Glossary
The 25 terms that show up most in term sheets, VC conversations and due diligence. Clear definitions, no jargon, with numeric examples where they help.
A capitalization table lists every shareholder, the number and class of shares they own, and their fully diluted ownership percentage. A clean cap table includes founders, ESOP, SAFE/convertible notes converted at each round, and option grants. Investors check it during due diligence to verify dilution, founder commitment and any unusual clauses.
Simple Agreement for Future Equity. A short instrument created by Y Combinator that converts into equity at the next priced round, usually with a valuation cap, a discount, or both. SAFEs avoid setting a price today but still dilute founders when they convert. Standard amounts in Europe range from 100K€ to 1M€ per SAFE.
A short-term debt instrument that converts into equity at the next priced round. Unlike a SAFE, it accrues interest (typically 4-8% annual) and has a maturity date. If the round does not happen before maturity, the note must be repaid or renegotiated.
Pre-money is the company's value before new investment. Post-money is pre-money plus the new round. Example: 8M€ pre-money + 2M€ round = 10M€ post-money. The new investor owns 2/10 = 20%.
The reduction of existing shareholders' percentage ownership when new shares are issued. If you owned 50% and the company issues 25% in a new round, you now own 50% × (1 - 0.25) = 37.5%. Founders typically expect 15-25% dilution per priced round.
A non-binding document that summarizes the key terms of an investment: valuation, amount, board composition, liquidation preference, anti-dilution, vesting and information rights. Signing the term sheet typically triggers exclusivity and starts legal due diligence.
The right of preferred shareholders to be paid before common shareholders in a sale or liquidation. 1x non-participating is the founder-friendly standard: investors get their money back, then the rest is split pro-rata. Participating preferred or multiples (2x, 3x) shift returns sharply toward investors in modest exits.
The right of an existing investor to invest in future rounds to maintain their ownership percentage. Critical for VCs who want to protect their stake in winners. Founders should grant pro-rata only to lead investors and meaningful contributors.
The annualized value of recurring subscription contracts. Calculated as MRR × 12 or by summing the annual value of active contracts. Series A SaaS benchmarks in Europe usually start at 1M€ ARR with 3x year-on-year growth.
The predictable monthly revenue from subscriptions. Net New MRR = New + Expansion - Contraction - Churn. The most useful operating metric for early-stage SaaS.
Net monthly cash consumption. Gross burn is total monthly spend. Net burn is spend minus revenue. Investors expect founders to know their burn within a 5% margin.
Months of cash remaining at the current net burn. Runway = cash on hand / net monthly burn. Standard guidance is to raise when 9-12 months of runway remain and to target 18-24 months post-round.
The rate at which customers or revenue is lost over a period. Logo churn counts customers lost; revenue churn weights by contract value. SaaS at Series A typically targets <2% monthly logo churn and negative net revenue churn.
Total sales and marketing spend divided by the number of new customers acquired in the same period. A healthy ratio for SaaS is LTV/CAC > 3 with a payback period under 18 months.
The total revenue or gross profit a customer generates before churning. Simplified formula: ARPU / churn rate. Sophisticated investors prefer LTV calculated on gross margin, not revenue.
The investor's verification process before closing: legal review of contracts and cap table, financial review of metrics and forecasts, technical review of the product, and reference calls with customers and ex-employees. Usually takes 4-8 weeks after term sheet.
A secure folder where the founder shares due diligence documents: financials, customer contracts, cap table, employment agreements, IP assignments and corporate documents. A well-organized data room can shorten DD by weeks.
The investor who sets the terms, writes the largest check (usually 30-60% of the round) and typically takes a board seat. Finding a credible lead is the hardest part of any priced round. Other investors follow once the lead is committed.
An additional investment by an existing investor in a later round, usually exercising pro-rata rights. A strong follow-on signal from existing investors is one of the most important quality markers in a new round.
A short funding round between two priced rounds, usually via SAFE or convertible note, to extend runway until the next milestone. Bridges that drag past 12 months tend to signal trouble.
A round priced below the previous round's post-money valuation. Triggers anti-dilution clauses and usually heavy founder dilution. Avoidable through patient capital, revenue growth or a bridge.
A pool of shares reserved to grant as options to employees. Investors typically require a 10-15% post-round ESOP, created from the founders' pre-money equity, which effectively lowers the real pre-money valuation.
The schedule under which founder or employee equity is earned over time. Industry standard is 4 years with a 1-year cliff: nothing vests in the first 12 months, then 25% vests at month 12, then 1/48 monthly.
The minimum period before any equity vests. The typical 1-year cliff means an employee or founder who leaves before month 12 keeps nothing.
A clause that adjusts the conversion price of preferred shares downward if the company raises a future round at a lower valuation. Weighted-average is the founder-friendly standard; full ratchet is aggressive and rare.
