VC Buzzwords 101
PART 2
If you read Part 1, you know I broke down the first set of venture capital buzzwords using something we all understand: coffee.
Click here to read VC buzzwords 101 (part 1)
Today, we’re diving into round two. This time, we’re looking at what happens when your company is up and running, investors are showing interest, and you're entering your first real negotiation.
1. Convertible Note / SAFE
Imagine an investor gives you money now but doesn’t get a slice of your company immediately. Instead, they get the promise of shares later, when your company raises its first real priced funding round.
A convertible note is like a loan that turns into shares later, usually with a little interest added.
A SAFE (Simple Agreement for Future Equity) is even simpler. No loan, no interest, just a promise to get shares later.
💸 Why VCs care: It lets them invest early without having to agree on how much your company is worth just yet.
2. Pre-Money vs Post-Money Valuation
Your cart is valued at $1M. An investor puts in $250K.
Pre-money = your value before the money = $1M.
Post-money = value after the investment = $1.25M.
💸 Why VCs care: This math determines what percent of the cart they own.
3. Option Pool
You set aside shares (usually 15%-25%) for future hires to motivate them with equity.
But VCs often ask you to expand the pool before they invest, which dilutes your ownership, not theirs.
💸 Why VCs care: They want future employees motivated but don’t want their stake diluted.
4. Pro Rata Rights
An early investor wants to keep their 10% even as you grow.
Pro rata rights give them the right to invest more in the next round to maintain their stake.
💸 Why VCs care: They want the chance to double down if you’re winning.
5. Liquidation Preference
Imagine you sell your company, but the sale isn’t a huge jackpot.. just enough to pay back the investors.
With a 1x liquidation preference, the investors get their original money back first, before the founders or anyone else sees any cash.
Think of it like a safety net for investors: they get their initial investment before profits are shared.
💸 Why VCs care: It limits their downside if things don’t go as planned.
6. Anti-Dilution Clause
You raise your next round at a lower valuation than the last (a down round).
An anti-dilution clause protects early investors by adjusting their shares so they don’t lose value or get “diluted” unfairly because of that lower price.
💸 Why VCs care: They don’t want to get punished for betting on you early.
7. Bridge Round
You’re not out of money, but you need a top-up to get to your next raise. You raise a short-term round to “bridge” the gap.
💸 Why VCs care: It’s a lifeline, but if you need too many, it’s a red flag.
8. Down Round
You raised at a $10M valuation last time. Now it’s $6M.
That’s a down round; your valuation dropped.
💸 Why VCs care: It signals things didn’t go as expected. They’ll want to know why.
9. Drag-Along Rights
Most of your investors want to sell the company, but one or two are holding out.
Drag-along rights force everyone to follow the majority decision.
💸 Why VCs care: They don’t want a deal blocked by one loud voice.
10. Cliff & Vesting
If you promise shares to a co-founder who leaves after 3 months, with a 1-year cliff and 4-year vesting, they get no shares unless they stay at least 1 year. After that, their shares vest gradually over 4 years.
💸 Why VCs care: They want equity in the hands of people who build, not bail.
These terms aren’t just legal boilerplate; they define the power dynamics and financial outcomes in every deal. Understanding them is non-negotiable if you want to negotiate from a position of strength and build lasting investor relationships.
Get these basics down, and you’re no longer just fundraising; you’re running the game.