05 — Glossary

Every venture term, explained.

36 startup and venture terms — funding instruments, metrics, cap-table mechanics, process, exits — defined in plain English. Written for founders raising capital and for anyone trying to understand a term sheet for the first time.

Funding & instruments · 9

SAFE (Simple Agreement for Future Equity)
A SAFE is a short investment contract that gives an investor the right to receive shares in a future priced round, without setting a valuation today.
Convertible note
A convertible note is short-term debt that converts into equity when the company raises a future priced round.
Valuation cap
A valuation cap is the maximum valuation at which an early investment (SAFE or convertible note) will convert into equity, protecting the investor from being diluted if the company's valuation skyrockets.
Pre-money valuation
Pre-money valuation is what a company is worth before the new investment is added — used to calculate how much of the company the new investors are buying.
Post-money valuation
Post-money valuation is what a company is worth after the new investment is added (pre-money + the amount raised).
Pre-seed round
Pre-seed is the earliest formal funding stage, typically $50K–$500K raised on a SAFE before a company has revenue or product-market fit.
Seed round
A seed round is the first priced (or SAFE) financing of a startup, typically $1M–$5M raised to find product-market fit.
Series A round
A Series A is typically the first priced round led by an institutional VC, with a $5M–$20M check size, requiring strong evidence of product-market fit.
Bridge round
A bridge round is a small extension financing raised between two priced rounds, usually to extend runway and prove out metrics needed for the next bigger round.

Metrics · 12

ARR (Annual Recurring Revenue)
ARR is the annualized value of a SaaS company's recurring subscription revenue at a point in time, excluding one-time fees.
MRR (Monthly Recurring Revenue)
MRR is the predictable, normalized monthly revenue from recurring subscriptions, used to track SaaS business momentum month-over-month.
NRR (Net Revenue Retention)
Net Revenue Retention measures the percentage of revenue retained from a cohort of customers over a year, including expansion and contraction but excluding new customers.
CAC (Customer Acquisition Cost)
CAC is the total sales and marketing cost required to acquire one new customer.
LTV (Lifetime Value)
LTV is the total revenue (or gross profit) a company expects to earn from a customer over their entire lifetime.
CAC payback period
CAC payback period is the number of months it takes to recover the cost of acquiring a customer through their gross-margin contribution.
Burn rate
Burn rate is how much cash a company spends per month, net of revenue — the rate at which it's depleting its bank balance.
Runway
Runway is the number of months a company can keep operating at its current burn rate before running out of cash.
MOIC (Multiple on Invested Capital)
MOIC is the ratio of an investment's total value (realized + unrealized) to the capital originally invested.
DPI (Distributions to Paid-In capital)
DPI is the ratio of actual cash returned to fund investors (LPs) to the capital they paid in — the realized portion of a fund's return.
IRR (Internal Rate of Return)
IRR is the annualized rate of return on an investment, accounting for the timing of all cash flows in and out.
TAM, SAM, SOM
TAM (Total Addressable Market) is the entire global revenue opportunity for a product, SAM is the slice the company could realistically serve, and SOM is the share they can realistically capture in the near term.

Cap table & equity · 8

Dilution
Dilution is the reduction in an existing shareholder's ownership percentage that happens when a company issues new shares — typically when raising a new round.
Liquidation preference
A liquidation preference is the right of preferred shareholders to get their money back (often a multiple of it) before common shareholders see anything in a sale or liquidation.
Anti-dilution protection
Anti-dilution protection adjusts an investor's share price downward if the company later raises at a lower valuation (a 'down round'), preserving their economic position.
Pro-rata rights
Pro-rata rights give an existing investor the right (but not the obligation) to maintain their ownership percentage by buying their share of any new financing.
Option pool (ESOP)
An option pool is a reserved allocation of equity (typically 10–20% of the company) set aside to grant to current and future employees as stock options.
Vesting (and the cliff)
Vesting is the schedule on which an employee earns their granted shares — most commonly 4 years with a 1-year cliff, meaning no shares vest until 12 months in, then monthly thereafter.
409A valuation
A 409A valuation is an independent third-party assessment of the fair-market value of a private company's common stock, required by the IRS to set the strike price for stock options.
Acceleration
Acceleration provisions speed up vesting on a change of control — single-trigger accelerates on the acquisition itself, double-trigger requires both an acquisition AND termination.

Process · 4

Term sheet
A term sheet is a non-binding document outlining the key terms of a proposed investment — valuation, amount, board seats, liquidation preference, anti-dilution, and other rights.
Due diligence (DD)
Due diligence is the investigation an investor conducts before finalizing an investment — covering legal, financial, technical, and customer references.
Data room
A data room is a secure online folder where a startup shares confidential documents (financials, contracts, cap table, employee info) with investors during due diligence.
Lead investor
The lead investor is the firm that writes the largest check in a round, negotiates the term sheet, and usually takes a board seat — the social proof that anchors the rest of the round.

Exits · 3

Secondary sale
A secondary sale is the sale of existing shares (from founders, employees, or early investors) to a new buyer — distinct from a primary fundraise where new shares are issued.
Tender offer
A tender offer is a structured secondary sale where the company arranges for a buyer (usually a growth fund) to purchase shares from any willing employee or investor at a set price.
IPO (Initial Public Offering)
An IPO is the first sale of a company's stock to the public, listing the shares on a stock exchange — historically the most common exit for venture-backed companies.