Startup Glossary

Full startup glossary. Find terms ranging from the basics of raising capital to essential legal terms that any entrepreneur or founder should know. Read more.

Full startup glossary. Find terms ranging from the basics of raising capital to essential legal terms that any entrepreneur or founder should know. In this glossary, we give you key startup words that are used on a daily basis in the startup ecosystem, such as metrics and SAFEs.

LEGAL

• C-CORP: Type of company where shareholders are taxed separately from the entity. Also widely used by startups.
• DNDA: The “Dirección Nacional de Derechos de Autor” or “National Copyright Directorate” allows you to register your software and proprietary developments to protect your startup.
• Operating Entity: This is the entity registered in the country where the company operation will actually take place.
• ESOP: ESOP stands for "Employee Stock Options Plan" which are options usually tied to vesting so that employees can own a percentage of your startup.
• Holding (Delaware, Cayman, UK): They allow you to integrate activities and manage resources more easily, especially for capital raising.
• Intermediary: Sometimes an intermediary is used to intermediate funds between the holding company and the operating entity for tax and capital raising purposes.
• LLC: Limited Liability Company, a company in which the owners of shares are considered "members" and the limited liability means that their personal assets cannot be affected in the event of liquidation or bankruptcy.
• Liquidity Preferences: A clause usually appearing in a term sheet for more advanced series of financing that dictates the order of payment in the event of liquidation of the company. Usually, shareholders with preferred shares receive their money first before other types of shareholders. However, there can also be liquidation multiples where a shareholder receives a multiple of their initial investment before other shareholders can receive anything. (This is not usually well regarded).
• Vesting: Allows the disbursement of a certain amount of shares upon meeting different milestones such as duration in the company or objectives that can be assigned to the employee, once they meet the conditions they can access their shares. There are several clauses and restrictions that you can incorporate in this contract.
• Vesting cliff: The amount of time needed before getting the agreed shares, if I get fired or resign before the "cliff" I receive zero shares. A common example in startups is a four year agreement with a one year cliff and monthly vesting afterwards. Where I must wait one year to receive an agreed percentage of the shares and then monthly vesting is done proportional to the remaining 3 years to fulfill the contract.
• Single trigger/double trigger: These are terms used to accelerate the vesting of shares in an employee or executive stock option plan. Single trigger means that the vesting shares will be delivered before the cliff if an event occurs, such as the sale of the company. The Double Trigger is based on the same, with the difference that two events must occur to partially or fully accelerate the delivery of the shares. You can set as many triggers as you want, however it is not common to have more than two.

VENTURE CAPITAL

• Backward integration: Acquire or begin to enter processes that are backward in the supply chain.
• Bootstrapping: Usage of own resources to operate the startup. Startups that do bootstrapping do not receive third party resources to finance the startup.
• Valuation cap:The cap is used to define a ceiling on the future valuation at which your SAFE will become. An example is if you invest in Y company with a Cap of $5M and they end up raising at a valuation of $10M your SAFE will convert to the $5M valuation.
• Common stock: A type of stock usually held by the founders of the company with voting rights.
• Co-sale right: Right to sell the stock with the founders in this new financing round.
• Data Room: A place where all the files that an investor usually requires, pitch deck, financial projections, cap table and other relevant details are organized.
• Discount: Discount is one of the optional clauses of a SAFE where you can receive a better conversion condition of the invested amount by having a discount on the future valuation of the company. Example, X company is valued at $10M in a future round and your SAFE has a 20% discount, your shares would convert to $8M giving you a better position.
• Down round: A round that is raised at less favorable conditions than the previous one is not the ideal scenario and this is why clauses like MFN's are created.
• Drag along: A clause used so that a majority shareholder can "drag along" other investors to a decision.
• Due diligence: Process of gathering information and data on the company in different business areas for a fund to decide whether or not to invest.
• Exit: What investors call the moment when they can withdraw their money due to a liquidity event.
• First Mover: A company that is first in the market and therefore has a competitive advantage.
• Forward integration: Acquire or begin to enter processes that are ahead in the supply chain.
• Full Ratchet: An anti-dilution clause that allows an investor to maintain its % ownership of the company at all times and without putting up additional capital.
• Fully diluted shares outstanding: It is assumed that all shares that have some parameter to convert and have not been converted are already converted. In this way, only shares that are 100% free are counted.
• General partners: The people in charge of the day-to-day operations and investments made in the fund.
• Godfather offer: A hostile takeover offer with terms so attractive that the board of directors must agree to sell the company because it has a fiduciary responsibility to its investors.
• Hedge Fund: A hedge fund that invests in relatively liquid asset markets using various trading techniques.
• Angel investor: A natural person who has confidence in an early-stage startup.
• KISS: The acronym that stands for "Keep It Simple Agreement" is a contract less used than the SAFE but also seeks to simplify the investment process in startups, created by 500 startups. It has a debt version and an equity version. It always contains the MFN clause to protect the investor in case of a down-round.
• Limited partners: These are natural or legal persons who have invested capital in the fund.
• LOI / IOI: The "letter of intent" or "Indication of interest" allows a party to show its intention to acquire shares of the company or to enter into a negotiation. It is non-binding, which means that it cannot be legally enforced.
• MFN (most favoured nation):A clause that allows an investor to reconvert its contract to new conditions if more favorable conditions have been generated.
• MEMORANDUM OF UNDERSTANDING (MOU): Memorandum of Understanding is a formal agreement written by two or more parties expressing an understanding of the parties' intentions and expectations.
• Settlement multiple: This is a clause that indicates what multiple must be paid out of the initial investment per share to the investor before paying others. For example, a multiple of 2x indicates that if I pay $1 per share I must be paid $2 per share before further liquidating others.
• Convertible Note: An investment instrument that with a maturity date, interest rate and conversion events allow an investor to enter a startup. The SAFE is a simplified version of this contract that does not contain an interest rate.
• Non Shop: A clause that allows the investor to ensure that the startup is not looking for more favorable term sheets to use as a negotiating strategy.
• PAC man defense: A company defends itself against a hostile takeover.
• Participation rights: Allows the investor to have the right to participate in any other sale the company offers.
• Pay to play: A clause that obliges investors to invest in future rounds if third party financing is not forthcoming. If the investor is unable to contribute for any reason their shares become common stock or another type of stock with lower returns.
• PE: Acronym referring to Private Equity.
• Pivot: A way for the business to change its corporate purpose.
• Resource pool: A capital fund that is made by raising funds from various investors, whether institutional or individual.
• Post Money: Refers to the valuation after receiving the expected resources from the current round. A company valued at 100M raising 10M would have a post money of 110M.
• Pre-money: Refers to the valuation before receiving the expected proceeds of the current round. A company valued at 100M raising 10M has a pre money of 100M.
• Liquidation preference: It is the order in which the company's shares will be liquidated, usually those that have been traded with the highest exit preference would go first. It is used when there are events such as the sale or liquidation of the company or other liquidity events that are included in the clause.
• Preferred stock: A type of stock usually held by investors and other stakeholders of the company that does not have voting rights but has priority in payments for dividend distributions and liquidation events.
• Right of First Refusal: Before selling shares to third parties they must first be offered to current investors at the price being offered by the outside investor.
• Debt/Equity Rounds: The difference is that a debt round seeks to finance working capital, specific assets or other purchases and the investor expects an interest on the capital raised while in the equity round the investor expects to receive a % of the company.
• Funding Rounds: They start from pre-seed stage until the series deemed necessary, usually a startup will be funded as follows: FF (Friends and Family), pre-seed, seed and Series A, B, C (...) until needed.
• SAFE: The Simple Agreement for Future Equity, also known as SAFE is an instrument created by the prestigious accelerator YCombinator, which allows startups and investors to invest quickly and without so many complications, not having a defined valuation of the company allows to reach agreements more quickly. SAFE's also have some tools to make the investment more attractive, such as ceilings on future valuation or discount percentages on future valuation.
• Sandbagging: When a company lowers expectations of its future results in order to surprise investors.
• Secondary offering: Sales in subsequent rounds of financing in which some investors can sell their shares and get liquidity sooner.
• Smart capital: Capital considered smart because it comes from people with technical, industry or high utility knowledge that can help your startup grow.
• SPV: The Special Purpose Vehicle is an instrument that can have many variations, conditions and be very different from one another. One of the uses is to create a "pool" of resources that allows investors to invest lower amounts individually. For the startup it is useful as it groups several investors in the same vehicle avoiding a complex cap table.
• Stock: Shares of the company.
• Tag Along: Option given to minority investors to enter or not enter an investment opportunity taken by a majority investor.
• Term sheet: One of the final documents of the investment and usually used in more advanced rounds where the final terms of the investment are defined.
• Use of funds: What the funds you are raising will be used for in your company, we recommend you to put a slide of this in your pitch deck if you are raising capital.
• VC: Acronyms that refer to Venture Capital.

STARTUPS

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• Cap table: The capitalization table of a startup that shows who the owners are and in what percentages the shares are distributed.
• Method per unit: Revenue x Unit - CTO Variable X Unit gives us the contribution margin. With the Contribution Margin we can calculate the break even by dividing the fixed costs over the contribution margin.
• Customer method: Here we must take into account the CAC and LTV, where the recommended figure is to have a LTV/CAC > 3. Something to keep in mind is that the LTV must always be higher than the CAC for the business to work and it is important the payback period that tells us how long the customer will pay his CAC.
• MOAT: The ability of a startup to maintain its competitive advantages such as customer switching costs, intangible assets, network effects, cost advantages and scale efficiencies.
• SAM (Serviceable Available Market): The portion of the market within the TAM that you can reach with your product or service by evaluating barriers such as geography and ease of access.
• Shareholder: A shareholder of your startup.
• SOM (Serviceable Obtainable Market) SOM (Serviceable Obtainable Market) SOM (Serviceable Obtainable Market). The portion of the SAM that you believe you can capture.
• Spin-Off: A company, usually with startup thinking that spins out of a more established company that is considered the parent company.
• Stakeholder: Anyone who has an interest in your startup.
• Startup: A company in its initial stages of operation, founded by one or more entrepreneurs to develop products or services that generate demand. They often seek external resources and funding to leverage their growth.
• TAM (Total Addressable Market): The largest market size of all, it is the total market demand for your product or service.
• Types of startups: There are many types of startups, an easy way to recognize some of them is that there is a word mixed with tech: such as proptech, fintech, deeptech (technology to solve scientific or engineering challenges of some kind), martech. Nowadays, we also see this trend in the environmental and construction sectors, such as watertech and construtech. Many types will probably continue to emerge.
• Unit economics: They allow us to know if the business model is viable in the long term. It can be measured per unit or per customer.

METRICS

• Burn rate: Amount being "burned" monthly by the company.
• Customer Acquisition Cost (CAC): How much it costs to bring a consumer to use the product/service.
• CAGR: Compounded Annual Growth Rate is the average annualized growth rate of some metric being evaluated, assuming compounded growth.
• Churn: Shows what % of customers abandon the service after X amount of time after acquiring it.
• CMGR: Same logic as CAGR but measured on a monthly basis.
• GMV (Gross Merchandise Value): The total value of merchandise sold. The total value of merchandise sold, other than the company's revenue that would be found by applying the rake or take rate to the GMV.
• LTV (Lifetime Value): How much revenue a consumer leaves the startup in its lifetime.
• MRR/ARR: In subscription models it shows the recurring revenue a company has, MRR shows monthly and ARR shows yearly.
• Rake (Take rate): Very common in Fintechs and Marketplaces, it is the rate at which your startup keeps the GMV.
• Revenue: The company's revenue from its operation.
• Revenue drivers: What drives your company's revenue.

TECH

• Decentralized Autonomous Organization (DAO): A new type of organization that under the decentralized mentality of cryptocurrencies seeks that tokens can be purchased in exchange for money and these tokens represent authority in the operation of the DAO, the most important thing is that these companies can operate without human intervention at all.
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• Defi (Decentralized Finance): Decentralized finance eliminates the bank and middlemen from financial transactions normally done by a bank, all based on blockchain technology and P2P agile transaction.‍

• ML (Machine Learning): A subfield of artificial intelligence, it mimics human elements such as pattern recognition, continuous learning and recognizing different types of information to continuously improve and adjust the actions it takes.
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• ‍Metaverse: A digital world that allows the user to live digital and quasi-real experiences. Metaverses such as Descentraland, Enjin, Sandbox and the one to be developed by large companies such as Meta seek to revolutionize the way we interact in digital worlds.‍

• Mixed reality: Incorporates elements of the real world in the virtual world or vice versa. An example is Meta's gloves that allow you to touch objects in the digital world.
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• Virtual reality: Gives the sensation of being in digital scenarios and interacting with them.
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• Industrial Revolution 4.0: Rapid technological advances, automation and data exchange along with major innovations will enable a new way of working, living and interacting in society.‍

• Robotics: Although they have been around for a long time, we are slowly approaching androids. Human-like robots that will be able to perform operational, repetitive and administrative functions, allowing humans to take charge of other more technical areas of the organization.
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• Staking: A way to make money by allowing cryptocurrencies to process your payments by giving your assets on the blockchain and in return receive interest (APY). (Your crypto assets are locked while you are staking and you can choose how long you want to do it for, just like a bank the longer the longer the return).‍

• Smart contract: A type of contract that works with blockchain and allows something to happen once the conditions are met.
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• Web 3.0: The decentralized internet that is going to allow using blockchain to allow users to own their own information and data. Similar to DeFi but with user information and free navigation.
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• 5G: A new ultra-fast network that will allow great technological developments due to its ultra-speed and capacity.

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