Discover the key terms you’ll need to make your way through the world of venture capital.
One of two types of investors permitted to invest in startups by the SEC. To become accredited, an investor must meet a specific income or net worth threshold, or pass a financial exam and hold a specific license.
The accredited investor qualification is a common way for individual people to start investing in startups. As of today, the criteria are either 1) an income of $200,000 a year single or $300,000 joint in each of the two most recent years; 2) a net worth of over $1 million not counting the value of your primary residence, or 3) taking the test to receive a license Series 7, Series 65, or Series 82. But these requirements may change. At Carta, we believe that more people should be able to become accredited investors.
An individual person with enough capital to invest in startups who invests directly into the company, rather than putting money into a fund.
Angel investors often invest in the early stages of a company, usually via convertible instruments. That means angel investors typically take on more risk.
A legal structure that pools other people’s money together to invest.
Typically, VC firms are structured into three parts: The general partner, the management company, and the fund.
In a VC firm, the GP is the manager that controls a fund.
GPs are the venture capitalists who decide which private companies to invest in and manage the investments.
Institutional investors who invest in venture capital funds through a VC firm.
LPs bring the money to invest, but typically aren’t involved in the day-to-day—though they will have requirements.
A company that is part of a VC firm. Everything that makes the firm run, like hiring and paying employees and finding office space and software, is done and paid for by the management company.
You can think of the management company like the “brand” of the firm, and the “headquarters” of the firm.
A fee on a fund charged by the management company so it can handle overhead. Usually, the fee is around 2% of the value of a fund.
Along with carried interest, this is the other way a VC firm makes money. GPs often refer to their overall pay structure with the phrase “two and 20,” or 2% management fee with a 20% carry.
When your company gets bought by another entity, or merges with another company.
Mergers and acquisitions can be liquidity events. Often, the acquiring company will give you a lump sum payout. If you own common stock (like most employees and founders do), you’ll be the last to be paid out.
A calculation of the amount of money the company will be worth after an investment comes in. It’s based on the price of preferred shares, which are granted to investors.
This type of valuation is a way for founders to keep track of the equity they control in a company.
A calculation of the amount of money the company is worth before an investment comes in.
Investors often require an employee stock option pool to be created on a pre-money basis, meaning that the pool will only affect the people who owned shares before the investment came in.
A type of stock that is mainly issued to investors, who usually pay a higher price per share than for common stock.
Shareholders of preferred stock get paid out first if the company has an exit event (like an IPO or M&A) or in case of bankruptcy.
A way private companies can raise funds from investors by taking money in exchange for shares in the company. In these agreements, the investor pays a clear, defined price for a certain percentage (or number of shares).
Priced rounds are typically used by VC firms once a company gets some traction and really starts growing. Those rounds tend to be “lettered,” like Series A, B, and C.
An entity—which could be an individual or a business—with a significant amount of investment capital. This is the second of two types of investors permitted to invest in startups by the SEC.
Qualified purchasers are permitted to take on more types of investments than accredited investors, but the credentials are stricter. Individuals need to have either $5 million invested for themselves or $25 million in private capital invested on behalf of other people.
An SPV is like a VC fund, but it’s designed to only invest in one single thing—often one company.
New investors often use SPVs to build a track record when they’re just starting out. Investors might also use an SPV when they want to do a deal that’s outside the normal operating procedure of their fund.
A type of equity compensation that gives you the option to buy shares at the price listed on your equity grant. Early-stage companies tend to give stock options.
Stock options aren’t stock. That’s a big misconception. You still need to buy (“exercise”) them at the agreed-upon price (“strike price”) in order to be an owner.
The Securities and Exchange Commission, a government regulatory agency whose duties include protecting investors.
A private company isn’t required to make financial information public, so investing in a private company comes with more risk. For that reason, not everyone can invest in a startup—only people deemed by the SEC to be sophisticated enough to understand the heightened risk involved.
A company that makes startup investments on behalf of pooled funds from institutional investors, called limited partners.
VC firms fund startups, often coming in later than angel investors as the company is a bit more mature. They typically fund companies with priced rounds.