Private Equity Terms

Startup

A temporary organization searching for a repeatable, scalable business model.

Small business

A stable, usually local business focused on profitability and steady income rather than hyper-growth

Founder

Person (or people) who start and lead the company

Angel investor

Individual investing personal money, usually in very early-stage startups

Venture capital (VC) fund

Firm that invests a pooled fund (money from LPs) into startups, aiming for large (10x+) returns

Limited Partner (LP)

Investor in a VC/PE fund (e.g., pension fund, endowment, family office)

Private Equity (PE)

Investors who typically buy larger, more mature businesses (often using debt) and aim to improve and later sell them

Pre-seed / Seed / Series A/B/C+

Labels for funding stages from earliest (idea/early traction) to later (scaling/growth)

Business model

How a company creates, delivers, and captures value (who it charges, what it charges for, and how)

SaaS (Software-as-a-Service)

Software sold as a subscription (e.g., monthly or yearly per user or per account)

Marketplace

Platform connecting buyers and sellers where the company usually takes a percentage of transactions

GMV (Gross Merchandise Value)

Total dollar value of transactions processed on a marketplace/platform

Take rate

The percentage of GMV the platform keeps as revenue

Freemium

Model where a basic version is free and users pay for premium features

Consumer app

Product aimed at individual end-users rather than businesses

Fintech

Financial technology products (payments, lending, banking, trading, etc.)

Hardware startup

Company whose core product is a physical device (often paired with software/services)

Income statement

Shows revenue, expenses, and profit/loss over a period of time

Balance sheet

Snapshot of what the company owns (assets) and owes (liabilities), plus equity, at a point in time

Cash flow statement

Tracks cash in and cash out over a period (operations, investing, financing)

Revenue

Money earned from selling products or services.

Cost of Goods Sold (COGS)

Direct costs of providing the product/service (e.g., hosting, manufacturing, support tied to usage)

Gross profit

Revenue minus COGS

Gross margin (%)

Gross profit divided by revenue, shown as a percentage

Operating expenses (OpEx)

Ongoing costs to run the business (salaries, marketing, rent, etc.)

Operating profit

Gross profit minus operating expenses

Profitability

When revenue exceeds all costs; the business generates net income

Cash burn (burn rate)

Net cash lost per month (cash out minus cash in)

Net burn

Monthly burn after considering any cash coming in (e.g., revenue)

Runway

How many months the company can operate before running out of cash, given the current burn

“Extending runway”

Reducing burn or raising more capital to increase the number of months of runway

Total Addressable Market (TAM)

The total revenue opportunity if you served 100% of all possible customers worldwide

Serviceable Available Market (SAM)

The portion of TAM you can realistically serve (e.g., specific geography or segment)

Serviceable Obtainable Market (SOM)

The slice of SAM you can realistically capture in the next few years

Top-down market sizing

Starting from big industry numbers and narrowing down by percentages

Bottom-up market sizing

Starting from number of customers × average revenue per customer to build TAM

Unit economics

Profitability of a single “unit” (customer, order, seat, etc.)

Customer Acquisition Cost (CAC)

Average cost to acquire one paying customer

Customer Lifetime Value (LTV)

Total gross profit expected from a customer over their relationship with the company

LTV/CAC ratio

LTV divided by CAC, a shorthand for return on acquisition spend

Payback period

Time it takes for the profit from a customer (usually gross profit) to pay back the CAC

MRR (Monthly Recurring Revenue)

Predictable subscription revenue per month

ARR (Annual Recurring Revenue)

MRR × 12; yearly view of recurring revenue

Churn (customer churn)

Percentage of customers who cancel or stop using the product in a period

Churn (revenue churn)

Percentage of recurring revenue lost from existing customers in a period

Net Dollar Retention (NDR)

How revenue from last year’s customers changes after upgrades, downgrades, and churn (often >100% is good)

ARPU (Average Revenue Per User)

Revenue divided by number of users (sometimes ARPA = per account)

Cohort

Group of users who started at the same time, tracked over time (e.g., January signups)

Funnel

Step-by-step path from awareness to paying and retained customer (e.g., visit → sign up → activate → pay → retain)

Conversion rate

Percentage of users who move from one funnel step to the next

Activation

Moment when a new user first experiences the core value of the product

Drop-off

Users who exit the funnel at a given step

Fundraising round

A discrete event where a startup raises new money (seed, Series A, etc.)

Pre-money valuation

Value of the company before new investment in the round

Post-money valuation

Pre-money valuation plus the amount of new investment

Dilution

Reduction in an existing shareholder’s ownership percentage when new shares are issued

Equity

Ownership stake in the company, usually in the form of shares

SAFE (Simple Agreement for Future Equity)

Contract that converts an investor’s money into equity at a later priced round, often with a discount or valuation cap

Convertible note

Debt that converts into equity in the future, usually at a discount and/or cap

Priced equity round

Round where the price per share is set, implying a specific valuation

Cap table (capitalization table)

Spreadsheet showing who owns what percentage of the company (founders, employees, investors)

Option pool

Set of shares reserved for future employees and hires

Stock options

Rights given to employees to buy shares at a fixed price (strike price) in the future

Fully diluted shares

Total shares including all currently issued shares plus options, warrants, and convertibles

Ownership percentage

Your shares divided by the total fully diluted shares

Enterprise Value (EV)

Value of the whole business (market cap + debt – cash)

EV/Revenue multiple

EV divided by annual revenue; often used for high-growth or unprofitable companies

EV/EBITDA multiple

EV divided by EBITDA (earnings before interest, taxes, depreciation, amortization)

Revenue multiple

Short for EV/Revenue multiple, especially in SaaS/startups

Valuation multiple

General term for EV divided by some financial metric (revenue, EBITDA, etc.)

Term sheet

Non-binding document outlining key terms of an investment (valuation, ownership, rights)

Liquidation preference

Rule that determines who gets paid (and how much) first in a sale or liquidation

1x non-participating preference

Investor gets either their original investment back or their pro-rata share of the proceeds (whichever is greater), but not both

Participating preference

Investor first gets their money back, then also participates in remaining proceeds pro-rata (more favorable to investor)

Preference stack

The ordering and magnitude of all investors’ liquidation preferences

Pro-rata rights

Investor’s right to invest in future rounds to maintain their ownership percentage

Product-market fit (PMF)

When a product satisfies strong market demand (high retention, customers love it, organic growth)

Traction

Evidence that the business is working (growth, revenue, engagement, customers, etc.)

Engagement

How often and how deeply users use the product

Default alive

A company that will reach profitability before running out of cash, assuming current growth/burn

Default dead

A company that will run out of cash before becoming profitable, absent more funding

Moat

Structural advantage that makes a business hard to compete with over time

Network effects

The product’s value increases as more users join (e.g., social networks, marketplaces)

Economies of scale

Costs per unit decrease as the company grows (spreading fixed costs over more output)

Switching costs

Frictions or losses a customer faces when changing suppliers/products

Data advantage

Unique or superior data that improves the product and is hard for competitors to replicate

Brand

Perception and trust built in the market that helps with sales and pricing power

Commoditized product

Product that’s largely undifferentiated; competition mostly on price

Differentiation

What makes a product meaningfully different in ways customers care about

Go-to-market (GTM) strategy

How a company reaches and sells to its customers

Self-serve

Customers sign up, try, and buy with minimal or no human sales interaction

Inside sales

Salespeople selling remotely (phone, email, Zoom) rather than in-person

Enterprise sales

High-touch, often long-cycle deals with large organizations

Partnerships / channel sales

Selling through partners (resellers, integrators, platforms)

Sales cycle

Time from first contact to deal closed

Sales efficiency (simple)

New revenue generated divided by sales & marketing costs

Driver-based model

Financial model where key outcomes (revenue, costs) are driven by core assumptions (users, prices, conversion rates)

Scenario analysis

Comparing base, upside, and downside cases based on different assumptions