Bread and Butter Ventures VC Vernacular Glossary
In January 2022 we started a series on our Twitter account called #VCVernacular, where each week we define (in our own words) a term commonly used in the world of venture capital. We’ve gathered all of the terms here to be a living, updateable glossary for those interested in learning more about VC and raising money.
Full list in alphabetical order below with links to their definitions:
Annual recurring revenue (ARR)
Distributions to paid-in capital (DPI)
Key performance indicator (KPI)
Limited partner advisory committee (LPAC)
#VCVernacular
506(c) / 506(b) — Both of these are in relation to accreditation requirements. When raising under 506(b), the fundraiser can take the investors' word of accreditation. Under 506(C), the fundraiser must take steps to verify the accreditation.
Ac•cel•er•a•tor — A program designed to help early stage startups increase their chance of success. An accelerator takes equity in a company in exchange for investment, mentorship and access to their network. The two most well known accelerators are Techstars and Y Combinator.
An•nu•al re•cur•ring rev•e•nue (ARR) — A common KPI for SaaS startups. It is a number that demonstrates the total annual recurring contract value of a client or the combination of all clients. This number does not include any one time revenue (such as setup, consulting, etc).
Bridge round — An interim fundraise that occurs between two major fundraising rounds to “bridge” the gap and extend the company’s runway so they have the ability to execute and achieve milestones needed to successfully raise their next round.
Busi•ness mod•el — How a company makes money. More specifically, it is the strategy around how a company intends to generate revenue and gain profitability over time. There are many popular business models for tech companies including: software-as-a-service (SaaS) subscription, fee-for-service, free and ad-supported, freemium, and more.
Burn rate — How much cash is used to run a business. This rate is typically reported on a monthly basis. It’s a crucial metric to track to understand how much runway someone has. For example, if someone has $100k in the bank and they burn $10k every month, they have 10 months of runway left.
Churn — The percentage of customers you lose over a given period of time. It is an important metric for SaaS companies in particular and can be measured viz customer (logo) churn or revenue churn.
Co•hort a•nal•y•sis — The process of tracking analytics where users are clustered into related groups, or cohorts, before analyzing that data, a cohort is a user group that shares a common experience or characteristic (such as having similar behaviors and backgrounds or using the product in the same way).
Con•vert•i•ble & SAFE notes — Two common investment vehicles that investors use to invest in startups. These vehicles typically convert to “equity” or ownership in the startup at a later date at a pre-agreed upon valuation “cap” or “discount”. These are both more simple and less expensive alternatives to a traditional equity investment.
Crowd•fund•ing — A path entrepreneurs can use to source financing for their startup. It typically occurs when a startup raises small amounts of money from a large number of people or a “crowd” rather than one large check from a venture fund.
De•ploy•ment per•ri•od — The period of time a venture fund has to make new investments.
Di•lu•tion — The decrease in equity ownership by current shareholders each time new shares are issued. Occurs when startups raise a new round of funding or when they create an option pool for employee grants.
Dis•tri•bu•tions to paid-in cap•i•tal (DPI) — Until money is in the bank don’t count it! DPI is a ratio that shows how much cash a venture fund has returned to its investors relative to the amount of cash they have used. Because early stage venture funds typically have long wait times until exit DPI can be 0 for years!
Down round — Occurs when someone raises a subsequent round of venture capital at a valuation that was lower than the valuation of their prior fundraise.
Drag-a•long rights — These require all shareholders to follow the decision made by the controlling parties of a startup. For example, if 50% of Preferred share owners are required to accept an acquisition offer and 51% of Preferred vote yes, the remaining 49% are “dragged along” into that decision.
Due dil•i•gence — The process of evaluating a startup for a venture capital investment. This can include everything from meetings with the founders and team, market research, customer discovery calls, reference and background checks, consulting subject matter experts, analysis of the competitive landscape and more.
El•e•va•tor pitch — A concise overview of a company that quickly explains what pain point one is solving and how they are solving it. The goal of an elevator pitch is to drive questions, offers for help or a follow up meeting.
Ex•it — When a founder successfully sells their company, they gain an exit. An entrepreneur with “multiple exits” has started and sold several companies.
Gen•er•al part•ner (GP) com•mit — How much money the partners invest in their own fund. Limited Partners (LPs) often expect the GPs to have “skin in the game” by investing their own money into the fund they are raising.
In•i•tial pub•lic of•fer•ing (IPO) — This happens when a privately held company sells shares of stock to the public, shifting the company’s ownership from being privately owned to publicly owned. This is commonly referred to as a company “going public”. After an IPO, shares of the company are publicly traded on the market.
In•ter•nal rate of re•turn (IRR) — A common measurement of a venture fund’s performance. It accounts for total dollars returned and the time value of money. The higher the IRR the better!
In•vest•ment mem•o — An internal document investors use to outline their rationale for investing in a startup. These memos typically include an overview of the company, the key deal terms, and more detail specific to the firm’s investment criteria.
K-1 — An IRS tax form that helps investors calculate their tax liability when they file taxes. K-1s summarize gains, losses, interest, dividends, and distributions from a business or entity from the previous tax year. At venture funds, K-1s are prepared for both the general partners and limited partners.
Key per•for•mance in•di•ca•tor (KPI) — A metric that should be an early indicator of how a startup is performing against their goals and objectives. The best KPIs are predictive, change on a regular basis and are aligned with OKRs or other company goals.
Lead in•vest•tor — The VC firm or entity who is taking the lead role on a round of funding. This investor typically works with the company to agree upon set terms including round size, valuation, and the composition of the board of directors. This investor takes the lead in representing the preferred investors in negotiating the deal documents.
Let•ter of in•tent (LOI) — A document that outlines the terms of a business agreement that two or more parties use to finalize via a legally binding contract. For VC-backed startups, LOIs are often used as a mechanism to outline terms of an acquisition or a commercial partnership between the company and a third party.
Lim•it•ed part•ner ad•vi•so•ry com•mit•tee (LPAC) — Advises a venture fund’s General Partners during the life of the fund. The committee can serve as a strategic sounding board, address any conflict of interest, and provide market insight and guidance based on the group’s collective investment experience.
Lim•it•ed part•ner — An individual or organization that invests capital into a venture fund. They can range from large institutions like foundations, pension funds, university endowments, to family offices, corporations, and individual investors.
Liq•ui•da•tion pref•er•ence — The payout order in the event that a company liquidates (could be in either a positive exit scenario or a shutdown scenario). Typically, preferred stockholders are paid back first, then debt-holders. The two most common preferences are non-participating preferred and participating preferred (look closely for this on a term sheet).
Min•i•mum vi•a•ble prod•uct (MVP) — The earliest version of a product with just enough functionality and feature set to be used by early adopters and customers to gain quick feedback for future iterations.
Op•tion pool — A vehicle that sets aside a specific amount of shares that can be issued to anyone. These shares are typically issued to new hires as a part of their compensation package.
Pay-to-play — Play to Play provisions require investors to continue to invest in subsequent rounds in order to maintain certain rights. For example, if an investor decides not to invest in a new round, they may forfeit their future pro-rata rights.
Pitch deck — The most common tool used when pitching a startup to investors. Typically built in slide format, it covers the most important elements of your startup and startup’s progress.
Piv•ot — Occurs when a startup changes their core product offering. You can do 180 degree pivots and change your idea completely or make smaller pivots. A pivot occurs when a company’s hypothesis changes.
Port•fo•li•o com•pa•ny — A term VCs use to refer to the companies their fund is invested in who are within their portfolio.
Pre & post mo•ney — Both of these terms are in reference to the valuation of a company during a fundraising period, best understood through the following example: We are raising $500k at a $5M valuation. If the $5M is pre-money, the equity we are giving up is ($500l/$5.5M) or ~9%. If the $5M is post-money, the given up equity is ($500k/$5M) or ~10%. It is very important to be clear on which type when talking valuation with investors.
Priced round — A direct equity investment into a company. When an investor invests in this type of round, there is a price per share and an agreed upon valuation of the company. The investors in this type of round immediately become owners of the company and are placed on the cap table.
Prod•uct-mar•ket fit — When a founder or founding team has demonstrated that their product is at a point where it is actually solving a real pain point for their customer. When this happens, one sees more predictable sales cycles and use patterns.
Pro for•ma cap ta•ble — A spreadsheet that shows the capitalization of a company at present as well as what it will look like after an upcoming round of financing. It summarizes the ownership percentages of a company’s equity ownership including common shares, preferred shares, and convertible debt notes and is used to calculate the value of these holdings and dilution over time.
Qual•i•fied pur•chas•er — An investor with an investable net worth of $5M or more.
Ratch•et — An anti-dilution provision that protects investors in a down-round. As a company’s valuation decreases, to preserve an investor’s value, their ownership percentage must increase.
Re•turn on in•vest•ment (ROI) — Refers to a measurement of a VC fund’s performance, the venture rate of return, or how much capital VC investors are returning to their limited partners. One might hear this term be used to quantify the impact a startup is having for its user/customer.
Run rate — A method of forecasting that allows you to estimate future financial performance using data from recent earnings. This is typically calculated by taking a revenue number from last month and multiplying it by 12 to find the annual run rate. For example, if you did $12k in revenue last month, you are operating at a $144k annual run rate.
Run•way — The amount of money a company has prior to running out of cash; typically represented in the number of months remaining (e.g., 12 months of runway).
Scal•a•bil•i•ty — How big your company can be! A good question to ask is: Are there marketing or sales channels where you can spend money to profitably accelerate the growth of your business?
Soft•ware as serv•ice (SaaS) — A method of selling software as a monthly subscription. SaaS changed the historical business model of building and selling software as a 1-time fee.
Stage — A term used to identify how much funding a startup has raised. Examples of stages are Pre-Seed, Seed, Series A and so on. There are no formal demarcations for each stage.
Tar•get mar•ket — A summary of individuals that one is looking to work with, serve, or sell a product to. A related term often used here is total addressable market (TAM) which describes the total revenue opportunity of a category you are going after or target audience.
Term sheet — A document that outlines an agreement between a lead investor and a startup that contains key terms of a round of financing. This sheet covers key provisions including round size, valuation, board composition, voting rights, rights for preferred investors, key conditions to close, and more.
To•tal val•ue to paid-in cap•i•tal (TVPI) — A metric commonly used to demonstrate how well a venture fund is performing. It takes the total realized and unrealized value of all of the fund’s investments and divides it by the total called capital, not committed capital. This provides a multiple that shows how the fund is performing vs the amount of cash it has actually used, the higher the better.
U•ni•corn — A startup with a valuation of $1B or more. This term was coined by @aileenlee and there are over 800 unicorns globally today.
Val•u•a•tion — The value of a company; what the company is worth. This term is most commonly used when one is raising capital or selling a company.
Ven•ture cap•i•tal•ist — A private market investor who invests a pool of money (capital) typically raised from individual and institutional investors into high growth startups with a goal of generating outsized financial return on investment.
