision which specifies that options and convertible
securities may be exercised relative to the lowest price at which securities were issued
since the issuance of the option or convertible security. The full ratchet guarantee prevents
dilution, since the proportionate ownership would stay the same as when the investment
was initially made. Entrepreneurs much prefer a less harsh protection such as an
adjustment on a broad based weighted average.
Gross income– Net sales less cost of goods sold.
Gross profit– Indicates the revenues of the firm before consideration of its operating
expenses. Net sales less cost of goods sold.
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
income or loss for a specific period of time.
Incubator: a company or facility designed to foster entrepreneurship and help startup
companies, usually technology-related, to grow through the use of shared resources,
management expertise and intellectual capital.
Initial Public Offering: The first sale of stock by a private company to the public.
Installment loan– Loan type that is paid in periodic payments, such as an automobile loan.
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,
and finished goods.
Investor– An individual who takes an ownership position in a company, thus assuming risk
of loss in exchange for anticipated returns.
PO: Initial Public Offering. The first sale of stock by a private company to the public.
IRR: Internal Rate of Return
ISO: Incentive Stock Option
Lead Investor: The venture capital firm that leads an investment round by structuring the
deal (with a term sheet) and builds a syndicate (group) of investors to make the investment.
Leverage– Measures the firm’s use of borrowed funds versus those funds provided by the
shareholders or owners (equity).
Leveraged Buy Out (LBO): an acquisition of a business using mostly debt and a small
amount of equity. The debt is secured by the assets of the business.
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
a pre-agreed amount during a specific time frame. Usually reviewed annually and subject to
cancellation without notice.
Liquid assets– Those assets that can be readily turned into cash.
Liquidation Preference: The preference given to Preferred investors at a liquidity event.
Generally speaking, Preferred investors get paid first in the case of an acquisition or merger.
Liquidity Event: the way in which an investor or business owner will get out of (and get a
return on) an investment that he/she has made. Typically an acquisition or public stock
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
transactions other than those in the normal course of business.
Operating profit margin– Measures a firms profitability by examining the pre-tax profit
generated from primary operations (versus extraordinary items) in relation to net sales.
Operating-profit divided by net sales.
Pari Pasu: in term sheet use, this indicates that one series of equity will have the same
rights and privileges as another series of equity. (‘of equal step’ in Latin)
Partnership– Can be general or limited, but in either case the general partners are in
control. The tax burden is shared by all the partners at their personal rate, and the general
partners have unlimited liability. Limited partners have limited liability.
Pay-to-Play: Provision that encourages existing investors to participate pro-rata in the next
equity round, generally be specifying some punitive event if the investor does not fully
participate. (For example, the investor’s existing stock could be converted to Common.)
Piggy Back Registration: Gives investors the right to participate in any stock registration
(sale) initiated by the company
Preferred Stock: Stock (ownership) shares in a Corporation that have special privileges (as
opposed to Common Stock). For example, in return for providing capital to a company,
Preferred Shareholders may, voting as a group, have the right to veto certain corporate
decisions (e.g., a proposed acquisition) and, in the company is acquired, Preferred
Shareholders generally are first in line to receive proceeds. In the case of an acquisition or
IPO, Preferred Shares are converted to Common Shares.
Principal– The currently unpaid balance of a loan, not including interested owed. Also can
refer to a primary owner or investor.
Pro forma financial statements– Financial statements for a business where certain
amounts shown are hypothetical, or estimated, for the period depicted.
Profit and loss statement– Summary of the revenues, costs, and expenses for a business
over a period of time. Also called the income statement.
Profit– Compensation an entrepreneur receives for the assumption of risk a business
venture. Also called net income.
Pro-rata – “In proportion”. Typically refers to an existing investor investing in the next round in
the same proportion to his or her investment in the previous round.
Quick ratio– Liquidity ratio that focuses on the firm’s most liquid assets by excluding
inventory. Also known as the acid test ratio. Cash, marketable securities, and accounts
receivable divided by current liabilities.
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
(Internal Rate of Return).
Round of Funding: the stage of financing a start-up company is in. The usual progression is
from startup to first round to mezzanine to pre-IPO.
Seasonal loan– A loan made for the purpose of meeting predictable and periodic funding
needs, such as funding of camping gear inventory before summer purchases.
Seed Capital: money used to purchase equity-based in a new or existing company. This
seed capital is usually quite small because the venture is still in the idea or conceptual
Series A Preferred Stock: the first round of Preferred Stock offered during the seed or early
stage round by a portfolio company to the venture capitalist.
Sole proprietorship– A type of business where the owner has full control and unlimited
liability. A sole proprietorship is taxes at the personal income tax rate.
Syndication: the process whereby a group of venture capitalists will each put in a portion of
the amount of money needed to finance a small business.
Term Sheet: non-binding agreement setting forth the basic terms and conditions under
which an investment will be made. The term sheet is a template that is used to develop
more detailed legal documents.
Triple Net: Term used in office leases that indicates that the lease expense does not
include insurance, janitorial, or utilities.
Variable costs — those costs of doing business such as cost of goods, shipping, handling
and storage, sales commissions, etc., which are directly related to the sales of goods or
Warrants (Stock Warrants): A right to purchase some number of shares of stock at some
particular price in the future. Warrants are often offered in conjunction with bridge financing
to add an additional benefit in return for early investment.