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Venture Capital 101

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Venture Capital (VC)

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Financial capital provided to early-stage, high-potential, high risk, startup companies.

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Seed Funding

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The initial capital used to start a business, often coming from the company founders personal assets or from friends and family.

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Series A Funding

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A level of investment that typically follows seed funding, aimed at financing a company's early-stage growth and optimizing its product offerings.

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Due Diligence

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A comprehensive appraisal of a business undertaken by a prospective buyer or investor, mainly to establish its assets and liabilities and evaluate its commercial potential.

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Term Sheet

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A non-binding agreement that shows the basic terms and conditions of an investment.

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Equity

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Ownership interest in a company, usually in the form of stock or stock options.

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Liquidation Preference

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A term in a contract that dictates the payout order in case of a corporate liquidation.

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Convertible Note

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A short-term debt that converts into equity, typically in conjunction with a future financing round.

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Cap Table

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A spreadsheet or table that shows the equity capitalization for a company.

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Preferred Stock

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A class of stock that provides a specific dividend that is paid before any dividends are paid to common stock holders and that takes precedence over common stock in the event of a liquidation.

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Burn Rate

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The rate at which a company spends its capital to finance overhead before generating positive cash flow from operations.

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Exit Strategy

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A strategic plan to sell ones investment in a company.

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Initial Public Offering (IPO)

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The process of offering shares of a private corporation to the public in a new stock issuance.

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Bootstrapping

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Starting a company without external help or capital, relying on one's own finances and revenue generated by the business.

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Angel Investor

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An affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.

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Drag Along Rights

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A clause that allows majority shareholders to force minority shareholders to join in the sale of a company.

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Pro-rata Rights

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The right for an investor to participate in future funding rounds so they can maintain their percentage ownership in the company.

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Valuation Cap

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A stipulated maximum value on the conversion price for investors who participate in a convertible note offering.

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Mezzanine Financing

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A mix of debt and equity financing that gives the lender the right to convert to an equity interest in the company in case of default, generally, after venture capital companies and other senior lenders are paid.

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Vesting

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The process by which an employee earns shares or options over time, which can help keep talent in a company by offering them a gradual stake in the business.

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Hurdle Rate

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The minimum rate of return on a project or investment required by a manager or investor.

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Fund of Funds

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An investment strategy where a fund invests in a collection of other investment funds rather than investing directly in stocks, bonds or other securities.

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General Partner (GP)

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A principal investor in a venture capital fund who has the authority to make decisions on behalf of the partnership and is responsible for managing the portfolio of investments.

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Carried Interest

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A share of any profits that the general partners of private equity and hedge funds receive as compensation, despite not contributing initial funds.

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Down Round

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A round of funding where investors purchase equity of a company at a lower valuation than the valuation placed upon the company by earlier investors.

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