We believe investing in early-stage startups is very different than investing in public market opportunities. Besides the unique opportunities associated with startup investing, and the long term liquidation nature of your investments, startups use slightly different terminology with which you may not be familiar. Below is a sample of the most commonly used deal terms.
Capitalization Table (Cap Table)
A capitalization table is a document that displays who owns what in a company. This is where you will find a company’s common stockholders and option holders (employees and advisors) as well as preferred stockholders (investors). Cap tables break down the ownership by percentage, equity dilution and investment by fundraising round.
A direct investment is an investment that goes directly into the company that is fundraising. You, as the investor, are represented on the company’s cap table that reflects your percentage ownership in that company.
However, since some companies may not want a large number of small investors on their cap table, a company might create a Special Purpose Vehicle (SPV) or Special Purpose Fund (SPF).
Indirect Investments via Special Purpose Vehicles or Special Purpose Funds
A SPV or SPF pools together many small investors in a private fund or limited liability company. This fund then invests directly into a company, representing one single entity on the company’s capital table.
Advantages: SPVs allow “smaller ticket” investors (investments below a company’s investment minimum) to participate in offerings that would not normally be available to them. For a company, an SPV reduces the number of smaller investors on their cap table and streamlines investor communication as they only need to communicate with the fund’s manager.
Disadvantages: SPVs tend to have additional fees for management associated with them, and investors pay a percentage of the proceeds from their investment back to the fund’s manager. For investors who are investing at higher dollar amounts and would like to be more involved with the company, an SPV may not be appropriate.
A company’s valuation is the amount a company is valued at in dollars. Read Top 5 Angel Investor Hacks to learn more about valuations.
An equity investment is an investment of cash for stock, or shares, in a company. When a company raises an equity round of investment, they will set a valuation (pre or post-money valuation) and a share price. Using the valuation, raise amount and share price, you can calculate the percentage of the company that is being sold.
For example, company ABC is selling 100,000 shares for $2M. Each share is $20. If the pre-money valuation of ABC is $6M, this means they are selling 25% of their company for $2M.
A convertible note (convertible debt) is a debt loan that converts to equity when a company reaches a certain milestone, usually the next round of equity financing.
Convertible notes are commonly used by startups as it is generally less expensive for a company to fundraise via this method (e.g., legal costs for document creation are lower) and is useful for smaller rounds of funding at earlier stages (for example before Series A).
A company raising using debt is looking to borrow money from investors to be repaid with interest at a later date. Components of a debt raise include an interest rate and term length.
A revenue share operates like a royalty. In other words, an investor buys a share in the future revenue of a company.
Revenue shares set a date for repayment, payment frequency, and return amount (usually a percentage of the original investment).
Disclaimer: The terms highlighted herein do not reflect a complete description of the use or definition of the terms. These terms reflect a general use and understanding to the best of our knowledge. Any investor is encouraged to seek further information as we are not offering any legal, financial or accounting advice. Investing can cause the entire loss of principal and performance of any company is not guaranteed. This information is not an offer to buy or sell any investment, whether on Crowdfunder or another platform. All information herein is for informational purposes only.