Startup finance glossary

91 terms that appear in term sheets, cap tables, board decks and on the Garage to IPO dashboard, defined in plain English. Where a concept needs more than a sentence, each entry links to the guide that works through it with numbers.

Want the longer explanations instead? Read the startup finance guides.

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83(b) election: A tax filing made within 30 days of receiving restricted stock, electing to be taxed on its value at grant rather than as it vests. Usually cheap at grant and expensive to forget. Read the guide.

A

Accelerator: A fixed-term programme that provides a small amount of capital, mentorship and a demo day in exchange for equity, typically 5-10%.
Accrued liability: An expense the company has incurred but not yet paid, such as unpaid salaries at month end. It appears on the balance sheet, not in the bank balance. Read the guide.
Acquihire: An acquisition made primarily to hire the team rather than to buy the product or revenue. Payouts to common shareholders are usually small.
Angel investor: An individual investing personal money at an early stage, typically writing cheques between $10,000 and $250,000.
Annual recurring revenue (ARR): Contracted subscription revenue expressed as a yearly figure. The headline metric for most software companies and the base most valuation multiples are applied to. Read the guide.
Anti-dilution: A provision that adjusts an investor's conversion price downward if the company later issues shares at a lower price. Broad-based weighted average is standard; full ratchet is aggressive. Read the guide.
ARR: Annual recurring revenue. Current monthly recurring revenue multiplied by twelve. The base number most software valuations are calculated from. Read the guide.

B

Balance sheet: A snapshot at one moment of what a company owns, what it owes, and the difference. Assets always equal liabilities plus equity. Read the guide.
Board of directors: The body that hires and fires the chief executive and approves major transactions. Composition, not ownership, determines control. Read the guide.
Bookings: The total contracted value of deals signed in a period. Distinct from billings (invoices issued) and revenue (service delivered). Read the guide.
Bootstrapping: Funding growth from customer revenue and founder savings rather than outside investment. Read the guide.
Bridge round: A short financing intended to carry a company to a specific milestone or a larger round, usually from existing investors. Read the guide.
Bridge round: A short financing, usually convertible notes or SAFEs, intended to carry a company to a larger priced round or to profitability. Read the guide.
Burn multiple: Net burn divided by net new annual recurring revenue added in the same period. Below 1.5 is efficient; above 3 usually means growth is being bought. Read the guide.
Burn rate: Cash leaving the business each month. Gross burn is total spending; net burn subtracts revenue received. Read the guide.

C

CAC: Customer acquisition cost. Total sales and marketing spend divided by new customers acquired, including salaries and tooling. Read the guide.
Cap table: The record of every shareholder, instrument and share class in a company, and the ownership percentages that result. Read the guide.
Carry: Carried interest — the share of fund profits, typically 20%, that venture partners keep after returning capital to their own investors. Read the guide.
Churn: The rate at which customers or revenue leave in a period. The single largest driver of lifetime value. Read the guide.
Churn: The rate at which customers or revenue leave over a period. Compounds every month, which makes it the single most powerful driver in a recurring-revenue model. Read the guide.
Cliff: The period, usually one year, before any equity vests. Leaving before the cliff means leaving with nothing. Read the guide.
Cohort analysis: Grouping customers by when they joined and tracking each group separately, so that changes in retention are visible instead of hidden inside aggregate growth. Read the guide.
Common stock: The share class held by founders and employees. Paid last in an exit, after every liquidation preference. Read the guide.
Contribution margin: Revenue minus the variable costs of serving that revenue. What is left to cover fixed costs and, eventually, profit. Read the guide.
Convertible note: Debt that converts into equity at a future priced round, usually with a valuation cap, a discount, interest and a maturity date. Read the guide.
Cost of revenue: The direct cost of delivering the product: hosting, payment processing, support and delivery staff. Subtracted from revenue to get gross profit. Read the guide.

D

Data room: The organised set of financial, legal and commercial documents shared with investors or acquirers during diligence. Read the guide.
Deferred revenue: Money received for services not yet delivered. A liability on the balance sheet until the service is provided. Read the guide.
Dilution: The reduction in an existing shareholder's percentage when new shares are issued. Read the guide.
Discount (convertible): A percentage reduction on the priced round's share price granted to earlier convertible holders, typically 10-25%. Read the guide.
Down round: A financing at a lower price per share than the previous round. Read the guide.
Drag-along right: A clause forcing minority shareholders to join a sale approved by a specified majority. Read the guide.
Driver-based model: A forecast built from the operational inputs that produce revenue — spend, conversion, price, churn — rather than from typed-in revenue growth rates. Read the guide.
Due diligence: The investigation an investor or acquirer performs before closing: financial, legal, technical and customer reference checks.

E

Earnout: Part of an acquisition price paid only if the acquired business hits agreed targets after closing. Frequently disputed and frequently unpaid. Read the guide.
Escrow: A portion of acquisition proceeds held back for a period to cover breaches of the seller's representations. Commonly 10-15% for 12-18 months. Read the guide.
Exit: A liquidity event — an acquisition or a public listing — in which shareholders can convert ownership into cash or tradable stock.
Expansion revenue: Additional revenue from existing customers through upgrades, seats or usage. The engine behind net revenue retention above 100%. Read the guide.

F

Founder vesting: A schedule under which founders earn their own shares over time, protecting the company if a founder leaves early. Read the guide.
Free float: The share of a public company's stock actually available for trading, excluding locked-up insider and strategic holdings. Read the guide.
Fully diluted: Ownership calculated as though every option, warrant and convertible instrument had already converted into shares. Read the guide.

G

Greenshoe option: An over-allotment option letting IPO underwriters sell additional shares, used to stabilise the price after listing. Read the guide.
Gross margin: Gross profit as a percentage of revenue. Determines how much of each sale is available to fund everything else. Read the guide.
Gross margin: Revenue minus the direct cost of delivering the product, as a percentage. Determines how much of each new dollar is available to fund growth. Read the guide.
Guidance: A public company's forecast of upcoming results. Share prices react to the gap between guidance and outcome. Read the guide.

I

Independent director: A board member who is neither a founder nor an investor, often the deciding vote on a balanced board. Read the guide.
Information rights: An investor's contractual right to regular financial statements and, sometimes, to inspect company records. Read the guide.
Investor update: The recurring written report to shareholders covering metrics, cash, wins, problems and asks. The main mechanism for keeping investors useful between rounds. Read the guide.
IPO: Initial public offering. The first sale of shares to public investors, after which the company is subject to continuous disclosure. Read the guide.

L

Letter of intent (LOI): A mostly non-binding document setting out the headline terms of an acquisition before full diligence and definitive agreements. Read the guide.
Liquidation preference: The right of preferred shareholders to be paid before common holders in an exit. One times non-participating is the market standard. Read the guide.
Lock-up period: The window after an IPO, usually 90-180 days, during which insiders cannot sell shares. Read the guide.
Lock-up period: The window after an IPO, typically 90-180 days, during which insiders may not sell shares. Read the guide.
LTV: Lifetime value. Average revenue per account times gross margin, divided by churn rate. Read the guide.

M

MRR: Monthly recurring revenue. Predictable subscription revenue in a given month, excluding one-off fees. Read the guide.

N

Net revenue retention: Revenue from an existing cohort this period versus last, including expansion, contraction and churn. Above 100% means cohorts grow without new customers. Read the guide.
Net revenue retention (NRR): Revenue from an existing cohort a year later, including expansion and churn, divided by where it started. Above 100% means the base grows without new customers. Read the guide.

O

Option pool: Shares reserved for future employee grants, usually carved out of the pre-money valuation and therefore paid for by existing shareholders. Read the guide.

P

Participating preferred: A preference that pays the investor their money back and then a pro rata share of the remainder. Expensive for common holders in modest exits. Read the guide.
Payback period: How many months of gross profit from a customer it takes to recover the cost of acquiring them. Under twelve months is strong for B2B software. Read the guide.
Payback period: How many months of gross profit it takes to recover the cost of acquiring a customer. Under 12 months is strong; over 24 strains cash. Read the guide.
Post-money valuation: Company value immediately after an investment: pre-money valuation plus the amount raised. Read the guide.
Pre-money valuation: Company value agreed immediately before new money is added. The number that determines how much of the company the round buys. Read the guide.
Preferred stock: The share class issued to investors, carrying liquidation preference, anti-dilution and protective provisions that common stock does not have. Read the guide.
Price basis: The unit that scales a customer's bill — seats, usage, tiers or a share of value. Choosing one that conflicts with customer value creates permanent friction. Read the guide.
Pro rata right: An investor's right to invest enough in future rounds to maintain their ownership percentage. Read the guide.
Product-market fit: A specific group uses the product repeatedly, would be genuinely disrupted without it, and refers others unprompted. Best evidenced by a retention curve that flattens. Read the guide.
Protective provisions: A list of company actions requiring preferred shareholder consent, exercised separately from the board vote. Read the guide.

Q

Quiet period: The stretch around an IPO when a company's public communications are restricted by securities regulation. Read the guide.

R

Recapitalisation: A restructuring of the entire cap table, often converting preferred to common and clearing the preference stack so new investment and employee equity have value again. Read the guide.
Retention curve: The share of a cohort still active over time. Whether it flattens or trends to zero is the clearest single signal of product-market fit. Read the guide.
Revenue multiple: The factor applied to revenue to estimate company value. A compressed forecast of growth, retention and exit certainty. Read the guide.
Roadshow: The series of investor meetings before an IPO where management presents the company and the book of demand is built. Read the guide.
RSU: Restricted stock unit. A promise of shares delivered on vesting, with no strike price to pay, taxed as income when they vest. Read the guide.
Runway: Months of cash remaining at the current net burn. Below nine months, every hiring decision is also a fundraising decision. Read the guide.

S

SAFE: Simple agreement for future equity. A right to shares at a future priced round, with no interest and no maturity date. Read the guide.
Secondary sale: A sale of existing shares from one holder to another, rather than new shares issued by the company. Sometimes allows founders partial liquidity before an exit.
Secondary sale: A sale of existing shares by a founder or employee to an investor, rather than new shares issued by the company. Provides liquidity without a full exit. Read the guide.
Seed round: Early financing intended to prove that a specific group of users returns to the product. Read the guide.
Sensitivity analysis: Re-running a model with each key assumption moved up and down to see which inputs actually control the outcome. Read the guide.
Series A: The first substantial priced round, typically raised once acquisition and retention are repeatable rather than founder-driven. Read the guide.
Strike price: The fixed price at which an option holder may buy a share, set at the fair market value on the grant date. Read the guide.

T

TAM: Total addressable market. The full revenue opportunity if every possible customer bought. Credible only when built bottom-up. Read the guide.
Term sheet: The non-binding outline of a financing's economics and control terms, which the definitive documents then implement. Read the guide.

V

Valuation cap: The maximum valuation at which a convertible instrument converts, effectively setting a best-case price for the early investor. Read the guide.
Venture debt: Loans made to venture-backed companies, usually alongside equity, extending runway without dilution but adding repayment obligations and covenants. Read the guide.
Vesting: The schedule over which granted equity is actually earned, typically four years with a one-year cliff. Read the guide.

W

Waterfall: The order in which exit proceeds are distributed: preferences first, then remaining proceeds to common holders. Read the guide.
Work sample: A short, paid, realistic task used in hiring to observe the actual work rather than interview performance. Read the guide.
Working capital: The cash gap created by the timing difference between paying suppliers and collecting from customers. Profitable companies fail here. Read the guide.