A startup founder is a person who has launched a new business or enterprise. Startup founders are typically self-employed. The term “startup founder” also refers to an entrepreneur who started a startup and continues to run it. The role of the founder is different for each startup, but most successful startups require specific skills, either in technology or business development.
To run such startups, the founders have to find a way to raise capital.
Startup founders can raise capital through a variety of methods. Some founders seek venture capital, which is money that is invested in early rounds of company financing. Venture capitalists typically provide startup companies with larger amounts of money than angel investors do, and the risk for the investors is greater because they are putting money into potentially high-growth companies.
Other startups get funded by crowdfunding platforms such as Kickstarter or Indiegogo. These platforms allow individuals to donate small amounts of money to projects they believe in, and startups will often use these sites to raise funds for their products or services.
Some startups choose to bootstrap their businesses by developing their products or services on a low budget and selling them at a price below their expected revenue. This strategy can be successful if it allows them to build up enough revenue to attract venture capitalists who are interested in investing in high-growth startups that have a good chance of becoming successful firms over time.
In this article we focus on 10 terms that every startup founder looking to raise capital must understand.
- Seed round or Seed stage: Seed money, sometimes known as seed funding or seed capital, is a form of securities offering in which an investor invests capital in a startup company in exchange for an equity stake or convertible note stake in the company.
- Valuation: Startup valuation is the process of calculating the value of a startup company. Startup valuation methods are particularly important because they are typically applied to startup companies that are currently at a pre-revenue stage. This is further broken intwo pre-money & post-money valuation. Pre-Money Valuation: The value of a company’s equity before raising a round of financing. Post-Money Valuation: The value of a company’s equity once the round of financing has occurred.
- Venture capitalist (VC): A venture capitalist (VC) is a private equity investor that provides capital to companies with high growth potential in exchange for an equity stake. This could be funding startup ventures or supporting small companies that wish to expand but do not have access to equities markets.
- Vesting: Vesting is the process of accruing a full right that cannot be taken away by a third party. In the context of the founders’ equity, a startup initially grants a package of stock to each founder. In startups, vesting happens over a period of 4 years & it applies to the founders and early employees of the startup. It is common to see a four-year vesting schedule tied to stock options with a one-year cliff. This simply means an employee needs to stay for a minimum of one year to earn any shares, and will have fully vested shares after four years of service.
- Acqui-hired: A company being bought out primarily for the skills and expertise of its staff, rather than for its products or services.
- Angel investor: An angel investor is an individual who provides capital for a business or businesses start-up, usually in exchange for convertible debt or ownership equity. Angel investors usually give support to start-ups at the initial moments and when most investors are not prepared to back them.
- Burn Rate: The burn rate is the pace at which a new company is running through its startup capital ahead of it generating any positive cash flow. The burn rate is typically calculated in terms of the amount of cash the company is spending per month.
- Convertible note: A convertible note is a way for seed investors to invest in a startup that isn’t ready for valuation. They start as short-term debt and are converted into equity in the issuing company. Investors loan money to the startup and are repaid with equity in the company rather than principal and interest.
- Exit strategy: A business exit strategy is an entrepreneur’s strategic plan to sell their ownership in a company to investors or another company. An exit strategy gives a business owner a way to reduce or liquidate their stake in a business and, if the business is successful, make a substantial profit.
- Pivot: A startup pivot, or business pivot, occurs occurs when a company shifts its business strategy to accommodate changes in its industry, customer preferences, or any other factor that impacts its bottom line.
Feel free to comment below with some other necessary terms that startup founders must look out for.