Dreaming of running your own startup, or already assembling your dream-team to make it happen? Wonderful—startups are a great way to bring your ideas to life, fuel your passions, and, of course, generate big profits.
That said, starting and running a startup is an incredibly complex process—one that requires lots of research and education at the start. That’s why we’ve compiled key startup finance terms that you need to know before starting your journey.
Think of it as your ‘Startup 101’ lesson for the day!
Key Startup Finance Terms
Get a handle on these important elements of startup financing, and you’ll be well on your way to success.
By definition, startups need financing, and a seed round is a great way to get it in the early stages. Seed capital is the initial money you use to start your business, often coming from family and friends, or, if you’re well-organized, early shareholders and angel investors.
Seed capital typically means giving up a hopefully small percentage of your business, but for many startups, it’s also how you get your company off the ground.
Speaking of angel investors, these are wealthy private investors who provide startup capital, usually in exchange for fairly large equity.
While they can be incredibly helpful and in many cases more flexible than venture capitalists , they may also want a significant say in how you run your business.
Something to definitely watch out for! Cash runaway is how long your business can stay sustainable until sales rise or you can raise more money. In other words, it’s how long you can operate without any new incoming money. Get tips on how to handle your cash runaway here.
To determine your cash runaway, you need to have a solid handle on your bash burn, which is the total money you’re spending (or ‘burning’ through) each month. Find tips for managing your startup cash flow here.
Cash flow is essentially how much money is coming into and out of your startup, comprising your revenue, costs, and assets. Learn how to manage your startup’s cash flow here.
Startups are more likely to succeed when they have a diverse capital stack, which is the structure of capital that is invested in your startup. It’s important to see your capital as layers, split between debt, equity, and other sources of capital—all of which make up your capital stack.
Specifically, a diverse capital stack can be comprised of:
- Debt, which is a loan that needs to be repaid, typically found in the following forms—
- Senior debt, which is generally provided by banks or bondholders
- Mezzanine debt, which is a high-risk form form of debt where the issuers can convert the debt to equity if you default or go bankrupt
- Convertible debt, which is acquired through a group of investors, with the expectation that it will be used to generate equity and revenue that is distributed in the future
- Equity, which is essential ownership—of both the risks, and the rewards. It can look like the following.
- Preferred equity, a shareholder equity that gives preference when cash or equity payouts are being made.
- Common equity, which is a standard class of shareholder, which is generally last on the priority list for receiving payouts and dividends after preferred equity holders and other debt classes
- Other sources of capital
- Grants and government incentives
- Crowdfunding (also called crowd-sourcing), which is a great way to raise capital in the early stages of your startup, because instead of being a loan with interest, people give capital in exchange for a product or service, once a goal has been met (see more ways early stage companies can finance their startup here).
- Retained earnings, which are low-risk because they’re essentially a portion of your startup’s profit
Fractional and/or Virtual CFO
Startup financing is complex, and it’s also make-or-break. But ironically, since money is so tight in the early stages, many startups aren’t able to hire a full time CFO to help manage their finances.
‘Fractional’ means you can get part-time financial support, in the areas where you need it most. And of course, thanks to the pandemic, we all know how virtual services work!
When you hire a virtual CFO, we can do a cash flow analysis of your startup. You’ll learn your complete financial picture and get expert advice about how to best control your finances.
We offer virtual CFO services specially catered to startups, with multiple plan options to meet your budget and goals. Reach out to learn more.