Reference
VC Glossary
45 essential venture capital and fundraising terms every founder should know.
409A Valuation
An independent appraisal of a private company's common stock fair market value, required by IRS Section 409A. Used to set strike prices for employee stock options.
Example
"We need to update our 409A before issuing the next batch of options to new hires."
Anti-Dilution
A provision that protects investors from dilution in future down rounds by adjusting the conversion price of their preferred shares.
Example
"The Series A investors had broad-based weighted average anti-dilution, so their conversion price was adjusted when we did a down round."
Board Seat
A position on a company's board of directors, often negotiated as part of an investment. VCs typically request board seats to have governance oversight.
Example
"Our lead investor took one board seat, and we kept two founder seats plus one independent."
Bridge Round
A short-term financing round meant to 'bridge' the company to its next major fundraise. Often structured as convertible notes or SAFEs.
Example
"We did a $500K bridge to get us to the metrics we needed for our Series A."
Cap Table
A spreadsheet or table showing the equity ownership breakdown of a company, including shares held by founders, investors, employees, and option pool.
Example
"Before the raise, make sure your cap table is clean and up to date."
Carry (Carried Interest)
The share of profits (typically 20%) that a VC fund's general partners receive as compensation, after returning capital to limited partners.
Example
"The fund charges 2% management fee and 20% carry on profits above the hurdle rate."
Cliff
A period (usually 12 months) before any equity vests. If an employee or founder leaves before the cliff, they forfeit unvested equity.
Example
"Standard vesting is 4 years with a 1-year cliff, meaning nothing vests until month 12."
Convertible Note
A form of short-term debt that converts into equity at a future priced round, typically with a discount rate and/or valuation cap.
Example
"We raised $750K on a convertible note with a $6M cap and 20% discount."
Down Round
A funding round where the company's valuation is lower than in the previous round, resulting in existing shareholders being diluted.
Example
"After missing growth targets, we had to accept a down round at a 30% lower valuation."
Drag-Along Rights
A provision that allows majority shareholders to force minority shareholders to participate in a sale of the company.
Example
"The drag-along clause meant all shareholders had to agree to the acquisition once 60% approved."
Due Diligence
The investigation process VCs conduct before making an investment, reviewing the company's financials, legal status, technology, team, and market.
Example
"Due diligence took 4 weeks -- they reviewed our contracts, financials, and customer interviews."
ESOP (Employee Stock Option Plan)
A pool of equity reserved for current and future employees, typically 10-20% of the company's shares. Usually set up before or during a fundraise.
Example
"The investors asked us to set aside a 15% ESOP before the investment, diluting the founders."
Follow-on
When an existing investor participates in a subsequent funding round to maintain or increase their ownership stake.
Example
"Our seed investor did a follow-on in our Series A to maintain their 12% stake."
GAAP
Generally Accepted Accounting Principles. The standard framework for financial accounting in the US, relevant when VCs evaluate financials.
Example
"Investors wanted to see GAAP-compliant financials before proceeding with due diligence."
General Partner (GP)
The managing partners of a VC fund who make investment decisions, sit on boards, and manage the fund. They earn management fees and carry.
Example
"The GP at the fund personally led our deal and joined our board."
Ghosting
When a VC stops responding to a founder's communications without providing a formal pass or rejection.
Example
"After two partner meetings and a positive signal, they just ghosted us for 3 weeks."
Hurdle Rate
The minimum rate of return that a VC fund must achieve before the GPs can earn carried interest, typically 8%.
Example
"The fund has an 8% hurdle rate, so LPs get their capital back plus 8% before GPs take carry."
Information Rights
Rights granted to investors (typically those holding a certain percentage) to receive regular financial and operational updates from the company.
Example
"Major investors with >5% ownership have quarterly information rights."
IRR (Internal Rate of Return)
A metric used to estimate the profitability of an investment, accounting for the time value of money. Key metric for VC fund performance.
Example
"The fund generated a 35% net IRR over its 10-year life."
J-Curve
The pattern of VC fund returns over time: initially negative (fees and early investments), then rising as portfolio companies mature and exit.
Example
"Don't worry about year 2 returns -- every VC fund follows the J-curve pattern."
Key Person Clause
A provision in a fund's LPA that allows LPs to suspend commitments if key partners leave the fund.
Example
"When the founding partner left, the key person clause was triggered and LPs could halt capital calls."
Lead Investor
The investor who leads a funding round, typically contributing the largest check, setting the terms, and conducting due diligence.
Example
"We needed a lead investor to set the terms before other investors would commit."
Limited Partner (LP)
The investors who provide capital to a VC fund, including pension funds, endowments, family offices, and high-net-worth individuals.
Example
"The fund raised $200M from a mix of institutional LPs and family offices."
Liquidation Preference
The order and amount investors get paid in a liquidation event (sale, IPO, wind-down). Typically 1x non-participating for founder-friendly deals.
Example
"With a 1x non-participating liquidation preference, investors get their money back or convert to common -- whichever is higher."
Management Fee
An annual fee (typically 2% of committed capital) charged by a VC fund to cover operating expenses.
Example
"The fund charges a 2% management fee on committed capital during the investment period."
MFN (Most Favored Nation)
A clause in SAFEs or convertible notes ensuring that if better terms are offered to future investors, the same terms apply retroactively.
Example
"Our early SAFE investors had MFN clauses, so when we gave a lower cap to later investors, the early ones got the same cap."
MOIC (Multiple on Invested Capital)
A metric showing total return as a multiple of the original investment. A 3x MOIC means the investment returned 3 times the capital.
Example
"The fund returned 3.2x MOIC, meaning every dollar invested returned $3.20."
NAV (Net Asset Value)
The total value of a fund's portfolio companies minus liabilities. Used to track fund performance between exits.
Example
"The fund's NAV has grown to $150M based on the latest portfolio markups."
Option Pool
A block of shares reserved for future employee equity grants. Typically 10-20% of total shares, often created or expanded during a fundraise.
Example
"The term sheet specified a 15% option pool created pre-money, which diluted existing shareholders."
Participating Preferred
A type of preferred stock where investors get their liquidation preference AND share in remaining proceeds pro-rata with common shareholders.
Example
"With participating preferred, investors double-dip -- they get their money back first, then share in the rest."
Pay-to-Play
A provision requiring existing investors to participate in future rounds to maintain their preferential rights.
Example
"Our Series B had a pay-to-play provision, so investors who didn't participate had their preferred stock converted to common."
Pre-Money / Post-Money
Pre-money valuation is the company's value before new investment. Post-money = pre-money + new investment. Determines how much equity investors receive.
Example
"We raised $3M at a $12M pre-money valuation, giving a $15M post-money and 20% to the new investors."
Pro-Rata Rights
The right of existing investors to participate in future funding rounds to maintain their ownership percentage.
Example
"All Series A investors have pro-rata rights in subsequent rounds up to their current ownership."
QSBS (Qualified Small Business Stock)
An IRS tax benefit allowing investors and founders to exclude up to $10M (or 10x basis) of capital gains from federal tax on qualifying stock held 5+ years.
Example
"Because we're a C-corp under $50M in assets, our stock qualifies for QSBS -- huge tax benefit for early investors."
ROFR (Right of First Refusal)
A right that allows the company or investors to match any offer for shares before they can be sold to a third party.
Example
"Before selling your shares on the secondary market, the company's ROFR gives them the right to buy them first."
Runway
The amount of time a startup can operate before running out of cash, calculated as cash on hand divided by monthly burn rate.
Example
"After the raise, we have 18 months of runway at our current burn rate of $120K/month."
SAFE (Simple Agreement for Future Equity)
A Y Combinator-created instrument where an investor provides capital in exchange for the right to future equity at a discount or cap. Not debt, no interest.
Example
"We raised $1M on a post-money SAFE with a $10M cap."
Secondary Sale
The sale of existing shares from one shareholder to another, rather than new shares issued by the company.
Example
"Some early employees did a secondary sale in the Series C to get partial liquidity."
Syndicate
A group of investors who co-invest together in a deal, often led by one lead investor who sets terms.
Example
"We put together a syndicate of 5 angels and 2 micro-funds for the seed round."
Tag-Along Rights
A provision that allows minority shareholders to participate in a sale if a majority shareholder sells their stake.
Example
"The tag-along clause let us sell our shares alongside the majority investor in the secondary transaction."
Term Sheet
A non-binding document outlining the key terms and conditions of a proposed investment. Serves as the basis for the definitive legal agreements.
Example
"We received a term sheet within a week of the partner meeting -- $5M at a $20M pre-money."
Unicorn
A privately-held startup valued at $1 billion or more. The term was coined by Aileen Lee of Cowboy Ventures in 2013.
Example
"After their Series D at a $1.2B valuation, the company officially became a unicorn."
Vesting
The process by which founders and employees earn their equity over time. Standard is 4-year vesting with a 1-year cliff.
Example
"My co-founder left after 18 months, so they vested 37.5% of their shares."
Voting Rights
The rights associated with certain classes of stock to vote on company matters. Preferred stock may carry additional voting provisions.
Example
"Investors negotiated protective provisions that gave them veto power over certain decisions."
Warrant
A financial instrument giving the holder the right to purchase shares at a specific price within a certain timeframe, often issued alongside debt.
Example
"The venture debt facility came with warrants for 0.5% of the company at the last round's price."