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There is a common set of shorthand jargon used to describe investments in startups. It is best to follow along with this way of talking, so that investors clearly understand the specifics of your deal.
If you use these terms incorrectly or in a way that the investor does not understand, that counts against you. Remember, unless you truly have the next best idea since sliced bread and investment terms that can’t be passed up, it is easier for an investor to pass on your deal than to spend the time trying to parse your non-grammatical investorese.
Convertible note – The shorthand to describe a convertible note offering goes like this: “We are raising $X in a convertible note with a Y% discount and Z% annual interest rate.” When asked for more details, you can then add on the length of time of the note, any “cap” on the conversion price, or other major terms.
This translates to: We are raising $X but not selling equity. Instead, we are offering the right to buy equity in the future for an unknown price, but with a Y% + Z% discount, assuming it takes another year to raise at least $W (where $W is a multiple of $X). The term “convertible note” implies a few other terms such as a minimum percentage ownership in that future equity round, a.k.a. a “cap.”
Equity – The shorthand for equity goes like this: “We are raising $X on a $Y valuation,” or sometimes shortened to, “We are raising X on Y” (where X and Y are in thousands or millions). E.g., “We are raising 2 on 5.” This translates to a raise of $2 million with a pre-money valuation of $5 million. That is a $7 million post-money valuation, where the investors own two-sevenths (28.6%). Note that “equity” is implied by default when talking about startups, and thus the shorthand form does not include the word “equity.”
In addition to explaining the deal terms, you are expected to know the meaning of the following jargon:
Raise – When you are out raising money, the “raise” is the amount of funding you are seeking. The “total raise” is the total amount of funding your company has raised to date. Thus the word “raise” is used as both a verb and a noun.
Private Offering – U.S. securities laws prohibit companies from selling shares to members of the public without spending an unreasonably large amount of money on regulatory filings to “go public.” However, there are exceptions. For instance, you can sell shares to “accredited investors,” as long as you follow some specific regulations. When a company sells shares to accredited investors through various exceptions to the securities laws, it is called making a “private offering to investors.”
Private Placement Memorandum – To comply with the securities laws, private companies are expected to provide details of the companies and disclosures of the risks associated with making private investments. The compilation of this information is generally known as a “private placement memorandum” or “PPM.” A PPM can contain the full business plan, the terms of the investment, and pages of legalese explaining many ways in which the investor can lose the money they are investing.
Term Sheet – It is common to provide investors with a summary of the terms of the investment, in addition to the complete investment contract. Sample term sheets are available online.
Subscription Agreement – The contract that investors usually sign to purchase equity in your company is called the “subscription agreement.” In the U.S., this contract covers the requirements of the securities regulations.
