1- Financing Terms and Concepts
This article is part of
Accessing Finance in Jordan
A Guide For Entrepreneurs
The following is a glossary of relevant terms.
Accelerator: A program that accelerates the growth of startups, while offering them a variety of support services to bring their product or service to market, including dedicated expertise, introductions to investors, office space, and occasionally, funding. A key difference between accelerators and incubators is that accelerators have shorter time frames to graduate startups from their program.
Angel investors: Individual investors who provide early stage funding to startups and entrepreneurs. Many are successful entrepreneurs themselves and can offer non-financial support to investees.
Bootstrapping: The practice of maximizing existing resources in a situation, generally referred to in relation to a startup and its approach to save money and resources, especially in its early stages.
Business plan: A document meant for investors which details your idea, service or product, financials, team, and future outlook.
Collateral: An asset such as physical property (land, vehicle) and/or intangible assets, including money owed to a company, that is pledged in exchange for a loan and is forfeited in case of default.
Common majority: The provision of voting rights to common shareholders.
Common stock: Ordinary shares that provide voting rights and irregular, or sometimes no, receipt of dividends.
Convertible note/debt: A debt instrument that converts to equity at a future date.
Cross-selling: The practice of selling different, usually complementary, products or services to a client or customer.
Crowdfunding: The process of raising funding from multiple sources.
Debt financing: Funding, usually in the form of a loan, that is provided in exchange for a markup (or interest) split over a series of repayments over a period of time.
Dividends: A sum of money paid by a company to shareholders at different time intervals, typically from profits or reserves.
Due diligence: The audit that potential funders conduct on startups to make sure their affairs are in order.
Drag-along: The right in a deal that allows the majority shareholder to force minority shareholders to join in the sale of a company.
Ecosystem: The community and interconnected system of stakeholders relevant to entrepreneurship, including the government, financial institutions, support organizations, academia, media, and advisory services.
Entrepreneur: Someone who turns an idea into an established business, taking significant risks along the way, and benefitting from significant rewards accruing from their business’ success.
Equity: A share of ownership in a company.
Exit: The process or stage through which owners and investors sell their ownership stake in a company to a purchaser.
Funding round: Rounds of larger amounts of funding a growing startup will go through.
Grant: Funding that is usually provided for a strategic activity that does not require repayment and is not in exchange for a share of ownership.
Incubator: Similar to an accelerator, an incubator can focus on entrepreneurs only armed with an idea, and support them in turning their ideas into a real product or service, including support through dedicated expertise, introductions to investors, and office space. Incubators typically support entrepreneurs for a longer duration than accelerators.
IPO: ‘Initial Public Offering’, when a company becomes public and floats its shares on a stock market, providing shareowners with large returns.
Lead Investor: The first investor to fund a company as part of a deal, providing impetus to other, smaller investors, to fund the rest of the deal.
Liquidation preference: The amount that must be paid to preferred shareholders before common shareholders in the event of liquidation of a company.
Micro VC: A smaller version of a traditional VC firm, they generally invest in pre-seed and seed stage startups with ticket sizes that are typically less than that of traditional venture capital.
Mezzanine: Type of quasi equity financing frequently used by startups.
Minimum Viable Product: A prototype for a product or service that allows an entrepreneur or startup to test and showcase to potential investors and funders.
No-shop: A clause in a term sheet which prohibits entrepreneurs from selling any part of their company to another investor for a set period of time.
Operating expenditure: Expenditures needed to run a company, including salaries, rent, and other day-to-day expenses (subscriptions, services, etc.).
Pitch deck: A presentation that summarizes your business plan and makes clear what you request from an investor.
Post-money valuation: The value of a company after an investment has been made.
Preferred majority: The provision of voting rights to preferred shareholders.
Preferred stock: Shares that entitle the holder to the receipt of regular dividends, but don’t guarantee a voting right.
Profit: Revenues minus costs.
Quasi Equity: A form of capital that has both debt and equity-like features,and includes mezzanine financing, convertible debt, and stock.
Revenue: Money generated from sales.
Security: A financial instrument, typically stock, that holds monetary value and can be traded.
Series (A, B, C…) funding: Successive rounds of venture capital funding (A to E), which start after seed and/or angel investing.
Startup: A company that is in the initial stages of its operations, is experiencing accelerating growth, and provides a unique solution to an existing problem.
Term sheet: A non-binding agreement between investors and startups that sets out the term of funding.
Ticket Size: The size of an investment made by an investor.
Upselling: The practice of persuading a customer to purchase more of the same product or a more expensive service.
Valuation: The value of a company, that depends on its assets, revenues, and its potential, which will decide how much equity is given in exchange for an investment.
Venture Capital (VC) funds: Institutional investors that invest in high growth businesses and startups, providing funding in exchange for equity, or proportional ownership of the business.