Brief investment dictionary for startups

There is a whole summary of terms related to startup financing and investment. Knowing some of the most important ones can help you better prepare for your business venture.

Break-even point. The break-even point is the point at which the startup’s revenues are balanced by fixed and variable costs. From this point on, profits begin being generated.

Cap table. A document, usually in spreadsheet format, that provides information on the share capital structure of a company: investors, shareholdings, percentage of ownership, date of investment and valuation of the different rounds. It allows you to analyse and forecast the impact of financing rounds on share ownership.

Carried interest. Profit sharing or additional remuneration earned by venture capital managers for the success of their management.

Dealflow. The process by which professional investors take advantage of investment opportunities, evaluate them and close them. The dealflow is analysed from the quantitative and qualitative perspective: the investment fund evaluates the investment possibilities it receives and studies their quality exhaustively.

Dilution. Decrease in the shareholding percentage (i.e. loss of part of the company’s ownership) that occurs after a capital increase. This occurs when some of the old partners make a new contribution or when new shareholders enter the company and the percentage of shares of those who have not participated in a financing round decreases. In other words, the share of the equity pie of investors who have not participated in the company’s round is reduced, as other investors acquire new shares. To avoid the effect of dilution and losing some of their control, these investors must purchase a proportional amount of shares with each capital increase.

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Dead equity. Shareholdings of the management team or employees who are no longer part of the company and therefore no longer make decisions about the company. If there is too much dead equity, the cap table will not be balanced. To avoid this, one can resort to vesting, a mechanism that restricts the sale of shares to ensure the permanence of the co-founders, generally.

Due diligence. Audit of a company’s financial records to verify that there are no risks due to its activity, carried out by external consultants.

Investor deck. Cover letter of the startup dedicated to attracting the attention of investors. The document, consisting of about ten slides, contains information on the company’s proposed solution, business model, product, team and financial data.

Partners’ agreement. Agreement signed by the partners of a startup to set the rules that regulate the internal relations of a company and help avoid possible conflicts. It takes into consideration aspects such as the governance of the company, the entry and exit of partners, the functions of the partners and non-compete or confidentiality clauses, among others. It is a central document at the time of incorporation of a company as well as when new partners enter.

Term sheet. A non-binding document that an investor sends to a startup, stating its interest in participating in the startup, as well as the conditions for doing so. It serves as a starting point for negotiations between the company and investors.

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