VC Glossary

Benchmarks are reference performance levels (typically quartile breakpoints by vintage year and strategy) used to evaluate whether a fund or portfolio company is performing well relative to peers. Cambridge Associates and PitchBook publish the two most cited private-market benchmark series.

Burn rate is the monthly rate at which a startup spends cash before reaching positive cash flow. Gross burn is total monthly cash outflow. Net burn subtracts monthly cash revenue from cash outflow and represents the actual cash loss per month.

DPI (distributions to paid-in capital) is cash actually returned to limited partners divided by capital they contributed. It is the only fund multiple that represents realized money rather than paper marks.

EBITDA is earnings before interest, taxes, depreciation, and amortization, calculated as net income adjusted to add back those four items. It is a non-statutory measure (not defined under IFRS, and treated as a non-GAAP measure under US rules) used as a proxy for operating cash profitability and as the denominator in EV/EBITDA valuation multiples.

An exit multiple is the valuation multiple (typically EV/Revenue or EV/EBITDA) applied to a company's projected financials at the time of a future sale or IPO, used to estimate terminal value in venture and DCF models. It is the dominant input in the venture capital method and in probability-weighted MOIC scenarios.

IRR (internal rate of return) is the annualized discount rate that sets the net present value of a fund's cash flows to zero. In venture, it is calculated from inception using contributions as outflows, distributions as inflows, and the ending NAV as a residual inflow, so it weights returns by both timing and dollar size.

A KPI (key performance indicator) is a quantifiable measure tied to a specific business objective, used to track progress toward that objective over time. KPIs are a structured subset of metrics: every KPI is a metric, but most metrics are not KPIs.

Market capitalization is a listed company's equity value, calculated as current share price multiplied by total shares outstanding. Common size brackets used by index providers and regulators: mega-cap above $200B, large-cap $10B to $200B, mid-cap $2B to $10B, small-cap $250M to $2B, micro-cap below $250M. Exact thresholds vary by jurisdiction and provider.

MOIC (multiple on invested capital) is the total value returned by an investment, realized plus unrealized, divided by the capital invested. It is the simplest measure of investment performance and ignores time.

Multiples are ratios of company value to a fundamental input (earnings, revenue, EBITDA, cash flow), used to compare valuations across firms. The main families are price multiples (P/E, P/S) and enterprise value multiples (EV/EBITDA, EV/Sales). EV multiples are preferred when companies have different capital structures.

NAV (net asset value) is a fund's assets at fair value minus its liabilities at a reporting date. For a private equity or venture fund, NAV equals the fair value of unrealized portfolio holdings plus uncalled-but-committed cash and receivables, minus payables and accrued expenses. The IPEV Valuation Guidelines define the fair value standard GPs use.

pwMOIC (probability-weighted MOIC) is the expected return on a venture investment, calculated by multiplying each possible exit multiple by the probability of that scenario occurring and summing the results.

Quick ratio has two distinct meanings. In accounting it is (current assets minus inventory) divided by current liabilities, measuring short-term liquidity. In SaaS it is (new MRR plus expansion MRR) divided by (churned MRR plus contraction MRR), measuring how much new revenue is added for each dollar lost.

ROI (return on investment) is the gain on an investment divided by its cost, usually expressed as a percentage. ROI = (Final Value - Initial Investment) / Initial Investment. It ignores time, fund-level fees, and unrealized markups, which is why venture LPs prefer MOIC and IRR for fund reporting.

Runway is the number of months a startup can operate at its current net burn before cash reaches zero. Runway = cash on hand / monthly net burn. Most venture-backed companies target twelve to eighteen months of runway between rounds.

TAM (total addressable market) is the total annual revenue available if a product captured 100% of demand in its category. SAM (serviceable addressable market) is the subset a company can reach with its current distribution. SOM (serviceable obtainable market) is the share realistically winnable in the near term.

Traction is observable evidence that customers find value in a product: paying users, recurring revenue, retention, growth rate, and engagement. Investors treat traction as proof of product-market fit and as the strongest signal for valuation at early stage.

TVPI (total value to paid-in) is the sum of distributions returned to LPs and the current unrealized NAV, divided by capital contributed. TVPI = DPI + RVPI and represents the full mark-to-market picture of fund performance.

Valuation is the agreed worth of a company at a point in time. In venture, the priced round sets it: pre-money valuation is the company's worth before the new investment, post-money is pre-money plus the round size. Both numbers are typically computed on a fully-diluted share count that includes the option pool.

Yield is the income return on an investment over a period, expressed as a percentage of price or NAV. Dividend yield divides annual dividends per share by share price. Distribution yield, used for funds and REITs, annualizes recent distributions and divides by NAV.

An accelerator is a time-boxed cohort program (typically three months) that gives early-stage startups capital, mentorship, and a peer network in exchange for equity. The model was pioneered by Y Combinator in 2005 and Techstars in 2006.

An angel investor is an individual who deploys personal capital into early-stage startups, usually before institutional venture capital is available. Individual checks typically range from a few thousand to around one hundred thousand dollars (or local-currency equivalent), often pooled through angel groups or syndicates.

Bootstrapping is funding a company's growth from personal savings, founder revenue, or customer cash flow, without raising outside equity. Bootstrapped founders trade slower growth for full ownership and full control.

Crowdfunding is a fundraising method that pools small individual investments from a large number of people, typically through a regulated online platform. In an equity crowdfunding round, those investors receive shares or share-like securities, in contrast to rewards or donation crowdfunding where backers receive a product, perk, or nothing in return.

Deal flow is the rate and quality of investment opportunities reaching a venture firm. It is the input side of the funnel: every deal a partner sources, screens, or receives inbound becomes a candidate for screening, diligence, and an eventual term sheet.

Due diligence is the pre-investment investigation a VC runs on a target company. It covers commercial, financial, legal, technical, and reference workstreams, and the findings determine whether the firm signs the term sheet, renegotiates, or walks away.

General solicitation is the public advertising of a private securities offering, permitted under SEC Rule 506(c) of Regulation D. It allows companies to broadly market a fundraise, but every investor must be accredited and the issuer must take reasonable steps to verify accreditation.

An incubator is a longer-form support program for very early-stage startups, typically offering workspace, services, and mentorship over 12 to 24 months. Incubators may be university-affiliated, corporate-backed, or non-profit, and often do not take standard equity stakes like accelerators do.

The investment committee is the internal body that votes to approve or reject a venture firm's investments. Structure varies by firm: unanimous partner votes are common at small funds, while larger firms use a designated subset of partners or a chair with veto rights.

The lead investor sets the terms of a venture round, runs the diligence, and typically takes the board seat. Other participants in the round, called follow-on or co-investors, accept the lead's terms in exchange for allocation.

An NDA is a confidentiality agreement between two parties that restricts disclosure and use of shared information. In venture capital, most firms decline to sign NDAs at intro or pitch stage because partners hear overlapping ideas across hundreds of deals and cannot accept disclosure liability.

A pivot is a material change in a startup's business model, target customer, or product, made in response to learning. Famous examples include Slack pivoting from the failed game Glitch, Instagram pivoting from the check-in app Burbn, and YouTube pivoting from a video-dating concept.

A strategic investor is a corporate entity that invests in startups primarily to gain strategic value such as access to technology, M&A optionality, or distribution partnership, alongside or instead of pure financial return. Most strategic capital is deployed via Corporate Venture Capital (CVC) arms.

A syndicate is a group of investors collaborating on a single deal, often pooled through an SPV with a lead investor who negotiates terms and signs the term sheet. The syndicate model is used by angel groups, AngelList Syndicates, and traditional VC co-investment rounds.

A term sheet is a non-binding document that outlines the price, structure, and key clauses of a proposed venture investment. It precedes the definitive financing documents and sets the framework the lawyers will paper, with only confidentiality, exclusivity, and expense provisions usually binding.

A capital call is a formal notice from the GP requiring LPs to wire a portion of their committed capital, typically within 10 business days. Funds call capital deal-by-deal rather than upfront so LP capital is only at work when needed.

Capital under management (AUM) is the total committed or fair-value capital a firm manages across all its funds. The same firm can quote different AUM figures depending on whether it counts committed capital, called capital, or current fair value, so the basis of the number matters as much as the number itself.

Carried interest is the GP's share of fund profits, typically 20%, paid only after LPs receive back their contributed capital plus a preferred return. Carry is the GP's primary compensation and the reason venture is a performance-driven business.

A clawback is the LP right to recover excess carried interest paid to the GP if the fund underperforms by the end of its life. It exists because deal-by-deal waterfalls can pay carry on early winners before later losses are realized. ILPA's Model LPA pairs the clawback with an interim true-up and 30 percent escrow of distributed carry.

A family office is a private investment and wealth-management entity that serves one ultra-high-net-worth family (single-family) or a small set of them (multi-family). Most jurisdictions offer some form of investment-adviser exemption for entities that serve only family members and do not market to the public; specifics vary by country.

A fund of funds is an LP vehicle that invests in other venture capital funds rather than directly in companies. It gives smaller LPs access to a diversified portfolio of GPs in exchange for a second layer of fees, typically 1 percent management plus 5 to 10 percent carry on top of the underlying fund economics.

A GP (general partner) is the managing entity of a venture or private equity fund. The GP makes investment decisions, owns the management company, and bears unlimited liability for the partnership's obligations in exchange for a management fee and carried interest.

The harvest period is the back half of a venture fund's life, when the GP stops making new investments and focuses on growing existing portfolio companies and selling them. It typically runs from around year five through year ten, with most distributions concentrated in years seven to nine.

A hurdle rate is the minimum annual return LPs must receive before the GP earns carried interest. The market standard is 8% IRR, compounded annually on contributed capital, applied across roughly two-thirds of private equity and venture funds.

The J-curve is the shape of a venture fund's net returns over time: negative or below-cost in the early years due to fees and write-downs, then climbing steeply as winners exit. The trough typically lasts three to five years.

An LP (limited partner) is an investor in a venture or private equity fund. The LP commits capital, receives distributions, and has limited liability capped at its commitment, but does not participate in investment decisions.

A management fee is the annual fee LPs pay the GP to operate the fund, typically 2% of committed capital during the investment period and stepping down to 1% to 1.5% of invested capital afterward. The fee funds salaries, office, and overhead; it is not contingent on performance.

Overhang is committed capital that LPs have promised to a fund but the GP has not yet called or invested. At the industry level it is the aggregate pool of uninvested commitments sitting at venture funds, often reported as dry powder.

A side letter is a bilateral agreement between a fund and a specific LP that grants custom terms outside the main LPA. Common provisions include most-favoured-nation (MFN) rights, fee discounts, co-investment rights, regulatory or tax accommodations, and enhanced reporting.

An SPV is a single-purpose legal entity that pools capital from multiple investors to make one investment in one company. Standard syndicate economics are roughly 20 percent carry to the lead plus a fixed administrative fee, with the SPV appearing as a single line on the company's cap table.

A venture partner is a part-time or non-permanent member of a VC firm who sources deals, advises portfolio companies, or brings a specific expertise the partnership lacks. Compensation is usually deal-specific carry plus a retainer, not a salary plus full partnership share.

A vintage year is the calendar year a fund makes its first investment or its first capital call. LPs benchmark fund performance against peer funds with the same vintage because deployment macro conditions (valuations, exit windows, rates) heavily shape outcomes.

A waterfall is the contractual order in which a fund distributes proceeds: return of LP capital, preferred return, GP catch-up, then carried-interest split. European (whole-of-fund) waterfalls apply this across all fund deals; American (deal-by-deal) waterfalls apply it deal by deal.

An anti-dilution provision adjusts the conversion price of preferred stock downward when the company issues new shares at a price below the original investor's purchase price. The lower conversion price means each preferred share converts into more common shares, partially offsetting the down round's economic dilution. The market standard is broad-based weighted-average; the more aggressive full ratchet is rare.

Bridge financing is short-term capital raised between priced rounds to extend runway until the next major financing or liquidity event. It is usually structured as a convertible note, a SAFE, or an extension of the most recent preferred series. Pricing typically references the prior round, sometimes with a discount.

A capitalization table is the official record of every security a company has issued: common shares, preferred shares (by series), options granted, options reserved in the pool, warrants, convertible notes, and SAFEs. It shows who owns what, at what price, with what restrictions, and on what basis (issued, outstanding, or fully diluted). It is the master ledger that every financing, exit, and equity grant runs through.

A convertible note is short-term debt that converts into equity at the next priced round, usually at a discount to the round price and capped by a maximum conversion valuation. Interest accrues, a maturity date sets a fallback, and the note holder receives shares of the new preferred series on conversion.

Convertible preferred stock is preferred equity that can be exchanged for common stock at a defined conversion ratio, either at the holder's election or automatically at events such as a qualified IPO. It is the standard instrument used in venture priced rounds because it combines downside protection (liquidation preference) with upside participation (conversion).

Drag-along rights compel minority shareholders to join a sale of the company approved by a defined majority (typically some combination of the board, the preferred holders, and the common holders). Each signatory of the shareholders' agreement agrees in advance to vote their shares in favor of the sale and waive dissent rights, which lets the company close a stock sale without holdouts.

Equity financing is capital raised by issuing ownership stakes in the company rather than borrowing. It is the umbrella term for priced rounds (Series Seed through Series E), SAFE and convertible note conversions, and any other transaction where the investor receives shares. Equity financing has no fixed repayment obligation but dilutes existing ownership.

Founder's stock is common stock issued to the founders at incorporation, almost always subject to vesting over four years with a one-year cliff and reverse-vesting repurchase rights for the company if the founder leaves. There is no separate legal class called founder's stock; it is just early-priced common stock with restrictions in a stock purchase agreement.

Full ratchet is the most aggressive form of anti-dilution protection. When the company issues new shares at a price below an investor's conversion price, the investor's conversion price resets all the way down to the new issue price, regardless of the size of the dilutive round. The result is significantly more common shares on conversion at the expense of founders and other unprotected holders.

A liquidation preference is the contractual right of preferred shareholders to receive a defined amount (typically 1x their invested capital) before any proceeds flow to common shareholders in a sale, dissolution, or other liquidation event. It sets the floor on what investors recover in a low-value exit and is one of the most important economic terms in a venture term sheet.

Mezzanine financing is subordinated debt paired with equity kickers, typically warrants, that sits between senior debt and equity in the capital stack. It is used late in a private company's life or in leveraged buyouts, with all-in yields commonly 12-20% combining cash interest, PIK interest, and warrant upside.

Non-dilutive funding is capital that does not require issuing equity in exchange. It includes government grants, R&D tax credits, revenue-based financing, customer prepayments, and certain forms of debt where the lender takes no equity beyond minor warrant coverage.

An option pool is a block of common stock the company reserves for future grants to employees, advisors, and contractors. It is created via the equity incentive plan and is included in the fully diluted cap table even though the underlying options have not yet been granted. Pool sizing at a priced round is one of the most consequential term-sheet negotiations because investors typically require the pool to be inflated into the pre-money valuation, which dilutes only common holders.

A PIPE is a private placement of equity or convertible securities into a company that is already publicly traded. The issuer sells restricted shares (or convertible notes, preferred, or warrants) to qualifying institutional investors at a negotiated price, then registers the shares for later resale into the public market. The mechanics originated in US securities practice; specifics vary by jurisdiction.

Preferred stock is the equity class issued to venture investors that sits ahead of common (ordinary) stock on liquidation, dividends, and often voting. It is the standard instrument for priced rounds and is documented as a separate series (Series Seed, Series A, Series B) in the company's constitutional documents.

A SAFE is an equity-like instrument introduced by Y Combinator in 2013 that converts into preferred stock at the next priced round. SAFEs have no interest, no maturity, and no repayment obligation, and they convert based on a valuation cap, a discount, or both. The 2018 post-money SAFE made ownership immediately calculable: investment divided by post-money cap equals ownership.

Unsecured debt is a loan that is not backed by a specific asset of the borrower. If the borrower defaults, the lender has only a general claim against the borrower's estate, which is why unsecured debt carries materially higher interest rates than secured debt of the same borrower.

Venture debt is senior secured debt extended to VC-backed startups, repaid primarily out of the company's ability to raise the next equity round rather than current cash flow. Loans typically carry interest in the high single digits, a maturity of 3-5 years, and warrant coverage of 0.5-2% of the borrower's equity.

Vesting is the schedule that determines when an employee, founder, or advisor earns ownership of options or restricted stock. The industry standard for venture-backed companies is four years of monthly vesting with a one-year cliff: nothing vests until month 12 (when 25% vests at once), then 1/48th of the original grant vests each month for the next 36 months.

Warrants are long-dated options issued by a company that give the holder the right to buy a fixed number of shares at a fixed strike price for a fixed period, typically 5-10 years. They appear most often as equity kickers attached to venture debt, mezzanine notes, and PIPE deals.

Dilution is the reduction in an existing shareholder's ownership percentage when a company issues new shares. The share count grows, the held shares stay constant, so the percentage falls. Priced rounds, option pool expansions, and SAFE or note conversions are the three common sources.

A follow-on investment is additional capital deployed by an existing investor into a subsequent priced round of a portfolio company. Funds set aside follow-on reserves, often 40-60% of fund size, to defend pro-rata and double down on winners.

Operational support is the non-capital help a venture investor gives a portfolio company after the check clears: recruiting, customer introductions, finance and operations playbooks, board work, and follow-on capital. Top funds quantify it; weaker funds promise it without delivery.

Post-money valuation is the company's value immediately after a new financing closes. It equals pre-money valuation plus the new investment, and it is the denominator for the new investor's ownership percentage.

Pre-money valuation is the agreed value of a company immediately before a new financing closes. It sets the price per share for the new round: pre-money plus the new investment equals post-money, and the investor's ownership is their check divided by post-money.

Early-stage is the umbrella term for venture financings from pre-seed through Series A (and sometimes Series B), where the primary risk is product-market fit rather than scale. Conventions differ: industry data providers segment seed and early-stage VC as distinct buckets, while fund-benchmarking conventions often group all rounds before late-stage growth into a single early-stage category.

Growth stage is the late-venture window, typically Series C and beyond, where companies have proven unit economics and the investment thesis is scale rather than survival. Industry trackers classify these rounds as late-stage venture and venture growth, distinct from the earlier seed and Series A/B risk-return profile.

Pre-seed is the earliest institutional financing round, typically raised before product-market fit on a SAFE or convertible note rather than priced preferred stock. The round funds team-building, a wedge product, and the path to a priced seed.

A round is a single financing event in which a startup issues new securities (preferred stock, SAFEs, or notes) at a defined price or valuation cap, usually with a named lead investor. Each round packages price, allocation, governance rights, and protective provisions into one closing.

A seed round is the first real financing round for a startup. It is often the first priced round, raised after any earlier SAFEs or convertible notes have come in. The point of the round is to get the company from early product to enough traction to raise a Series A.

Series A is the first large priced equity round after a startup shows early evidence of product-market fit. A lead investor signs a real term sheet, takes a board seat, and the cap table converts from any earlier SAFE or note stack into clean preferred stock.

Series B is the scaling round that funds go-to-market expansion and team build after a company has proven its initial GTM motion. The round shifts the question from 'does this work?' to 'how big can this get?'

Series C is a growth-stage equity round for companies approaching profitability or an IPO window. The round typically funds category leadership, international expansion, or acquisitions rather than core product or market discovery.

An acquisition is the purchase of a venture-backed company by another company, usually a strategic operator or a private equity firm. It is the most common venture exit by deal count, with proceeds paid in cash, acquirer stock, or a mix.

A buyout is an acquisition of a controlling stake in a company by a private equity firm, typically funded with a mix of sponsor equity and debt secured against the target's cash flows. The target services the debt out of its own EBITDA after close.

An exit strategy is the investor's or company's plan for realizing returns from a venture investment. The four primary paths are IPO, strategic acquisition, financial buyout, and secondary sale. M&A consistently dominates VC exits by count, while IPOs and large buyouts contribute most of the value when public-market windows are open.

An IPO (initial public offering) is the first sale of a private company's shares to public investors on a stock exchange, executed through a registration statement filed with the relevant securities regulator. It is the highest-multiple but lowest-frequency venture exit path: it produces a small share of exits by count and a much larger share by dollar value.

An MBO (management buyout) is an acquisition in which the existing management team buys a controlling stake in the company they already run, typically with backing from a private equity sponsor and bank debt. Management rolls existing equity into the post-deal entity to align incentives with the new sponsor.

A recapitalization is a restructuring of a company's debt and equity mix, often used to extract liquidity for existing shareholders without a full sale. A dividend recap takes on new debt to fund a one-time distribution to equity holders, returning cash to LPs while the sponsor retains ownership.

A trade sale is the sale of a venture-backed company to a strategic buyer from the same or an adjacent industry. The term is used interchangeably with acquisition in European VC parlance, where M&A is the dominant exit route and IPOs are comparatively rare.

A unicorn is a privately held company with a valuation of $1 billion or more based on its most recent priced funding round. The term, coined by Aileen Lee in 2013, has expanded from a handful of companies at the time to more than a thousand globally, concentrated in the US, China, and India.