When you first dive into the startup world and start raising funds, you might find yourself thinking: "VCs speak a different language!"
Ever had that moment where you're sitting in a meeting with a VC, and their jargon completely throws you off? It feels like there's an invisible barrier between you and the investment world—one filled with complex financial and legal terms.
To help you bridge that gap, we've compiled 10 key terms you need to know when talking to venture capitalists (VCs). Understanding these will help you keep up with investors—and at the very least, make you sound like a pro!
What’s in This Guide?
Term Sheet – The initial agreement setting investment terms
Articles of Association – The official "rulebook" of your company
Cap Table – A breakdown of company ownership
Anti-dilution – Protecting early investors from losing equity
Down Round – When your company raises funds at a lower valuation
Drag-Along Rights – Majority rules when selling the company
Good/Bad Leaver – What happens to equity when key people leave
Lock-In – Restrictions on selling shares
ROFR (Right of First Refusal) – Giving existing investors first dibs
Waterfall – Who gets paid first when the company exits
1. Term Sheet: The Initial Investment Agreement
A Term Sheet is a non-binding document that outlines the key terms of an investment deal.
It sets the foundation for negotiations and typically includes details like equity distribution, valuation, board structure, and investor rights.
💡 Pro Tip:
At this stage, startups often face pressure from investors. Be cautious not to concede too much in the terms, as they will impact your control over the company in the long run.
2. Articles of Association: The Company’s Rulebook
This is the legal document that defines the rights and responsibilities of shareholders, board members, and executives.
For investors, this document is key—they often negotiate amendments to secure greater control or protect their returns.
💡 Why It Matters:
The Articles of Association directly shape governance, shareholder dynamics, and future exit strategies. Be sure to review these clauses carefully to avoid unfavorable restrictions.
3. Cap Table: Who Owns What?
The Cap Table (Capitalization Table) is a spreadsheet that outlines every shareholder's ownership stake in the company. It determines voting power, financial returns, and future fundraising potential.
⚠️ Warning:
Poor cap table management—such as giving away too much equity too early—can complicate future fundraising, exits, and decision-making.
4. Anti-dilution: Protecting Early Investors
Imagine you've spent years building your company, and early investors have bet on you.
Now, a new funding round is issued with additional shares. Without Anti-dilution protections, early investors could see their ownership shrink significantly.
💡For Investors:
This clause ensures their percentage ownership remains protected when new shares are issued.
💡For Startups:
Be cautious! If anti-dilution clauses are too aggressive, investors may end up with disproportionate control over your company. When negotiating funding terms, carefully evaluate these clauses to ensure they don’t overly favor investors at your expense.
5. Down Round: Raising Money at a Lower Valuation
A Down Round happens when a startup raises new funding at a lower valuation than in a previous round. This can be triggered by market conditions, business challenges, or investor sentiment.
⚠️ Risks:
Shareholders experience equity dilution
Reputational damage—market confidence may decline
Managing investor expectations becomes crucial to preventing panic
6. Drag-Along Rights: When Majority Rules
Drag-Along Rights allow majority shareholders to force minority shareholders to sell their shares in the event of an acquisition.
💡Pros:
Ensures smoother company exits by preventing holdouts.
💡 Cons:
As a minority shareholder, you may have little say in the timing or terms of a sale. Always negotiate fair conditions before agreeing to this clause.
7. Good/Bad Leaver: What Happens When Someone Leaves?
These clauses define what happens to founders or key team members' equity if they leave the company.
💡Good Leaver:
Leaves under normal circumstances and retains their shares.
💡Bad Leaver:
Leaves under negative circumstances (e.g., breach of contract) and may lose their equity.
⚠️Why It Matters:
If you're a founder, make sure the definitions of "good" and "bad" are reasonable and fair—otherwise, you risk losing your stake in your own company.
8. Lock-In: Restricting Share Sales
A Lock-In Period prevents key shareholders (founders, executives, or early investors) from selling or transferring their shares for a set period.
💡Pros:
Ensures stability and investor confidence.
💡 Cons:
Limits flexibility—could delay your ability to cash out.
⚠️Key Takeaway:
Negotiate reasonable lock-in terms so you're not stuck when opportunities arise.
9. ROFR (Right of First Refusal): First Dibs on Equity
ROFR gives existing investors the right to buy new shares before outsiders can invest.
⚠️ Startup Trap:
While ROFR protects investors, it can also consolidate control among early shareholders, making it harder for founders to bring in new investors or partners.
10. Waterfall: Who Gets Paid First?
The Waterfall Clause defines the payout order when a company is sold or liquidated.
💡 Typically:
Investors get paid first, then founders and employees.
⚠️ Why It Matters:
If structured poorly, founders and employees may end up with little to no payout after an exit.
⚠️ Negotiation Tip:
Try to secure a balanced structure so founders and early employees are rewarded fairly.
Final Thoughts
Mastering VC terminology isn’t just about sounding smart—it’s about protecting your company and making informed decisions. The more you understand these terms, the better equipped you’ll be to negotiate deals, raise funds, and scale successfully.
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