FYO Terms and Concepts

A/B testing

also known as split testing, the goal of A/B testing is to compare two versions of a website,
product, feature, etc; the goal of which is to evaluate which version performs more effectively

Accelerator

Startups are admitted to an Accelerator in cohorts and generally given a deadline to
complete intensive training and iteration (typically 1 week to 6 months). Startups end an accelerator
program with a Demo Day in which they pitch to investors. Well-known accelerators include Y-
Combinator and Techstars. In an accelerator, a seed investment (usually between $15k - $50k) may be
made in return for equity.

Acquisition

A process under which a company acquires the controlling interest of another company. In
other words, taking majority ownership of another business. Frequently used in conjunction with the
word merger, as in mergers and acquisitions (or M&A’s)

Advisor

an individual providing business connections, guidance, advice, and support to entrepreneurs
as they develop and grow their startup

Advisory Board

a group of external advisors to a company. Less formal than a board of directors.

Angel Investors

Independently wealthy individuals who back emerging entrepreneurial ventures,
usually as seed capital or as a bridge to get from the self-funded stage to the level of business that would
both need and attract venture capital. Funding level is broad, but generally ranges between $50,000 to
$2M. Note: angels write checks with their own money, while VC’s (venture capitalists) write checks
with other people’s money

Angel Fund

an organization composed of accredited investors which serves as a platform for them to
coordinate investments in seed and early stage startup companies. The group members typically work
together consolidating their resources, expertise, and capital through informal networks or formal funds

Angel round

a round of investment into a startup company from angel investors not previously
affiliated with the founder (e.g., not friends or family). Typically, the first money invested in a company
after the founder’s own money and after the founder’s friends and family.

Anti-dilution provisions

contractual measures that allow investors to keep a
constant share of a firm’s equity in light of subsequent equity issues. These may give investors
preemptive rights to purchase new stock at the offering price

Articles of Incorporation

document filed with the Secretary of State or Company Registrar which acts
as a charter to document the establishment and existence of a corporation. The articles typically include
the business name, address, a statement of business purpose, and details related to the types of stock the
corporation is entitled to issue.
corporation is entitled to issue.

Articles of Organization

documentation filed with the Secretary of State which acts as a charter to
document the establishment and existence of a limited liability company (LLC)

Assets

all financial resources that a corporation owns are known as its assets. These include material
goods, equipment, intellectual property (such as patents or copyrights), investments, cash, etc

Balance sheet

a condensed financial statement showing the nature and amount of a company’s assets,
liabilities, and capital (equity) on a given date

B2B

“business to business”; a company which sells a product or service to other businesses

B2C

“business to consumer”; a company which sells a product or service directly to individual
consumers

Board of directors

a group of people elected by the company’s shareholders that makes decisions on
major company issues, including hiring/firing the Chief Executive Officer. A corporation is legally
required to have a board of directors.

Bridge round

a round of funding that comes between your seed round (see below) and your full-blown
Series A round (see below). This can be used to extend your financial runway (see below) as you fully
prepare for your Series A.

Bootstrapping

funding a company only by reinvesting initial profits; from “pulling yourself up by your
own bootstraps”

Burn rate

the rate at which a company expends net cash over a certain period, usually a month

Business plan

a document that entrepreneurs use in detailing their business concept as well as their
company’s overall strategic and financial objectives. In recent years, the Business Model Canvas has
become increasingly popular with both entrepreneurs and managers as a guide or framework for the
startup’s efforts, and in many cases is now utilized in lieu of the business plan by these parties

Business model

a set of assumptions and hypotheses for the successful operation of a business. At its
heart, how you plan to make money. Includes all the activities associated with making something as well
as all the activities associated with selling something

Business Model Canvas

based on nine building blocks, the business model canvas is an entrepreneurial
tool that enables entrepreneurs to test hypotheses as they design, develop, articulate, challenge, invent,
and pivot their strategic business model. The building blocks referenced above include customer
segments, value proposition, channels, customer relations, revenue streams, key resources, key
activities, key partnerships, and cost structure.

Bylaws

written governing agreements established for the purpose of defining how corporations will
operate and be managed. Specifically established for corporations, as opposed to LLCs, which is
governed by an “operating agreement”

Cash flow

the incomings and outgoings of cash, representing the operating activities of an
organization. The difference between the available cash at the beginning of an accounting period and
that at the end of the period

Capital

is a term that can refer to the money exchanged between entrepreneurs and
investors during a business deal. Entrepreneurs need to raise capital (money) for their startups while
investors can provide them with the needed capital (funding). Capital can be used to launch an endeavor
as well as sustain a company until positive profit can be generated

Capitalization table (aka cap table)

a table (spreadsheet) depicting the quantity of shares or unit
ownership which is held by each investor in a corporation or LLC, typically including the founders’
equity, investor equity, and advisor/employee stock options pool. In other words, a detailed list of
exactly how much stock each entity or person owns in a company. A spreadsheet that lists names and
percentage ownership stakes, all adding up to 100%

Chief executive officer

the senior executive officer responsible for the overall management of a
corporation/company

Common stock

there are many “classes” of stock that can be issued in a company. Each class has its
own rights and preferences. Investors typically get preferred stock (see definition below) which may
give them preferences such as the ability to get their investment back first, before the rest of the
common stock holders get their proceeds. Founders and employees are usually left with common stock,
a class of stock ownership that has lower claims on earnings and assets than preferred stock (which
typically means you’re the last person to get paid)

Competitive advantage

a condition or circumstance that puts a company in a favorable or superior
business position against competitors

Convertible note

a loan made to a company that can be converted into stock upon certain triggering
events. Each note has an interest rate, a maturity date, and may come with the option to convert at a
discount at a future round or time

Conversion rate

the rate at which customer leads are “converted” into paying customers

Corporation

the legal entity structure that is granted a charter recognizing it as a separate legal entity
having its own rights, privileges, and liabilities distinct from those of its members. The primary
advantage of a corporation is that it shields its investors from personal liability for any losses the
corporation may experience. Ownership in a corporation is held by shareholders.

Crowdfunding

the process of raising financial support for a venture via smaller amounts from many
investors (“the crowd”) rather than the alternative pattern of larger amounts from a smaller number of
supporters. Today’s internet has vastly increased the ability of fundraisers to communicate information,
solicit and receive financial support from anyone online. Think Kickstarter

Customer acquisition cost

the cost associated with convincing a consumer to buy your product or
service, including research, marketing, and advertising costs. The calculation of customer valuation
helps a company decide how much of its resources can be profitably spent on acquiring a customer.

Customer discovery

a process for discovering and validating the right market for an idea and building
the right product features that solve customer problems. Customer discovery consists of transforming
assumptions about who a customer is, the problem a company will solve for the customer, and how the
customer will buy from the company into hypotheses, which are then tested via interviews with potential
customers (aka getting out of the building)

Debt financing

a form of financing in which a person or a company borrows money in return for a
promise to pay it back with interest; as opposed to equity financing, where money is raised from
investors who, in return, receive equity in the company

Dilution

A reduction in the percentage ownership of a given shareholder in a company caused by the
issuance of new shares. The effect of giving someone else part of your company’s stock is considered
dilution...it means that you are diluting your equity stake to make room for someone else

Director

a person elected by shareholders to serve on the board of directors. The directors generally
appoint the president, vice president, and all other operating officers, and decide when dividends should
be paid (among other matters)

Down round

when the valuation of a company at the time of an investment round is lower than its
valuation at the conclusion of a previous round

Due diligence

a process undertaken by potential investors to analyze and assess the desirability, value,
and potential of an investment opportunity by examining, for example, the operations and management
of a company and the verification of material facts

Early-stage startup

the state of a company that has typically completed its seed stage and has a
founding or core senior management team, has proven its concept, has minimal revenue, and no or
minimal positive earnings or cash flow. As opposed to later-stage company

Elevator pitch

a brief presentation, typically 30-60 seconds in duration, presenting the entrepreneur’s
concept/solution, business model, “go to market” strategy and value proposition to potential angel or
venture capital investors, in order to obtain the attention of the investors such that they are compelled to
learn more about the opportunity

Entrepreneurship

the pursuit of opportunity beyond resources controlled

Equity

the designation given to a stockholder’s ownership in a company. In corporations, this is
called “stock”, and LLCs or limited partnerships, it is called “interest” or units. This is exchanged for
value; generally, money. Generally, this is obtained when an individual or corporation purchases one
of more shares of stock (equity shares). The more of this is purchased, the greater the ownership

Equity financing

a term used for a company’s issuance of shares of stock to raise money. In other
words, this occurs when a company exchanges equity (stock) for capital. Opposed to debt
financing (see above). Investors who have exchanged money for equity realize their investment by an
exit. See below.

Exit

the sale or exchange of a significant amount of company ownership for cash, debt, or
equity of another company. this generally happens in one of two ways: acquisition by a bigger
company, or going public

Exit strategy

an entrepreneur’s strategic plan to obtain an exit (see above) that maximizes returns for
all shareholders

Fiduciary duty

a legal obligation of founders to act in the best interest of the company and all of its
shareholders by maximizing value and returns

Friends & family round

an investment in a company that often follows the founder’s own investment,
from people who are investing primary because of their relationship with the founder rather than their
knowledge of the business. A common way for a startup to fund their initial round of capital

Founder

an entrepreneur substantially involved in the founding/creation of a new company

Founder’s shares/stock

shares owned by a company’s founders upon its establishment

Funding

a term used synonymously with the words “financing” and “capital”. It refers to the amount of
money that is needed for a business endeavor. For example, a new business owner may seek a certain
amount of funding for their startup capital

Go-to-market strategy

an action plan that specifies how a company will reach customers and achieve
competitive advantage. The purpose of is to provide a blueprint for delivering a
product or service to the end customer, taking into account such factors as pricing and distribution

Hockey stick growth

a usually desirable pattern of business growth in which things like number of
users, page views, or revenue starts growing at a normal linear pace, then once an inflection point is it,
growth takes off at an exponential rate

Income statement

a financial statement that shows a company’s financial performance over a specific
period of time. It delineates revenue and expenses, as well as net income (which is total revenue minus
total expenses)

Incubator

an organization established to support the development of startup companies with access to
workspace, coaching, and support services. Incubators differ from accelerators in that the latter typically
focus on acceleration of growth in a shorter defined period, whereas the former is focused on the
development of the company and its product over a longer time period

Intrapreneur

one who takes on entrepreneur-like ventures within a large corporate environment

Intellectual property (IP)

defensible creations of the mind, encompassing patents, trademarks,
copyrights and more. A large portion of competitive advantage and potential value to investors is the
size and clarity of a company’s intellectual property

Initial Public Offering (IPO)

the sale or distribution of the stock of a company to the public for the first
time. These are often an opportunity for existing investors to receive significant returns on their original
investment

Institutional investors

organizations that professionally invest, including insurance companies,
depository institutions, pension funds, investment companies, mutual funds, and endowment funds

Investment round

a set of one or more investments made in a particular company by one or more
investors on essentially similar terms at essentially the same time

Investment terms

the legal terms and conditions upon which an investment is made, which may include
investment amount, valuation and corresponding price of shares, type of stock assigned to investor,
participation on the board of directors, anti-dilution provisions, liquidation preferences, and more. The
terms of the investment dictate who gets what financially and who gets to do what legally. At their
essence, all investment terms are essentially all about control of the company and the economics of an
exit event (who gets what cash)

Lead startup methodology

a methodology for developing businesses and products, which aims to
shorten product development cycles by adopting a combination of business-hypothesis-driven
experimentation, iterative product releases, and validated learning. Lean startup favors experimentation
overelaborate planning, measurable customer feedback over intuition, and iterative design over
traditional “big design up front” development. In short, the methodology proposes that all a founder has
in a new venture is a series of untested hypothesis. Therefore, you need to get outside of your building
and rapidly test all your assumptions. The odds are that one or more of your hypotheses will be wrong.
When you discover your error, rather than firing executives and/or creating a crisis, you simply change
the hypotheses

Later-stage company

a stage of company growth characterized by viable products, a developed market,
significant customers, sustained revenue growth, and both profits and positive cash flow from
operations

Lifestyle business

a business established and operated by its founders for the purpose of developing and
maintaining a particular lifestyle or level of income. Such businesses typically have limited scalability
because of issues such as limited access to capital, owner decisions relating to business operating models
and staging and reinvestment objectives. many are sole practitioners or small groups like husband/wife
teams. They are typically highly dependent on the experience, skills, drive, and engagement of the
owners.

Lifetime value of a customer

a forecast or prediction of the total net profit related to the entire lifetime
(present and future) of a specific customer relationship. In other words, how much money is this
customer going to make for you over the course of their entire relationship with the company?

Liquidity event

An event that allows stockholders to realize a gain or a loss on an investment. When a
corporation is purchased (through a merger or acquisition) or when an IPO is made, equity is converted
to cash

LLC

a legal entity that is not taxable itself, and distributes profits to its owners, but shields personal
assets from business debt like a corporation

Merger

a joining together of two previously separate corporations. A true merger in the legal sense
occurs when both businesses dissolve and move their assets and liabilities into a newly created entity

Minimum Viable Product (MVP)

A version of a new product which
allows a team to collect the maximum amount of validated learning about customers with the least
effort. It is intended to ensure that the market wants the product before a large amount of time
and monetary investments are made

Non-disclosure agreement (NDA)

a formal legal agreement between two or more parties
undertaken by the parties to keep information shared or provided by one party to another confidential

Networking

the act of interacting with other people to exchange information and develop contacts,
especially to further one's career. “Business is about people. It starts with an idea, and gets off the
ground with networking. Whether you’re looking for customers, help, or information, it’s all much
easier to achieve when you start connecting.” - Anna Urban; “Success in business is all about people,
people, people.” - Richard Branson

Option Pool

shares of stock set aside for future issuance to employees or advisors of a company. a way of attracting talented employees to a cash-strapped startup company. normally between 5% and 20% of the company

Operating agreement

an agreement between the members (shareholders) of a Limited Liability
Company which governs the LLC’s business including member powers, rights, duties and obligations,
and outlining the decision-making process related to operational, functional, and financial issues in a
structured manner. The operating agreement of LLCs is similar to bylaws utilized by corporations

Patent

a property right granted to an inventor to exclude others from making, using, offering for sale,
or selling the invention for a limited time in exchange for public disclosure of the invention when the
patent is granted

Pitch

a presentation in which a startup founder attempts to persuade an investor of the viability of their
company. The presentation spectrum varies based on the specific purpose of the pitch. Formal pitches
(as opposed to elevator pitches - see above) utilize PowerPoint type slide decks (known as a pitch deck)
and have the specific objective of seeking investment

Pitch deck

a presentation created by entrepreneurs that details the attributes of a startup opportunity in
order to help the entrepreneurs communicate it with investors in their efforts to raise money to fund their
venture. The presentation which typically includes approximately a dozen slides, helps investors
determine if they have a continued interest in evaluating the company

Pivot

an intentional, substantive change or course correction to a company’s business model based on
validated learning and feedback from the market

Portfolio

a strategic collection of startup companies invested in by an angel, angel group, venture
capital fund, or private equity firm

Portfolio company

startups and other companies in which an angel, angel group, venture capital fund,
or private equity firm have invested

Post-money valuation

the value of a company AFTER an investment has been made. This value is
equal to the sum of the pre-money valuation and the amount of new equity or alternatively calculated by
taking the product from multiplying the startup’s total number of shares or units outstanding by the share
or unit price of the latest financing round

Pre-money valuation

the valuation of a company prior to a round of funding

Private equity

a company ownership position that is not listed and cannot be traded on a public
securities exchange (has not yet had an IPO). Private equities are not subject to the same high-level of
government regulation as stock offerings to the general public, and private equity is also far less liquid
than publicly traded stock

Private equity firm

an investment management company that provides financial backing and makes
investments in the private equity of startup or operating companies through a variety of loosely affiliated
investment strategies including leveraged buyout, venture capital, and growth capital

Preferred stock

a class of ownership with more rights, preferences, and privileges than those with
common stock. Both angel investors and venture capitalists prefer to invest with preferred stock because
of the superior rights and protective provisions associated with these shares

Product/marker fit

“means being in a good market with a product that can satisfy
that market.” - Marc Andreesen

Profit

a financial gain, especially the difference between the amount earned and the amount spent in
buying, operating, or producing something

Proof of concept

evidence, typically derived from an experiment or pilot project, which demonstrates
that a design concept, business proposal, etc., is feasible

Public company

a company that has securities that have been sold in a registered offering and that are
traded on a stock exchange or NASDAQ. A company that “goes public” offers their securities to be sold
to the public through a registered public offering, and through the sale of such assets, a corporation can
raise capital for their company

Raising capital

refers to obtaining capital from investors or venture capital sources

Return on investment (ROI)

the amount of money that is gained in a past or existing investment. For
example, angel investors tend to invest in startups and early stage companies. Because such investment
is considered risky, they expect a large ROI to compensate for such risk

Revenue

the amount of money that is brought into a company by its regular business activities. Also
known as sales

Risk

the probability that all or part of an original investment of resources, cash or otherwise, will be
lost or that investment returns will be lower than anticipated. Numerous factors may impact potential
investment and return losses, including but not limited to demand risk, economic risk, environment risk,
funding risk, legislative risk, maintenance risk, technology risk, and timing riskR

Runway

the length of time your company can survive if your income and expenses stay constant

Scalability

the ability of a startup or small business to leverage its existing resources to grow and
operate at a large scale without being encumbered by factors such as capital investment, human
resources, etc

Seed capital

the money used to purchase equity-based interest in a new or existing company. This is usually quite small because the venture is still in the idea or conceptual stage

Seed round

the first investments made into a company by someone other than the founder or the
founder’s family and friends. The term comes from planting a seed for the first time

Seed stage

the stage of a scalable startup immediately following the concept stage. In this stage, the
entrepreneurs typically validate their product or service to the marketplace, develop their MVP,
commence market initial testing and development, and begin development of their business model/go to
market strategy. The first formal round of investment beyond friends and family typically occurs in this
round with investment from angels.

Serial entrepreneur

an entrepreneur who has previously founded and run one or more ventures

Series A financing

the first major round of business financing by private equity investors or venture
capitalists (though angels often participate). An ‘A’ round generally takes place after the founders have
used their seed money to provide a proof of concept demonstrating that their business concept is viable
and eventually profitable