A comprehensive guide to terms you've had to Google at least once as a startup founder.
Angel investor 👼
True to their name, angel investors are individuals who are willing to take a risk in you when almost no one else will. The most sophisticated angels bet on several nascent startups, building their own portfolio and often using their knowledge and network to help lead those companies in the right direction.
Angel syndicate 👼👼👼
Angel syndicates are “clubs” of angel investors who pool their resources together to invest in companies on a per-deal basis. That allows for individual investors to invest a smaller amount than they would normally be able to if they were investing alone, and choose the companies they commit capital to. Syndicates usually have a lead investor. Learn more here.
The Average Revenue Per Account is usually calculated per year or month as an indicator of profitability and growth. The formula is pretty straightforward: if your company has 100 accounts and is generating $100,000 in revenue monthly, the ARPA would be $100,000 / 100 = $1,000 per account per month.
As simple as it may seem, it can help you understand monthly customer trends, the products that are driving the most revenue and to what level customers subscribe (if you have different subscription plans).
ARPU looks a lot like ARPA, except this time we're measuring the Average Revenue per User. How's that different, you ask? Well, a B2B company can have accounts with multiple seats. Take Slack, for example: their pricing plan is based on active users in a workspace. That means that if a company (account) uses Slack for employees to communicate, the number of users will grow as this company hires. If the price per user is the same and all users are active every month, ARPU remains unchanged, while ARPA increases.
ARR / MRR 💰📆
Annual/Monthly Recurring Revenue is the part of your revenue stream that you can count on consistently, on an annual or monthly basis. It's the sum of all subscription revenue, which often includes all new business subscriptions and upgrades (sometimes called expansion), minus downgrades (or contractions) and cancelled subscriptions. By the way, tracking those subscription segments separately can also help decipher where revenue is increasing or decreasing.
Once you learn ASP stands for Average Selling Price, it can be pretty self-explanatory. The trick here is knowing you can either apply this metric to a specific product or service or, more broadly, to an entire market. Although it can be used in almost every type of business, ASP tends to offer more insight to businesses that sell in higher volumes.
When used as a comparison between your company and competitors, it can tell you a lot about the effectiveness of a marketing and sales team, your position in the market, and how much a product or service has been commoditized.
Customer Acquisition Costs is how much you need to find a potential customer and convert them into a real one.
Everything that is marketing or sales related should be in this equation: salaries, commissions, tools, ads... When you add up all these expenses in a certain period of time and divide the total by the number of customers acquired in that same period, you have your CAC. That plays a very important role in understanding profitability and efficiency.
Cap table 🗂
A cap table is essentially a list of who-owns-what in a company. Clarifying this information early on can be important to help prevent any future conflicts. Learn more here.
Convertible note 🔁
When startups are young, it's so tricky to agree on a valuation (and the investor's ownership percentage) that sometimes it's easier to just put it off. Convertible notes allow investors to make an investment as a loan, usually at the seed stage. But instead of paying the investor back in cash, the amount is converted (hence the name) into equity once it's easier to determine the company's value, usually at a series A round.
Remember, this is debt, so it will likely carry interest. That should be part of the note's terms, as well as the discount rate, the maturity date, and the valuation cap.
DAU / MAU 📲
Daily/Monthly Active Users is an important piece of data to learn about your user base's engagement. If you are trying to start the next Facebook you will want to know how “popular” your app is with your target audience. Does it keep people wanting to come back for more?
If you want to measure continued engagement, aka "stickiness" of your platform, the DAU:MAU ratio is also a valid metric. When DAU and MAU are combined, they tell the story of your growing customer base alongside your ability to engage users more frequently. The closer to 100%, the better.
ESOP stands for Employee Stock Ownership Plan, that pool of shares you set aside right away to early hires. If your team has stock options, interests and incentives are more aligned. Plus it's something investors will ask you to do AND it's a good way to compensate for potentially lower salaries in the beginning if you are strapped for cash. When your team members have a share in the action, they will have more skin in the game, i.e. aligned incentives to help make the company succeed.
“Limited Partners” aka “Silent Partners” are investors, often in VC funds, that have ownership in the companies those funds invest in. The “Limited” part of their name refers to their ownership and obligations, most importantly that they cannot assume no more of the company's debt than what they invested into the company.
LTV or Lifetime Value refers to how much value a customer brings to your company while they stay a customer. A high LTV likely means you have good retention rates and clients keep generating revenue for the company.
LTV:CAC is a ratio that seeks to understand the long-term profitability of your company, and helps answer an important question: are you spending more on finding customers than you are earning from those customers in the long run? If your answer is YES, then you have work to do.
A good rule of thumb is to have a LTV:CAC ratio of 3 or above. Calculating it is no picnic, but it can be done.
Member Get Member is a strategy that relies on customers to recruit new customers – sometimes through small incentives, other times just relying on the concepts of scarcity, exclusivity or FOMO (fear of missing out). Remember when you were looking for an invite to Clubhouse?
NDA stands for Non-Disclosure Agreement, that thing you ask investors to sign when you have no trust on your idea and you want to tell them it can be easily copied if shared (seriously, don't ask them to sign an NDA).
If you like filling out surveys, then this one is right up your alley. The Net Promoter Score is a single survey question used to understand customer satisfaction: "On a scale of 0 to 10, how likely are you to recommend this product to a friend?" Odds are you have been prompted to answer this question before.
NPS has a specific methodology behind it, so make sure you calculate your results right. A strong NPS score means your product is well received AND positively talked about, keep going!
PMF is the famous Product-Market Fit: the idea that your product’s success depends on its “fit” into the market it's addressing. Your product must meet the needs and desires of consumers, or else it will not take off. The unofficial holy grail of the startup world, everyone is trying to "find" it.
Post-money valuation 👉
As the name suggests, a post-money valuation is the resulting value of a company after money is invested. If the post-money valuation of a company is $10 million and the investor is putting in $2 million, the math is simple: you’re selling 20% of the company.
Pre-money valuation 👈
A pre-money valuation is how much a company is valued at before a new investment is in. The idea here is that after a company completes said round, its valuation will increase in comparison, since they received capital from investors. To use the same example we used in "post-money," if the post-money valuation of a company is $10 million and the investor is putting in $2 million, then the pre-money valuation is actually $8 million.
When an investor comes to you and says they’ll invest $2 million at a $10 million valuation, there can be a massive difference in value (and dilution) depending on whether they mean pre- or post-money. If they mean $10 million pre, the post-money valuation is $12 million. Otherwise, the pre-money valuation is actually only $8 million.
Needless to say, there’s a big difference between $2 million being invested at $8 million pre-money or $10 million pre-money. That’s 5% of your company you’re talking about!
Rolling fund 🌀
Like Netflix, a rolling fund requires that investors subscribe to the fund to get access to deals. Unlike Netflix, on rolling funds you only have access to deals closed while you're subscribed – so not every "show" in the "catalog." Rolling funds don't ever have to stop fundraising (or deploying capital, as long as it's available), so it works in a more flexible model compared to traditional VC funds.
Check out the Latitud Fund, Latin America's first rolling fund.
Rome was not built in a day, and odds are your company will take a while to generate significant returns to shareholders – including the ultimate investors, the founders. For some, that can sometimes be too long. Secondaries allow for shareholders to sell part of their personal shares early, before a liquidity event. So along with an M&A and an IPO, it's considered "the third type of exit."
While some investors may not be too fond of the idea, most will understand if a founder takes cash off the table for some personal financial comfort (and is transparent about it).
Similar to a convertible note, a SAFE – or Simple Agreement for Future Equity – is a document that promises early investors future equity in a company. Unlike a convertible note, SAFEs are not a form of debt and have no interest or maturity rate. But they may have a discount rate, a valuation cap and/or other clauses that may also be found in a convertible note.
SAFEs are usually simpler and shorter than most convertible notes, although they require attention so that founders don't get overly diluted nor investors get "underconverted."
Here are YC's SAFE templates (they started all of this!)
Special Purpose Vehicles allow investors to pool their money into an entity created solely to invest in ONE company. So the "vehicle" is generally a temporary company, a "pass-through" LLC. The "special purpose" can be, for example:
- A syndicate of angel investors wants to make a more substantial investment and appear as one entry in the company's cap table. With an SPV, an angel can contribute as low as a couple thousand dollars, whereas the minimum for a single investor would be much higher otherwise.
- A fund wants to make a follow-on investment, but there's no money left to deploy.
- The thesis of a specific fund doesn't match an opportunity that came along, so the fund doesn't want to deviate from that their limited partners were sold on, but also don't want to miss that unique deal.
Unit Economics 🔮
Unit Economics allows you to quantify the sustainability and profitability of your company in the long term. Analyzing some key metrics per unit and asking yourself some guiding questions will help you understand what parts of your business model are working and not working.
Learn more about it in this podcast with Mariana Donangelo, Partner at Kaszek.
Valuation Cap 🧢
The valuation cap is an important part of SAFEs and convertible notes, limiting the price at which a note will convert into equity. It serves as a reward to investors for taking the risk earlier on: if a priced round is raised at a valuation that exceeds the cap, investors are guaranteed to have paid less per share than a later investor would. See an example of how that works here.
YoY / QoQ / MoM / WoW 📊
This one is a bit of a tongue twister. YoY/QoQ/MoM/WoW or Year/Quarter/Month/Week over Year/Quarter/Month/Week is a term for when you compare any of your company's metrics over time. For example, if you had 10 users in January and 20 in February, you had 100% user growth MoM.
There's more where that came from
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