Plain-language definitions of 75 core terms used in venture capital and private investing, with sources noted for each.
Educational reference only. Nothing here is investment, legal, or tax advice, an offer to sell or a solicitation to buy any security, or a description of services offered. Regulatory figures reflect U.S. rules and can change; confirm current requirements with primary sources before relying on them.
A person or institution the SEC permits to buy securities that are not registered for public sale, on the theory that they can bear the risk. Individuals qualify by income (more than $200,000 alone, or $300,000 with a spouse, in each of the last two years) or by net worth above $1 million excluding a primary residence. Since 2020, certain professional credentials also qualify, including the Series 7, Series 65, and Series 82 licenses. Most entities qualify with more than $5 million in assets or if every owner is accredited.Source: U.S. SEC, Rule 501(a) of Regulation D
Equity granted to an advisor in exchange for guidance rather than cash or full-time work. The amounts are small, usually a fraction of a percent, and almost always vest over time so the advisor earns them through continued involvement.Source: Standard venture term-sheet convention
An individual who invests personal money into a startup at an early stage, often before institutional funds participate. Angels write smaller checks than venture firms and frequently invest in the founder as much as the business.Source: Standard venture convention
A clause that protects earlier preferred investors if the company later sells shares at a lower price. It adjusts the rate at which their preferred stock converts to common, giving them more shares to offset the drop. The two common forms are broad-based weighted average, which is founder-friendlier, and full ratchet, which is more severe.Source: NVCA Model Legal Documents
The total value of capital a firm manages on behalf of its investors. For a venture fund this includes committed capital plus the current value of its holdings. AUM is a common shorthand for a firm's size.Source: Industry convention
A person granted the right to attend board meetings and receive board materials but without a vote. Investors often take observer rights when they want visibility into a company without the legal duties of a full director.Source: NVCA Model Legal Documents
A voting position on a company's board of directors, frequently negotiated by a lead investor as a condition of funding. The director helps oversee strategy, executive hiring, and major decisions, and owes legal duties to the company and all shareholders.Source: NVCA Model Legal Documents
A short-term financing meant to carry a company from one priced round to the next, or to an exit. Bridges are often structured as convertible notes or SAFEs and are used when a company needs cash before it is ready to set a new valuation.Source: Standard venture convention
The pace at which a company spends cash beyond what it earns, usually stated per month. Gross burn is total monthly spending. Net burn subtracts revenue. Burn rate paired with cash on hand determines runway.Source: Standard finance convention
A record of who owns what in a company. It lists every shareholder, the type and number of shares held, options and warrants outstanding, and each holder's ownership percentage. A clean cap table is essential to financings and exits.Source: Standard venture convention
A request from a fund's general partner asking limited partners to send in a portion of the money they previously committed. Funds draw capital in stages as they make investments rather than collecting it all upfront. Also called a drawdown.Source: ILPA / limited partnership agreement convention
The share of a fund's investment profits paid to the general partner as the performance component of its compensation. Carry is commonly 20 percent of gains and typically applies only after limited partners receive their capital back, sometimes plus a preferred return.Source: ILPA / fund partnership convention
A provision requiring a general partner to return excess carried interest if, by the end of a fund's life, it was paid more profit than the fund's overall results justify. It protects limited partners when early winners are followed by later losses.Source: ILPA / limited partnership agreement convention
A period at the start of a vesting schedule during which no equity is earned. If the person leaves before the cliff, they keep nothing. Once they pass it, a block vests at once and the rest accrues over time. A one-year cliff on a four-year schedule is standard.Source: Standard venture term-sheet convention
The point at which a financing becomes binding and funds change hands. A round may have a first close and later closes. A fund may hold an initial close and continue raising until a final close.Source: Standard venture convention
An investment a limited partner or outside party makes directly into a company alongside a fund, on top of its commitment to that fund. Co-investments let investors add exposure to specific deals, often with lower or no fees.Source: ILPA / industry convention
Basic ownership shares in a company, usually held by founders and employees. Common stock ranks behind preferred stock when proceeds are distributed in a sale or liquidation, so it is paid only after preferred claims are satisfied.Source: Standard corporate convention
A short-term loan that converts into equity rather than being repaid in cash, usually at the company's next priced round. It carries interest and a maturity date, and typically includes a discount and a valuation cap that reward the investor for entering early.Source: Standard venture term-sheet convention
A dividend on preferred stock that accrues over time whether or not it is paid, building a balance the company must clear before common holders receive anything. In venture deals these dividends are often paid out at exit rather than annually.Source: NVCA Model Legal Documents
The reduction in an existing holder's ownership percentage when a company issues new shares. Raising capital, expanding the option pool, and converting notes all dilute prior owners, even when the value of their stake may rise.Source: Standard corporate convention
The agreed order in which a fund's proceeds are split between limited partners and the general partner. A typical sequence returns contributed capital first, then a preferred return, then carried interest to the general partner, often with a catch-up step.Source: ILPA / limited partnership agreement convention
A financing in which a company sells shares at a lower price per share than in its previous round. Down rounds dilute existing holders more heavily and can trigger anti-dilution adjustments for earlier preferred investors.Source: Standard venture convention
A measure of how much cash a fund has actually returned to investors relative to what they paid in. A DPI of 1.0 means investors have gotten their money back. It counts only realized distributions, not paper value.Source: ILPA Reporting Standards
A clause that lets a defined majority of shareholders force the remaining holders to join a sale of the company on the same terms. It prevents small holders from blocking a deal the majority and board support.Source: NVCA Model Legal Documents
Committed capital a fund has raised but not yet invested, available to deploy into new deals or to support existing portfolio companies. Large dry powder gives a firm flexibility, while idle dry powder weighs on returns.Source: Industry convention
The independent investigation an investor conducts before committing capital, covering the team, technology, market, financials, legal standing, and risks. The depth of diligence scales with check size and stage.Source: Standard investment convention
Raising money by selling ownership stakes in the company rather than borrowing. Investors receive shares and the upside that comes with them, and the company takes on no obligation to repay.Source: Standard corporate convention
An event that lets investors and founders convert their ownership into cash or liquid securities, most often an acquisition or an initial public offering. The exit is where venture returns are ultimately realized.Source: Standard venture convention
A privately held firm that manages the capital, investments, and affairs of a single family. A single-family office serves one family exclusively and invests its own capital rather than pooling money from outside investors.Source: Industry convention
Additional capital a fund puts into a company it has already backed, usually in a later round. Reserving money for follow-ons lets investors maintain ownership and support their strongest companies.Source: Standard venture convention
A brief notice an issuer files with the SEC after selling securities in an exempt offering under Regulation D. It is a notice of an exemption, not a registration or an approval, and discloses basic facts about the offering and the company.Source: U.S. SEC, Regulation D
A way of counting shares that includes everything convertible into stock, such as outstanding options, warrants, and the unissued option pool, not just shares already issued. Ownership percentages in term sheets are usually calculated on a fully diluted basis.Source: Standard venture convention
An investment vehicle that puts its capital into other funds rather than directly into companies. It gives investors diversified exposure across many managers, at the cost of an added layer of fees.Source: Industry convention
The party that manages a venture fund: sourcing deals, making investment decisions, supporting companies, and returning capital. The GP contributes a small share of the fund's capital and earns a management fee plus carried interest.Source: ILPA / fund partnership convention
Public advertising or marketing of a securities offering. Traditional private placements under Rule 506(b) prohibit it, while Rule 506(c) permits it provided every purchaser is verified as an accredited investor.Source: U.S. SEC, Regulation D
The annualized rate of return an investment or fund generates, accounting for the timing of cash in and out. Because it weights timing, earlier distributions raise IRR even when the total multiple is unchanged.Source: ILPA Reporting Standards
The typical shape of a venture fund's returns over time. Early years show losses from fees and young investments before value and distributions arrive later, tracing a dip then a rise that resembles the letter J.Source: Industry convention
The investor who anchors a financing round, usually negotiating the term sheet, setting the price, and often taking a board seat. Other investors frequently follow the lead's terms and diligence.Source: Standard venture convention
An investor who commits capital to a fund but does not run it. LPs include pensions, endowments, foundations, family offices, and individuals. Their liability is limited to the amount they commit.Source: ILPA / fund partnership convention
The right of preferred shareholders to be paid before common holders when a company is sold or wound down. A 1x preference returns the original investment first. The multiple and whether it is participating determine how proceeds are split.Source: NVCA Model Legal Documents
A window after an IPO during which insiders and early investors are barred from selling their shares, commonly 180 days. It limits a flood of sales that could depress the new public price.Source: Standard securities convention
An annual fee the general partner charges to operate the fund, commonly around 2 percent of committed capital. It funds salaries and operations and is separate from carried interest, which is performance-based.Source: ILPA / fund partnership convention
A simple measure of how many times an investment has grown, found by dividing total value by the amount invested. A 3x MOIC means the position is worth three times what was put in. Unlike IRR, it ignores timing.Source: Industry convention
Shares set aside to grant to employees, advisors, and future hires as equity compensation. Investors usually require the pool to be created or expanded before their round, so the dilution falls on existing holders.Source: Standard venture term-sheet convention
A Latin term meaning on equal footing. When preferred series rank pari passu, they share proceeds at the same priority rather than one being paid ahead of another.Source: NVCA Model Legal Documents
Preferred stock that takes its liquidation preference first and then also shares in the remaining proceeds alongside common stock, as if it had converted. This double dip raises the investor's payout, especially in modest exits. Non-participating preferred must choose one or the other.Source: NVCA Model Legal Documents
A provision that penalizes existing investors who decline to participate in a future round, typically by converting their preferred stock to common or stripping certain rights. It pressures insiders to keep supporting the company.Source: NVCA Model Legal Documents
A company's value immediately after a new investment, equal to the pre-money valuation plus the new money raised. An investor's ownership is the amount invested divided by the post-money valuation.Source: Standard venture convention
A company's agreed value before a new round of investment. It sets the price per share and, together with the amount raised, determines how much of the company new investors receive.Source: Standard venture convention
The class of stock venture investors typically receive, carrying rights senior to common stock such as liquidation preference, anti-dilution protection, and certain voting controls. It is the standard instrument in priced venture rounds.Source: NVCA Model Legal Documents
The right of an existing investor to buy enough of a future round to keep its ownership percentage from shrinking. These rights let early backers defend their stake as the company raises more capital.Source: NVCA Model Legal Documents
Veto rights that let preferred shareholders approve or block specified major actions, such as selling the company, raising new senior stock, changing the charter, or taking on large debt. They give investors a check on decisions that affect their position.Source: NVCA Model Legal Documents
A strong form of anti-dilution protection. A full ratchet reprices earlier shares as if they had been bought at the lower price of a later down round, regardless of how few new shares were sold, which is harsher than weighted-average methods.Source: NVCA Model Legal Documents
A restructuring of a company's ownership and capital, often involving a reset of the cap table. In distressed situations a recap can heavily dilute existing holders to bring in new money on revised terms.Source: Standard corporate convention
A right that allows preferred investors to require the company to buy back their shares after a set period, usually at the original price plus accrued dividends. It offers a path to liquidity when no exit has occurred, though it is rarely exercised.Source: NVCA Model Legal Documents
Contractual rights that let investors compel a company to register their shares for public sale, making them tradable. Demand rights initiate a registration. Piggyback rights let holders join one the company is already pursuing.Source: NVCA Model Legal Documents
An SEC exemption that lets companies raise capital from the general public, including non-accredited investors, with lighter requirements than a full IPO. Tier 1 permits up to $20 million in a 12-month period and Tier 2 up to $75 million, with Tier 2 adding ongoing reporting.Source: U.S. SEC, Regulation A
An SEC framework that allows companies to raise up to $5 million in a 12-month period from the general public through a registered online portal or broker-dealer. Issuers file a Form C, and the rules cap how much smaller investors may put in.Source: U.S. SEC, Regulation Crowdfunding
A set of SEC rules that exempt private securities offerings from full registration, the framework most venture financings rely on. Its principal safe harbors are Rule 506(b) and Rule 506(c), and issuers file a Form D after selling.Source: U.S. SEC, Regulation D
A right that requires a shareholder who wishes to sell stock to first offer it to the company or existing investors on the same terms. It lets insiders control who joins the cap table.Source: NVCA Model Legal Documents
The most common Regulation D exemption. It allows a company to raise an unlimited amount from accredited investors and up to 35 non-accredited but sophisticated investors, provided there is no general solicitation or advertising.Source: U.S. SEC, Regulation D
A Regulation D exemption that permits public advertising of a private offering, on the condition that every purchaser is an accredited investor and the issuer takes reasonable steps to verify that status.Source: U.S. SEC, Regulation D
How long a company can operate before it runs out of cash, found by dividing cash on hand by net monthly burn. Runway is usually stated in months and signals when the next financing must close.Source: Standard finance convention
A financing instrument that gives an investor the right to shares in a future priced round, without interest or a maturity date. Introduced by Y Combinator, a SAFE is not debt. It usually carries a valuation cap, a discount, or both.Source: Y Combinator, originator of the SAFE
An early financing that funds a company's first real work, such as building a product, hiring a small team, and finding initial customers. Seed capital comes from angels, seed funds, and early-stage venture firms, typically before a Series A.Source: Standard venture convention
Successive priced rounds of venture financing, each named in sequence. Series A typically funds a proven early model, Series B funds scaling, and Series C and beyond fund expansion or a path toward exit. Each round sets a new valuation and issues a new class of preferred.Source: Standard venture convention
A single-deal entity formed to pool investors into one investment, commonly used to back a specific company. Investors hold a stake in the SPV, and the SPV holds the shares, keeping the company's cap table simple.Source: Industry convention
A group of investors that joins to fund the same round, usually organized by a lead. Syndication spreads risk, brings varied expertise, and lets a deal raise more than any single investor would commit.Source: Standard venture convention
Also called co-sale, a right that lets minority shareholders join a sale by a major holder and sell their shares on the same terms. It protects smaller holders from being left behind when insiders cash out.Source: NVCA Model Legal Documents
A non-binding document that lays out the principal terms of a proposed investment, including valuation, the amount raised, the type of security, and key rights. It guides the binding legal agreements that follow.Source: NVCA Model Legal Documents
A measure of a fund's total value, both cash already returned and the current value of what it still holds, relative to capital paid in. TVPI equals DPI plus RVPI and captures realized and unrealized performance together.Source: ILPA Reporting Standards
A ceiling on the price at which a convertible note or SAFE converts into equity. If the next round prices the company above the cap, the early investor still converts at the lower capped value, rewarding the early risk.Source: Standard venture term-sheet convention
Money invested in private, high-growth companies in exchange for equity, usually pooled from limited partners into a fund managed by a general partner. Venture capital accepts a high failure rate in pursuit of outsized returns from a few winners.Source: Industry convention
The process by which a person earns equity over time or by meeting milestones, rather than receiving it all at once. Time-based vesting over four years with a one-year cliff is the common standard for founders and employees.Source: Standard venture term-sheet convention
A contract giving the holder the right to buy shares at a set price within a set period. Warrants are sometimes attached to venture debt or bridge financings as added compensation to the investor.Source: Standard finance convention