Funding a New Business For Dummies
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Entering the financing world can be a confusing place at first. One way to get a handle on it all is to master the common financing and investing terms. It always helps to know what everyone is talking about!

Funding a new business: glossary of terms

This list of common financing and investing terms will have you sounding like a pro to your company team and prospective investors in no time!

  • Accelerator: A program designed to help startups grow by providing funding, mentorship, resources, and access to a network of investors in a structured and time-limited environment.
  • Acquisition: When one company purchases another company, often to gain access to its technology, customer base, or market share.
  • Angel investor: An affluent individual who provides capital to startups or early-stage companies in exchange for equity ownership. They often offer mentorship and expertise.
  • Balance sheet: A balance sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. It lists assets, liabilities, and shareholders’ equity.
  • Bootstrapping: A method of financing a startup or business by using personal savings, revenue generated by the business, and minimal external capital. It allows founders to maintain control and ownership.
  • Budgeting: The process of creating a financial plan that outlines expected revenues and expenses over a specific period. It helps in managing resources and making informed financial decisions.
  • Burn rate: The rate at which a startup or company spends its available capital. It indicates how long a company can operate before running out of funds.
  • Cash flow: Represents the movement of cash in and out of a business. Positive cash flow indicates that a business is generating more cash than it is spending, while negative cash flow suggests the opposite.
  • Cash flow statement: Details the cash inflows and outflows of a business during a specified period. It helps assess a company’s ability to generate cash and manage liquidity.
  • Convertible note: A debt instrument that can convert into equity in the company at a future date or under specific conditions, often used in early-stage investments.
  • Corporate venture capital (CVC): Involves established corporations investing in startups that align with their industry or strategic objectives.
  • Crowdfunding: A method of raising capital from many individuals, typically through online platforms. It can take various forms, such as rewards-based, equity-based, or donation-based crowdfunding.
  • Debt financing: Borrowing funds from lenders, such as banks or investors, with the agreement to repay the borrowed amount along with interest over time.
  • Donation-based crowdfunding: A fundraising method where backers contribute to support charitable causes, projects, or personal needs without expecting financial returns.
  • Due diligence: The process of thoroughly researching and assessing a startup or investment opportunity to evaluate its viability, risks, and potential returns.
  • Elevator pitch: A concise and compelling presentation of a startup’s value proposition, typically delivered in the time it takes to ride an elevator.
  • Equity: Represents ownership in a company. It is often distributed to investors in exchange for their capital and can take the form of shares or ownership stakes.
  • Equity crowdfunding: Allows startups to raise capital by offering equity or ownership shares to a large number of investors through online platforms.
  • Exit strategy: A plan outlining how founders and investors intend to exit or cash out their investments in a startup, which may include options like acquisition, IPO, or merger.
  • Financial controls: Policies, procedures, and practices implemented by a business to manage its financial resources, minimize risks, and ensure accurate financial reporting.
  • Initial public offering (IPO): The process by which a private company becomes publicly traded by offering shares to the public on a stock exchange for the first time.
  • Incubator: A program or organization that supports early-stage startups by offering resources, office space, mentorship, and sometimes funding, typically in a more open-ended timeframe than accelerators.
  • Investor pitch: A presentation given by startup founders to potential investors, outlining their business model, market opportunity, and financial projections to secure funding.
  • IP (intellectual property): Refers to legal rights associated with creations of the mind, including patents, trademarks, copyrights, and trade secrets, which can be valuable assets for startups.
  • KISS (keep it simple security): Another type of financial instrument used in equity crowdfunding, offering a straightforward agreement for investors to receive equity.
  • Liquidation preference: A term in investment agreements that specifies the order in which investors receive proceeds from a startup’s liquidation or exit event.
  • Private equity: Refers to investments made in private companies by private equity firms or investors. It often involves acquiring a significant ownership stake in the company.
  • Pro forma financials: Projected financial statements that estimate a company’s future financial performance. They are often used for forecasting and planning purposes.
  • Profit and loss statement (P&L): Shows a company’s revenues, expenses, and profits (or losses) over a specific period. It provides insights into a company’s financial performance. Also known as an income statement.
  • Real estate crowdfunding: Involves raising capital from multiple investors to fund real estate projects, providing them with an opportunity to invest in real estate without owning physical property.
  • Regulation crowdfunding (Reg CF): A set of rules that govern equity crowdfunding offerings in the United States, allowing startups to raise funds from a wide range of investors.
  • Revenue: The income generated by a business through its primary operations, such as selling products or services.
  • Revenue-based financing: A funding model where a startup receives capital in exchange for a percentage of its future revenue until a predefined return is reached.
  • ROI (return on investment): A financial metric that measures the profitability of an investment by comparing the gain or loss relative to the cost of the investment.
  • ROI calculator: A tool used to assess the potential return on investment (ROI) for a specific project, initiative, or business decision.
  • Runway: The amount of time a startup can operate before exhausting its available capital, based on its current burn rate and available funds.
  • SaaS (software as a service): A software distribution model where software applications are hosted by a third-party provider and made available to customers over the internet on a subscription basis.
  • SAFE (simple agreement for future equity): A type of financial instrument used in equity crowdfunding that provides investors with the promise of future equity in the company once specific conditions are met.
  • Scale: Refers to the process of growing a business by increasing its size, market reach, and operations to achieve greater profitability.
  • Seed funding: The initial capital raised by a startup to support product development, market research, and other early-stage activities.
  • Strategic partnership: A collaboration between two or more companies to achieve mutually beneficial goals, such as accessing new markets, technologies, or resources.
  • Valuation: The process of determining the financial worth or value of a startup or company. It often plays a crucial role in investment negotiations.
  • Venture capital: Refers to funds provided by venture capital firms to startups and small businesses with high growth potential. In return, they receive equity in the company.
  • Working capital: The capital available to a business for its day-to-day operations. It is calculated as current assets minus current liabilities and is crucial for maintaining liquidity.

About This Article

This article is from the book:

About the book authors:

Marc R. Butler is a highly experienced financial services executive who currently works as an advisor and consultant in the financial services world, with a focus on wealth management, organizational operation, and startup success. Eric Butow is the owner of Butow Communications Group in Jackson, California, and is the coauthor of Instagram for Business For Dummies and Digital Etiquette For Dummies.

Marc R. Butler is a highly experienced financial services executive who currently works as an advisor and consultant in the financial services world, with a focus on wealth management, organizational operation, and startup success. Eric Butow is the owner of Butow Communications Group in Jackson, California, and is the coauthor of Instagram for Business For Dummies and Digital Etiquette For Dummies.

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