6/27/2023 0 Comments Common stock pro rataThey will do so in case they are better off being paid ratably (“in proportion”), rather than based on their liquidation preference (see: liquidation preference) and participating amount (see: participating preferred stock). Optional conversion rights allow investors to convert their preferred stock into common stock. There are two types of conversion rights optional and automatic (sometimes called mandatory). Once preferred shares have been converted into common ones, they can not be converted back. Conversion generally happens in relation to a liquidation event. The preferred stock that VCs are issued almost always comes with conversion rights. Most importantly, these rights give preferred shares priority in a liquidation event (see: liquidation preference).Ĭonverting preferred shares to common shares. In contrast, institutional external investors – particularly VCs – will almost always require that they be issued preferred stock (see: preferred stock) that comes with additional rights. Sometimes, early angel investors may also be persuaded to invest in common stock. Founders & employees typically own common stock. The basic unit of ownership in a company. In addition, it’s typical for VCs to demand vesting schemes that set back the clock on this in conjunction with funding rounds. A typical cliff is 12 months.įounder stock may also be subject to a vesting period. Much like vesting in general, the cliff is there to incentivize employees to stay on longer. While these vesting schedules are linearly progressive, they usually contain a cliff a period of time before which any options vest. In other words, they can only fully be converted into stock after this period of time. Investors will expect to see this when considering an investment, so make life easy by having one written out.Įmployee stock options usually vest (see: vesting ) over a period of some years. While aggregate benchmarks are quite vain here, the general wisdom goes that your CLTV/CAC ratio should be above 3:1 and your CAC payback should be less than 12 months.Ī company’s capitalization table, commonly abbreviated cap table, describes the ownership structure of the company – basically, who owns how much of which class of shares. ![]() Post-product-market-fit, these are going to be some of the key metrics that investors are interested in. In addition, and assuming your CLTV exceeds your CAC, many investors will be interested in your CAC payback time – how quickly you actually earn the money back that you spend acquiring a customer. CAC is one of the two components that define your basic unit economics – the other being CLTV (see: customer lifetime value ). Gross burn refers to the sum total of cash that a company is spending, while net burn is the cash it’s losing after revenue.Ĭustomer acquisition cost (CAC) is the average amount of money that it costs for a company to acquire a new customer. Sometimes, a further distinction is made between gross burn and net burn. The rate at which a company is spending the external capital it has raised – typically expressed over one month. ![]() There are two basic types of anti-dilution clauses: full ratchet (see: full ratchet ) and weighted average (see: weighted average ). They do so by adding anti-dilution clauses. In term sheet negotiations, investors will typically want to protect themselves against events that would reduce the value of their shares below what they paid for them. However, this changes if the company goes on to raise a flat or down round (see: flat round, down round ). existing shareholders will own less of the company, but the total value of their shares will increase. This is more than enough to offset the effect of dilution, i.e. ![]() If a company is doing well and has structured its fundraising process sensibly, its valuation will multiply at least a few times over with each consecutive round. The majority of dilution (see: dilution ) happens in relation to funding rounds. To that end, we collected and explained the 40 pieces of terminology that you are most likely to come across in your investor meetings. While every founder should hire a good lawyer, it never hurts to know the most important ones yourself. Venture capital deals are inundated with exotic terms.
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