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An expense of your company, incurred when you pay an accountant. Typical services include
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.
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.
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.
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.
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.
An expense of your company incurred when you pay an attorney to provide you with any legal counsel.
The rate at which current customers stop being customers. The opposite of retention rate.
The average size of a purchase by a customer.
A standard financial statement that shows all your company’s assets, liabilities, and shareholders’ equity at a specific point in time.
An employee’s starting salary if s/he were working full-time. If an employee were working half-time and earning $25,000, his/her base starting salary would be $50,000.
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.
A group of individuals generally elected by shareholders of the company and who have the responsibility to oversee the company’s activities, appoint the president and CEO of the company, and execute the responsibilities described in the company’s bylaws.
A member of the company’s board of directors. Also known as a director.
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.
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.
The bottom third section of the cash flow statement shows all sources and uses of cash related to the company’s
Offering and repurchase of its equities
Acquisition and repayment of loans.
The middle third section of the cash flow statement shows all sources and uses of cash related to the company’s purchase and sale of fixed assets.
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.
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.
The percent of a sale of an item that is awarded to employees (usually salespeople) for the roles they played in making that sale.
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.
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.
An individual or company that your company decides to retain for goods or services.
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.
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.
Any assets that you can convert into cash within one year.
Any liabilities that are due within one year.
Current assets divided by current liabilities.
The amount of money needed to convert one member of the target market into a paying customer.
Liabilities divided by shareholders’ equity.
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.
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.
An expense of your company. In most states, this is a mandated payment of a percentage of total gross payroll to cover workers’ compensation in the event of a work-related injury.
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).
An investment round in which equity is sold at a price lower than it was sold in an earlier round.
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.
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, we get “earnings after tax”
Literally, earnings before interest and tax. After we subtract depreciation and amortization from EBITDA, we get EBIT.
Literally, earnings before interest, tax, depreciation, and amortization. After we subtract all costs of goods sold and expenses from revenue, we get EBITDA.
Ownership in a company. Also known as stock.
Exercising a stock option is when an optionholder decides to purchase the stock at the strike price.
The term “exit strategy” refers to determining in advance how the company plans to enable external investors to achieve a return on their investment. Exit strategies typically include a liquidity event for the company.
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).
Tables of data reporting the financial condition of a company. Usually consists of an income statement, balance sheet, and cash flow statement.
The contiguous 12-month period in which a company reports its financial results.
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.
An individual who is present when the company is founded, and who purchases a percent ownership in the company.
The shares in a company purchased by a founder when the company is created.
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 insurance plans, 401(k)’s, life insurance, and so on.
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.
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&A. Also, any “other expense” not directly assigned to a sales & marketing, manufacturing and production, or research & development function should be assigned to G&A.
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.
Gross profit divided by revenues. It is a measure of how efficiently you produce products.
The sum of the salaries paid to all employees, before payroll deductions.
Revenue minus Costs of Goods Sold.
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.
A set of companies that provide goods and services to satisfy a specific set of needs of a market.
A mechanism by which cash for your company is raised by selling equity to the public.
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%.
An expense of your company, incurred when you pay for services such as web hosting, email, and so on.
Inventory consists of (a) raw materials purchased by the company, (b) work-in-process (i.e., partially assembled products), and (c) finished products that are waiting to be sold to customers.
On average, the number of days items are expected to remain in inventory?
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.
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.
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.
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.
The quality of an asset to be easily convertible to cash.
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.
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.
Any liability that is due after one year.
The specific division of your company involved in the creation of products to be sold to customers.
Customers your company is targeting for purchasing your goods and/or services, and from which you expect to derive revenue.
The percent of the market size that your company is selling to.
The number of customers in the target market.
The specific division of your company involved in the creation of awareness by customers, branding, and all aspects of the sales funnel.
An expense of your company that broadly covers advertising, trade shows, etc.
Earnings after tax (aka net income) divided by revenues.
Current assets minus current liabilities.
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).
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).
An expense of your company, incurred when you purchase items used in your office such as consumables, office equipment, and office furniture.
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).
The individual granted a stock option.
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.
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 prior to general distribution of the proceeds of the sale. “Participation rights” mean that 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.
The cost to pay all government employment taxes as a percent of gross payroll. This includes the company’s contributions to federal and state income taxes, social security, and Medicare.
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.
An expense of your company, incurred when you package and ship items.
The number of outstanding shares[1] in the company (after an investment round) times the price per share paid in the most recent round of investment. In other words, this is what the parties believe the company is worth.
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.
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.
The amount that the customer pays your company in return for one unit of the product or service.
The price that investors are paying for each share of equity of the company.
An expense of your company, incurred when you print items outside of your office.
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.
The number of days it takes the company to transform raw materials into a finished product.
When describing financial statements, pro forma indicates predictive, or looking to the future, as opposed to actual, or reporting on the past. Literally, “as a matter of form.”
Any item purchased from a supplier to be used in the manufacturing process.
An expense of your company, incurred when you recruit new employees or train new or existing employees.
An expense of your company, incurred when you pay a landlord to occupy office space.
The specific division of your company involved in the creation and development of new products and processes.
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.
The rate at which current customers remain current customers. The opposite of churn and attrition rate.
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.
The sums that customers pay the company for goods and services provided to them.
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.
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.
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.
A method of modeling your sales by stating what percentage of the market you expect to capture each month (or year).
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.
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.
A method of modeling your sales by predicting how many units you expect to sell each month (of each product in each market).
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.
A method of modeling your sales by predicting how many units you expect to sell each year (of each product in each market).
In general, the average number of days between when your company initiates some marketing effort and when a customer’s purchase creates revenue.
The name usually given to the first investment round in a company by external investors.
The name usually given to the second investment round in a company by external investors.
The name usually given to the third investment round in a company by external investors.
The sum of all shareholder investments plus retained earnings.
Any liability that is due with one year.
That percent of raw materials or inventory that will be discarded and never used for customer sale.
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.
The price at which a stock option optionholder may exercise his/her option. In other words, 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. Notice that if the current value of such a share is only 50 cents, the option is “under water” 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.
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.
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.
Working for a company in return for an ownership stake in that company (usually either founders’ shares or stock options) instead of cash salary.
An expense of your company, incurred when you pay a telephone company for either office phones or employee-held cellular phones.
An expense of your company, incurred when you pay for your employees to travel or reimburse them for meals and entertainment.
Refers to the total number of shares in the company that have been issued, excluding stock options. Contrast with fully diluted.
The number of products created during one production run.
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.
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.
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%.
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.
The rate at which current customers attract others to become customers.
A warrant to purchase X shares gives the bearer of the warrant the right to purchase X shares in the company as a specific price up until a specific date. A warrant often serves as a “sweetener” to other 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.
[1] Including any stock options that are “in the money,” i.e., those that are currently exercisable at a strike price lower than the fair market value of the underlying stock.