A majority of entrepreneurs do not set out to create venture capital fundable companies. But, they do all set out to build viable companies.  Usually, they are skilled specialists in a domain who recognize an opportunity and pursue it. As we develop our businesses, we all begin to use jargon, and this “jargonization” creates confusion when speaking with others who are not as familiar with the terms we commonly use.

Listen to an online marketer speak referencing Penguin, Panda, Journey and PR, and people outside their industry would presume they are speaking about a Press Release on traveling to see animals, whereas an industry insider would intuitively comprehend alternative references. This is true across all industries: the terms people use in their area of specialization are completely foreign to non-industry participants.

When selling to a new prospect an entrepreneur presents their business ideas, and normally is asked to define meaning of the industry specific terms they are using relative to their business. As outsiders to an industry, we all can admit we are not experts in the fields of others, and thus are as ignorant to their lexicon and jargon as they would be of ours.

Definition of Deal Terms

 

Deal Terms

Entrepreneurs that participate with an accelerator or incubator program are doing so to advance their business. We recognize that terms relating to venture capital deals are uncommon to anyone who has not raised capital previously. Some of the most basic points of confusion relate to valuation and the deal terms used in legal documents around funding rounds. This in itself is not surprising, and should be expected.

A majority of successful entrepreneurs set out to build solutions to problems. When business demands accelerate, they recognize that access to the capital sufficient to support the growth requires outside funding. For business operators in the tech sector, banks are usually not an option. For the entrepreneur headed down the venture capital path the first time, the learning curve is swift. Errors can be costly in the long run. In the end, errors make all parties look bad.

We recognize that investors are just as guilty of jargonization as the entrepreneur. We believe all our terms are clearly defined and understood, but fail to recognize that this is only because we use these terms daily. So, just as we ask entrepreneurs to define the industry terms they use when presenting, we decided to help the entrepreneur by defining the terms we ask them to understand when we speak. If we all understand common terms, we should be able to avoid confusion.

To assist the entrepreneurs avoid mistakes, we thought it opportune to provide basic definitions for some of these common terms. however, please remember there is no such thing as standard terms that’s why agreements invariable have terms defined. But if everyone works from a similar understanding of terms conceptually, things should be simpler.

deal terms venture capital

We all need to be prepared.  It is the responsibility of each signatory to fully understand what we are signing.  Always read every document, and make notes on anything you are unclear on, no matter how trivial it may appear.  Clarity is key.  Ask your lawyer questions about everything you do not understand; you may think “that’s expensive” but really, it will be cheap if it saves you from a mistake.  Every agreement will outline what happens if things go well, and it they go wrong.  This is implicit. Make sure you understand how, and what happens.

There are a lot of terms to cover, so we will break them up across a series of posts, and hopefully help alleviate confusion with regards that every entrepreneur faces. In the course of this series we will explain not just what they mean, but some of what you need to understand, and where relevant how they could impact your ability to operate your business.

Terms to be covered in the series

Pre-Money Valuation & Post Money Valuation 

Liquidation Preferences

Distributions

ESOP / SOP, Option Agreement / Plan

Funding Rounds

  • Seed Round
  • Angel Round
  • Debenture
  • Series A/B/C

Share Classes

  • Preferred Shares
  • Common Shares

Special Rights

Drag-Along Rights

Voting Rights

Follow-on

Dilution & Anti-Dilution 

Make Whole Clause

Blue Sky Clause

Assignment (IP)

Non Disclosure (what’s really covered)

Fund

  • Fund Purpose
  • Fund Size
  • Fund Life / Term
  • General partner
  • Limited partner

 

 

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