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1.

Accounting Fees

An expense of your company, incurred when you pay an accountant. Typical services include

 Perform an annual audit of your company

 Provide ongoing financial and accounting advice to you

 Maintain your day-to-day financial records.

2. Accounts Payable (aka A/P)

Amounts owed by your company to other parties for goods or services purchased from them. They

appear on your balance sheet as a liability (because you owe the accounts payable). Meanwhile, the

cash flow statement entry titled accounts payable reflects the change in accounts payable between

the previous period and the current period.

3.

Accounts Receivable (aka A/R)

Amounts owed to your company by other parties for goods or services purchased by them from

you. They appear on your balance sheet as an asset (because somebody owes you the accounts

receivable). Meanwhile, the cash flow statement entry titled accounts receivable reflects the change

in accounts receivable between the previous period and the current period.

4. Accumulated Deficit (aka Cumulative Losses)

The sum of all net profits and losses from previous periods. When negative, it is called an

accumulated deficit. When positive, it is called retained earnings.

5.

Acquisition

An example of an exit strategy in which your entire company, or just its assets, are purchased by

another entity. That entity pays for the purchase using either cash or its own company equity.

6. Anti-Dilution Rights

A very common preference associated with preferred stock in a start-up. In essence, anti-dilution

protects holders of preferred stock from a down round, i.e., from a subsequent sale of stock in the

company in which stock this investor purchased is later sold at a lower price. Although there are

many ways to calculate the way to compensate the investor, all of them aim to provide the investor

with additional shares at no additional cost, so as to in effect retroactively enable the investor to

purchase his/her shares at a lower price.

7.

AOS (see Average Order Size)

8. Attorney Fees

An expense of your company incurred when you pay an attorney to provide you with any legal

counsel.

9. Attrition Rate (aka Churn)

The rate at which current customers stop being customers. The opposite of retention rate.

10. Average Order Size (aka AOS)

The average size of a purchase by a customer.

11. Balance Sheet

A standard financial statement thatshowsallyourcompany’sassets,liabilities,andshareholders’

equity at a specific point in time.

12. Base Starting Salary

* nemployee’sstartingsalaryifs/hewereworkingfull -time. If an employee were working half-time

and earning $25,000, his/her base starting salary would be $50,000.

13. Board of Advisors

A group of individuals generally appointed by officers of the company to advise them on matters

that enable officers to improve their on-the-job performance. Advisors are typically experts in the

industry, technology or market.

14. Board of Directors

A group of individuals generally elected by shareholders of the company and who have the

responsibilitytooverseethecompany’sactivities,appointthepresidentandCEOofthecompany,

and execute the responsibilities described i nthecompany’sbylaws.

15. Board Member

• memberofthecompany’sboardofdirectors.lsoknownasadirector.

16. Cap Table (see Capitalization Table)

17. CAC (see Customer Acquisition Cost)

18. Capital Asset (see Fixed Asset)

19. Capitalization Table (or Cap Table)

A standard table that shows rounds of investment as multi-part columns and investors (or

aggregated classes of investors) as rows. The multi-part columns are divided into three smaller

columns: # of shares, % ownership, and fully diluted % ownership. The entries in the table show

how the number of shares and the % ownership changes for each investor with each successive

investment round.

20. Cash Flow Statement

A standard financial statement that shows all cash going in and out of the company over a specific

period of time. The statement is organized into three major sections:

Cash from operating activities

Cash from investing activities

Cash from financing activities.

21. Cash from Financing Activities

The bottom third section of the cash flow statement shows all sources and uses of cash related to

thecompany’s

Offering and repurchase of its equities

Acquisition and repayment of loans.

22. Cash from Investing Activities

The middle third section of the cash flow statement shows all sources and uses of cash related to

thecompany’spurchaseandsaleof fixed assets.

23. Cash from Operating Activities

The top third section of the cash flow statement shows all sources and uses of cash related to the

company’s principal business. It starts with the profit (or loss) from the income statement.

Although most items represented by the profit (or loss) are reflected in cash, a few are not. The

remaining lines of this section back out those items from the profit (or loss) that are not cash.

These are depreciation, changes to accounts receivable, changes to accounts payable, and changes

to accrued liabilities.

24. Churn (See Attrition Rate)

25. COGS (See Cost of Goods Sold)

26. Collection Period (aka Days Outstanding)

The number of days between when that revenue is booked and when customers pay for goods or

services related to that revenue. During this number of days, that amount remains as an accounts

receivable.

27. Commission

The percent of a sale of an item that is awarded to employees (usually salespeople) for the roles

they played in making that sale.

28. Common Stock

An example of equity in a company. Common shares are generally sold to founders of the company.

They are generally used in stock options, i.e., stock options awarded to employees and others are

generally options to purchase common stock at some predefined strike price. Investors in start-ups

generally purchase preferred stock, but sometimes purchase common stock.

29. Competitor

A company that is selling products that directly or indirectly cause customers to forgo purchasing

your product. Notice that a competitor could be in an entirely different industry than you are in.

For example, a highly-effective rapid transit system could be seen as a competitor to an automobile

dealer in a metropolitan area. See direct competitor and substitute competitor.

30. Consultant

An individual or company that your company decides to retain for goods or services.

31. Convertible Loan (aka Convertible Debenture)

A loan in which either or both parties (depending on the terms) may decide to accept payment for

the balance of the loan in equity of the company instead of cash. Often the terms include warrants

to purchase additional equity.

32. Cost of Goods Sold (aka COGS)

These are the costs that the company incurs in order to make products or services to be sold to

customers. If you are a reseller, it includes costs to purchase gross products from suppliers. If you

are a manufacturer, it includes costs of all raw materials as well as all manufacturing and inventory-

related labor. If you are a service provider, it includes costs of any materials you provide to

customers as part of your service and it could include the labor directly involved in delivering that

service depending on the industry.

33. Cumulative Losses (See Accumulated Deficit)

34. Current Assets

Any assets that you can convert into cash within one year.

35. Current Liabilities

Any liabilities that are due within one year.

36. Current Ratio

Current assets divided by current liabilities.

37. Customer Acquisition Cost (aka CAC)

The amount of money needed to convert one member of the target market into a paying customer.

38. Days Outstanding (see Collection Period)

39. Debt to Equity Ratio

Liabilities divided by shareholders’equity .

40. Depreciation

When you purchase a fixed asset, you can take a percentage of its cost as an expense each month

over its entire useful life. This expense is called depreciation, and is subtracted from the value of

the fixed asset on the balance sheet.

41. Direct Competitor

An example of a competitor. In this case, the competitor is producing goods or services that are

perceived by the customer as performing the same function in roughly the same manner.

42. Disability Insurance

An expense of your company. In most states, this is a mandated payment of a percentage of total

gross payroll tocoverworkers’compensationintheeventofawork -related injury.

43. Division (or Department)

A part of your company. For example,

General and Administrative (G&A)

Marketing and Sales (M&S)

Manufacturing and Production (M&P)

Research and Development (R&D).

44. Down Round

An investment round in which equity is sold at a price lower than it was sold in an earlier round.

45. Dues and Subscriptions

An expense of your company incurred when you reimburse your employees when they pay

for dues in professional societies and/or

purchase subscriptions in professional publications

to keep them up-to-date in their specialty.

46. Earnings after Tax (aka EAT)

After we subtract all costs of goods sold and expenses from revenue, we get EBITDA. After we

subtract interest, tax, depreciation, and amortization from EBITDA ,weget“earningsaftertax”

47. Earnings Before Interest and Tax (see EBIT)

48. Earnings Before Interest, Tax, Depreciation and Amortization (see EBITDA)

49. EAT (see Earnings after Tax)

50. EBIT (aka Operating Profit)

Literally, earnings before interest and tax. After we subtract depreciation and amortization from

EBITDA, we get EBIT.

51. EBITDA

Literally, earnings before interest, tax, depreciation, and amortization. After we subtract all costs of

goods sold and expenses from revenue, we get EBITDA.

52. Equity

Ownership in a company. Also known as stock.

53. Exercise (of an option)

Exercising a stock option is when an optionholder decides to purchase the stock at the strike price.

54. Exercise Price (see Strike Price)

55. Exit Strategy

Theterm“exitstrategy”referstodetermininginadvancehowthecompanyplanstoenableexternal

investors to achieve a return on their investment. Exit strategies typically include a liquidity event

for the company.

56. Expense

A cost incurred by the company that is not directly related to

Purchase of a fixed asset

Purchase of raw materials to be used to produce products for sale to customers (these become costs

of goods sold)

Purchase of products for resale to customers (these become costs of goods sold).

57. Financial Statements

Tables of data reporting the financial condition of a company. Usually consists of an income

statement, balance sheet, and cash flow statement.

58. Fiscal Year

The contiguous 12-month period in which a company reports its financial results.

59. Fixed Asset

An item purchased by the company, usually not of insignificant value, that has a useful life longer

than a year, and cannot be easily converted into cash.

60. Founder

An individual who is present when the company is founded, and who purchases a percent

ownership in the company.

61. Founders’Shares

The shares in a company purchased by a founder when the company is created.

62. Fringe Rate

The cost to provide all employment benefits to employees, expressed as a percent of gross payroll.

This includes the company’s contributions to medical/dental in surance plans, 401(k) ’s, life

insurance, and so on.

63. Fully Diluted

Refers to the total number of shares in the company assuming that all individuals exercise all their

individual rights to the extreme. In most cases, this means that all stock options in the authorized

option pool are granted by the officers of the company, and all individuals granted those options

exercise those options. Contrast with undiluted.

64. General and Administrative (aka G&A)

A specific division of the company. The labor costs for any employee not directly assigned to a sales

& marketing, manufacturing and production, or research & development functions should be

assigned to G&. lso, any “other expense” not directly assigned to a sales & marketing,

manufacturing and production, or research & development function should be assigned to G&A.

65. Grant (of an option)

Granting a stock option is when the company offers an individual (who then becomes an

optionholder) the right to purchase stock at the strike price during some pre-set period of time.

66. Grantee (see Optionholder)

67. Gross Income (see Gross Profit)

68. Gross Margin (aka Gross Profit Margin)

Gross profit divided by revenues. It is a measure of how efficiently you produce products.

69. Gross Payroll

The sum of the salaries paid to all employees, before payroll deductions.

70. Gross Profit (aka Gross Income)

Revenue minus Costs of Goods Sold.

71. Gross Profit Margin (see Gross Margin)

72. Income Statement (aka Profit and Loss Statement aka P&L Statement)

A standard financial statement that shows revenues, cost of goods sold, expenses, EBITDA, EBIT,

and earnings after tax of a company over a specific period of time.

73. Indirect Competitor (see Substitute Competitor)

74. Industry

A set of companies that provide goods and services to satisfy a specific set of needs of a market.

75. Initial Public Offering (aka IPO)

A mechanism by which cash for your company is raised by selling equity to the public.

76. Internal Rate of Return (aka IRR)

A standard way of calculating financial return for investors in a start-up. IRR is the annualized

compounded rate of return. For example, an investment of $100,000 that yields a return of $150,000

in one year has produced an IRR of 50%. An investment of $100,000 that yields a return of $225,000

in two years has also produced an IRR of 50%. An investment of $100,000 that yields a return of

$337,500 in three years has also produced an IRR of 50%.

77. Internet Services

An expense of your company, incurred when you pay for services such as web hosting, email, and

so on.

78. Inventory

Inventory consists of (a) raw materials purchased by the company, (b) work-in-process (i.e.,

partially assembled products), and © finished products that are waiting to be sold to customers.

79. Inventory Days

On average, the number of days items are expected to remain in inventory?

80. Inventory Turnover

Cost of goods sold divided by average inventory, where average inventory is the average of

inventory at the end of the current period and the inventory at the end of the previous period.

Inventory turnover can also be thought of as the number of times during the year that inventory is

replaced, i.e., an inventory turnover of 2 means that, on average, the entire inventory is replaced

twice a year. A low turnover (when compared to the rest of your industry) means that you may end

up with obsolete goods in your inventory. A high turnover (when compared to the rest of your

industry) means that you may end up with the inability to fulfill customer orders.

81. Investment Round

Investments in companies are done in rounds. During any one round, all investors purchase

identical classes of stock at the identical price under identical terms and conditions.

82. IPO (see Initial Public Offering)

83. IRR (see Internal Rate of Return)

84. Licenses and Permits

An expense of your company, incurred when you pay government entities for the right to do

business. This includes:

Domain name registrations

Tax licenses

Occupancy permits

Incorporation fees.

85. Liquidation Rights

A very common preference associated with preferred stock in a start-up. When a liquidity event

occurs, holders of preferred stock with liquidation rights first receive some multiple of their initial

investment (generally 1x, but some liquidation rights specify 2x or 3x) prior to general distribution

of the proceeds of the sale.

86. Liquidity

The quality of an asset to be easily convertible to cash.

87. Liquidity Event

An event in which some or all the equity in the company can be converted into cash. Typical

liquidity events include:

Acquisition by a publicly traded company in a stock swap, which enables investors to then sell

equity of the acquiring company on public markets.

Acquisition by a publicly traded or privately held company in a cash deal.

An initial public offering (IPO), which raises new rounds of investments for the company from the

public and may give external investors an opportunity to sell their shares on the public market.

Certainly, founders’ and officers’ equity will likely be locked out (read “prevented”) from selling

their shares for some period after the IPO.

88. Loan

Your company can borrow money from a third party with terms that specify how the money must

be paid back. See convertible loan for one such example.

89. Long-Term Liability (aka Long-Term Debt)

Any liability that is due after one year.

90. Lot Size (see Unit of Manufacture)

91. Major Purchase (see Fixed Asset)

92. Manufacturing and Production (aka M&P)

The specific division of your company involved in the creation of products to be sold to customers.

93. Market

Customers your company is targeting for purchasing your goods and/or services, and from which

you expect to derive revenue.

94. Market Penetration

The percent of the market size that your company is selling to.

95. Market Size

The number of customers in the target market.

96. Marketing and Sales (aka M&S)

The specific division of your company involved in the creation of awareness by customers,

branding, and all aspects of the sales funnel.

97. Marketing and Sales Expense

An expense of your company that broadly covers advertising, trade shows, etc.

98. Net Income (See Earnings After Tax)

99. Net Income Margin (aka Net Profit Margin)

Earnings after tax (aka net income) divided by revenues.

100. Net Profit (see Earnings After Tax)

101. Net Profit Margin (see Net Income Margin)

102. Net Working Capital

Current assets minus current liabilities.

103. “NewCustomersbyMonth”SalesModel

A method of modeling your sales by stating an average monthly purchase (average order size), and

then predicting how many new customers you expect to add each month (in each market).

104. “NewCustomersbyYear”SalesModel

A method of modeling your sales by stating an average annual purchase (average order size), and

then predicting how many new customers you expect to add each year (in each market).

105. Office Supplies

An expense of your company, incurred when you purchase items used in your office such as

consumables, office equipment, and office furniture.

106. Operating Profit (see EBIT)

107. Option (see Stock Option)

108. Option Pool

A pool of equity (shares) in the company that has been earmarked and reserved by the board of

directors and shareholders for use as stock options to be granted by officers of the company as

incentives to employees (for incentive stock option plans) and others (for non-qualified stock

option plans).

109. Optionholder (aka Optionee aka Grantee)

The individual granted a stock option.

110. Other Insurance

An expense of your company, incurred when you pay for insurance other than disability insurance

and medical/dental insurance (part of fringe rate) for employees. A partial list includes

Key person insurance

Liability insurance.

111. P&L Statement (see Income Statement)

112. Participation Rights

A very common preference associated with preferred stock in a start-up. When a liquidity event

occurs, holders of preferred stock with liquidation rights first receive some multiple of their initial

investmentpriortogeneraldistributionoftheproceedsofthesale.“Participationrights”meanthat

these preferred shares are then converted into common shares so that they then participate in the

distribution of the proceeds of the sale. Sometimes, participation rights of preferred shares are

capped at a multiple of their initial investment.

113. Payroll Tax Rate

The cost to pay all government employment taxes as a percent of gross payroll. This includes the

company’scontributionstofederalandstateincometaxes,socialsecurity,andMedicare.

114. Pivot

When a company discovers that one or more of its underlying business assumptions is false, it may

discover that the current business strategy is no longer viable, i.e., does not result in solid financial

returns for stakeholders. When this happens, the business needs to pivot, i.e., must change its

business strategy and its underlying assumptions to return it to a state in which solid financial

returns for stakeholders are once again possible.

115. Postage and Shipping

An expense of your company, incurred when you package and ship items.

116. Post-Money Valuation

The number of outstanding shares in the company (after an investment round) times the price per

1

share paid in the most recent round of investment. In other words, this is what the parties believe

the company is worth.

117. Preferred Stock

An example of equity in a company. Preferred shares are generally sold to investors in the

company. Owners of preferred stock in start-ups enjoy certain preferences over common share

owners. Typical preferences are:

Liquidation rights

Participation rights

Antidilution rights.

118. Pre-Money Valuation

The post-money valuation minus the amount of money invested in the current round. In other

words, this is what the parties believe the company is worth just before the investment round.

119. Price (for products or services)

The amount that the customer pays your company in return for one unit of the product or service.

120. Price per Share

The price that investors are paying for each share of equity of the company.

121. Printing

An expense of your company, incurred when you print items outside of your office.

122. Proceeds from Notes Payable

In the cash from financing activities section of the cash flow statement, this line reflects (when

positive) the amount of a new loan that the company has acquired or (when negative) the amount

paid on an existing loan.

123. Product Development (see Research and Development)

124. Production Days

The number of days it takes the company to transform raw materials into a finished product.

125. Profit and Loss Statement (see Income Statement)

126. Pro Forma

When describing financial statements, pro forma indicates predictive, or looking to the future, as

opposedtoactual,orreportingonthepast.Literally,“asamatterofform.”

127. Raw Material

Any item purchased from a supplier to be used in the manufacturing process.

128. Recruitment and Training

An expense of your company, incurred when you recruit new employees or train new or existing

employees.

129. Rent

1

Includinganystockoptionsthatare“inthemoney,”i.e.,thosethatarecurrentlyexercisableatastrikepricelower

than the fair market value of the underlying stock.

An expense of your company, incurred when you pay a landlord to occupy office space.

130. Research and Development (aka R&D aka Product Development)

The specific division of your company involved in the creation and development of new products

and processes.

131. Retained Earnings

The sum of all net profits and losses of previous periods. When negative, it is called an accumulated

deficit. When positive, it is called retained earnings.

132. Retention Rate

The rate at which current customers remain current customers. The opposite of churn and attrition

rate.

133. Return on Investment

The financial return investors receive between the time they invest in the company and the

liquidity event. Usually measured as an internal rate of return.

134. Revenue

The sums that customers pay the company for goods and services provided to them.

135. “SalesbynnualGrowth”SalesModel

A method of modeling your sales by predicting how many units you expect to sell each month (of

each product in each market) during the first year, and then predicting an annual growth rate for

each successive year.

136. “SalesbyManufacturedProductvailability”SalesModel

A method of modeling your sales by predicting how many units you expect to sell each month (of

each product in each market) by estimating how many such products you can manufacture.

137. “SalesbyMonthlyGrowth”SalesMode l

A method of modeling your sales by predicting how many units you expect to sell each month (of

each product in each market) during the first year, and then predicting a monthly growth rate for

each successive month.

138. “SalesbyMarketPenetration”SalesModel

A method of modeling your sales by stating what percentage of the market you expect to capture

each month (or year).

139. “SalesbyMarketingandSalesDollarsSpent”SalesMo del

A method of modeling your sales by predicting how many units (of each product in each market)

will be sold as a result of marketing efforts each month.

140. “SalesbyMarketingandSalesPeopleEffort”SalesModel

A method of modeling your sales by predicting how many units (of each product in each market)

each salesperson (or any other type of employee) can sell per month.

141. “SalesbyMonth” Sales Model

A method of modeling your sales by predicting how many units you expect to sell each month (of

each product in each market).

142. “SalesbyRawMaterialvailability”SalesModel

A method of modeling your sales by predicting how many units you expect to sell each month (of

each product in each market) by estimating how many raw materials will be available to produce

those products.

143. “SalesbyYear”SalesModel

A method of modeling your sales by predicting how many units you expect to sell each year (of

each product in each market).

144. Sales Cycle

In general, the average number of days between when your company initiates some marketing

effortandwhenacustomer’spurchasecreatesrevenue.

145. Series A

The name usually given to the first investment round in a company by external investors.

146. Series B

The name usually given to the second investment round in a company by external investors.

147. Series C

The name usually given to the third investment round in a company by external investors.

148. Shareholders’Equity

The sum of all shareholder investments plus retained earnings.

149. Short-Term Liability (aka Short-Term Debt)

Any liability that is due with one year.

150. Spoilage (aka Waste)

That percent of raw materials or inventory that will be discarded and never used for customer sale.

151. Statement of Cash Flows (see Cash Flow Statement)

152. Stock Option

An agreement between the company (called the grantor) and an optionholder giving the

optionholder the right to purchase up to a certain number of shares in the company at an agreed-to

strike price provided that optionholder exercises that option during a specific time period.

153. Strike Price (aka Exercise Price)

The price at which a stock option optionholder mayexercisehis/heroption.Inotherwords,let’s

say an employee has an option for 10,000 shares at a strike price of $1.00. That means that s/he can

(at any time during the exercise window) purchase up to 10,000 shares at the price of $1.00 per

share.Noticethatifthecurrentvalueofsuchashareisonly50cents,theoptionis“underwater”

and the optionholder is likely not motivated to exercise. If the current value of such a share is $5.00,

the optionholder is likely motivated to exercise, because s/he could purchase a share worth $5.00

for just $1.00.

154. Substitute Competitor (aka Indirect Competitor)

An example of a competitor. In this case, the competitor is producing goods or services that are in a

different industry, but nonetheless compete for the revenues.

155. Supplier

An entity that sells raw materials (in the case of a manufacturing company) or products (in the case

of a wholesaler, retailer, or distributor) to the company.

156. Sweat Equity

Working for a company in return for an ownership stake in that company (usually either founders’

shares or stock options) instead of cash salary.

157. Telephone

An expense of your company, incurred when you pay a telephone company for either office phones

or employee-held cellular phones.

158. Travel

An expense of your company, incurred when you pay for your employees to travel or reimburse

them for meals and entertainment.

159. Undiluted

Refers to the total number of shares in the company that have been issued, excluding stock options.

Contrast with fully diluted.

160. Unit of Manufacture (aka Lot Size)

The number of products created during one production run.

161. Unit of Purchase

The size or quantity of raw material or product that the company purchases from a supplier. For

example, a 24-box carton of candies, a 200 gallon shipment of gasoline, a vehicle .

162. Unit of Sale

The size or quantity of a product that the customer purchases. For example, a box of candies, a

single download of software, a day of car rental, a vehicle .

163. Valuation

The value of your company as agreed to by you and the purchasers of equity in your company.

When individuals agree to purchase (and you agree to sell) X% of your company for $Y, both parties

are implicitly agreeing that the company is valued at $Y/X%.

164. Value (of an option)

The value of being granted a single stock option is extremely hard to calculate. After all, it must

take into consideration the strike price of an option (what the optionholder will have to pay to

purchase the share), the expected growth in value of the company (tied to many factors such as

revenue, profit, cash flow, etc.), probability of the company succeeding/failing, and so on.

165. Virality Rate

The rate at which current customers attract others to become customers.

166. Warrant

A warrant to purchase X shares gives the bearer of the warrant the right to purchase X shares in the

companyasaspecificpriceupuntilaspecificdate.warrantoftenservesasa“sweetener”toother

deals, such as

Preferred stock, so that a purchaser of preferred shares may also negotiate the right to purchase

additional shares.

Convertible loans, so that the lender may also negotiate the right to purchase additional shares.

167. Waste (see Spoilage)