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.
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.
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.
Accrued Liabilities Regular expenses that the company has incurred but an invoice has not yet been received. If Offtoa, the only accrued liabilities that appear on the Balance Sheet and Cash Flow Statement correspond to monthly payroll, which has been incurred but not yet paid.
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.
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.
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.
AOS (see Average Order Size)
Attorney Fees An expense of your company incurred when you pay an attorney to provide you with any legal counsel.
Attrition Rate (aka Churn) The rate at which current customers stop being customers. The opposite of retention rate.
Average Order Size (aka AOS) The average size of a purchase by a customer.
B2B (aka Business to Business) Your customers are other businesses.
B2C (aka Business to Consumer) Your customers are consumers, not businesses.
Balance Sheet A standard financial statement that shows all your company's assets, liabilities, and shareholders' equity at a specific point in time.
Base Starting Salary 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.
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.
Board of Directors 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.
Board Member A member of the company's board of directors. Also known as a director.
Business to Business (see B2B)
Business to Consumer (see B2C)
CAC (see Customer Acquisition Cost)
Cap Table (see Capitalization Table)
Capital Asset (see Fixed Asset)
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.
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.
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.
Cash from Investing Activities 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.
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.
Churn (See Attrition Rate)
COGS (See Cost of Goods Sold)
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.
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.The amount of commissions will be included on the Marketing and Sales Expense line of the income statement. In addition, commissions are burdened with payroll tax, fringe and disability (just like salaries).
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.
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.
Consultant An individual or company that your company decides to retain for goods or services.
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.
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.
Cumulative Losses (See Accumulated Deficit)
Current Assets Any assets that you can convert into cash within one year.
Current Liabilities Any liabilities that are due within one year.
Current Ratio Current assets divided by current liabilities.
Customer Acquisition Cost (aka CAC) The amount of money needed to convert one member of the target market into a paying customer.
Days Outstanding (see Collection Period)
Debt to Equity Ratio Liabilities divided by shareholders' equity.
Deferred Revenue (aka Unearned Revenue) Cash received by the company that will become revenue after the company provides products and/or services to the customer.
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.
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.
Disability Insurance An expense of your company. In most states, this is a mandated payment of a percentage of total gross payroll (including commissions) to cover workers' compensation in the event of a work-related injury.
Distributor A company that sells your products and/or services to a target market. A distributor usually purchases your products and then resells them to its customers (retaining the spread). However a distributor could also just find the customers and have you sell directly to the end customer, in which case the distributor would earn a commission.
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).
Down Round An investment round in which equity is sold at a price lower than it was sold in an earlier round.
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.
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, we get “earnings after tax”
Earnings Before Interest and Tax (see EBIT)
Earnings Before Interest, Tax, Depreciation and Amortization (see EBITDA)
EAT (see Earnings after Tax)
EBIT (aka Operating Profit) Literally, earnings before interest and tax. After we subtract depreciation and amortization from EBITDA, we get EBIT.
EBITDA Literally, earnings before interest, tax, depreciation, and amortization. After we subtract all costs of goods sold and expenses from revenue, we get EBITDA.
Equity Ownership in a company. Also known as stock.
Exercise (of an option) Exercising a stock option is when an optionholder decides to purchase the stock at the strike price.
Exercise Price (see Strike Price)
Exit Strategy 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.
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).
Financial Statements Tables of data reporting the financial condition of a company. Usually consists of an income statement, balance sheet, and cash flow statement.
Fiscal Year The contiguous 12-month period in which a company reports its financial results.
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.
Founder An individual who is present when the company is founded, and who purchases a percent ownership in the company.
Founders' Shares The shares in a company purchased by a founder when the company is created.
Fringe Rate The cost to provide all employment benefits to employees, expressed as a percent of gross payroll (including commissions). This includes the company's contributions to medical/dental insurance plans, 401(k)'s, life insurance, and so on.
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.
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&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.
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.
Grantee (see Optionholder)
Gross Income (see Gross Profit)
Gross Margin (aka Gross Profit Margin) Gross profit divided by revenues. It is a measure of how efficiently you produce products.
Gross Payroll The sum of the salaries paid to all employees, before payroll deductions.
Gross Profit (aka Gross Income) Revenue minus Costs of Goods Sold.
Gross Profit Margin (see Gross Margin)
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.
Indirect Competitor (see Substitute Competitor)
Industry A set of companies that provide goods and services to satisfy a specific set of needs of a market.
Initial Public Offering (aka IPO) A mechanism by which cash for your company is raised by selling equity to the public.
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%.
Internet Services 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.
Inventory Days On average, the number of days items are expected to remain in inventory?
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.
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.
IPO (see Initial Public Offering)
IRR (see Internal Rate of Return)
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.
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.
Liquidity The quality of an asset to be easily convertible to cash.
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.
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.
Long-Term Liability (aka Long-Term Debt) Any liability that is due after one year.
Lot Size (see Unit of Manufacture)
Major Purchase (see Fixed Asset)
Manufacturing and Production (aka M&P) The specific division of your company involved in the creation of products to be sold to customers.
Market Customers your company is targeting for purchasing your goods and/or services, and from which you expect to derive revenue.
Market Penetration The percent of the market size that your company is selling to.
Market Size The number of customers in the target market.
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.
Marketing and Sales Expense An expense of your company that broadly covers advertising, trade shows, etc.
MOI (See Multiple of Investment)
Multiple of Investment (aka MOI) When a liquidity event occurs and an investor receives some part of the proceeds, then MOI for that investor is the amount received divided by the amount of the original investment.
Net Income (See Earnings After Tax)
Net Income Margin (aka Net Profit Margin) Earnings after tax (aka net income) divided by revenues.
Net Profit (see Earnings After Tax)
Net Profit Margin (see Net Income Margin)
Net Working Capital Current assets minus current liabilities.
“New Customers by Month” Sales Model 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).
“New Customers by Year” Sales Model 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).
Office Supplies An expense of your company, incurred when you purchase items used in your office such as consumables, office equipment, and office furniture.
Operating Profit (see EBIT)
Option (see Stock Option)
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).
Optionholder (aka Optionee aka Grantee) The individual granted a stock option.
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.
P&L Statement (see Income Statement)
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 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.
Payroll Tax Rate The cost to pay all government employment taxes as a percent of gross payroll (excluding commissions). This includes the company's contributions to federal and state income taxes, social security, and Medicare.
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.
Postage and Shipping An expense of your company, incurred when you package and ship items.
Post-Money Valuation The number of outstanding shares 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.
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 - Redemption rights.
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.
Price (for products or services) The amount that the customer pays your company in return for one unit of the product or service.
Price per Share The price that investors are paying for each share of equity of the company.
Printing An expense of your company, incurred when you print items outside of your office.
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.
Product Development (see Research and Development)
Production Days The number of days it takes the company to transform raw materials into a finished product.
Profit and Loss Statement (see Income Statement)
Pro Forma 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.”
Raw Material Any item purchased from a supplier to be used in the manufacturing process.
Recruitment and Training An expense of your company, incurred when you recruit new employees or train new or existing employees.
Redemption Rights A very common preference associated with preferred stock in a start-up. They define the terms under which the company will repurchase the stock from the investor.
Rent An expense of your company, incurred when you pay a landlord to occupy office space.
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.
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.
Retention Rate The rate at which current customers remain current customers. The opposite of churn and attrition rate.
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.
Revenue The sums that customers pay the company for goods and services provided to them.
Revenue-Based Loans Loans that are repaid with a percentage of revenues made by the company instead of with a predetermined fixed monthly payment.
“Sales by Annual Growth” 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) during the first year, and then predicting an annual growth rate for each successive year.
“Sales by Manufactured Product Availability” 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) by estimating how many such products you can manufacture.
“Sales by Monthly Growth” 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) during the first year, and then predicting a monthly growth rate for each successive month.
“Sales by Market Penetration” Sales Model A method of modeling your sales by stating what percentage of the market you expect to capture each month (or year).
“Sales by Marketing and Sales Dollars Spent” Sales Model 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.
“Sales by Marketing and Sales People Effort” Sales Model 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.
“Sales by Month” 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).
“Sales by Raw Material Availability” 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) by estimating how many raw materials will be available to produce those products.
“Sales by Year” Sales Model A method of modeling your sales by predicting how many units you expect to sell each year (of each product in each market).
Sales Cycle In general, the average number of days between when your company initiates some marketing effort and when a customer's purchase creates revenue.
Series A The name usually given to the first investment round in a company by external investors.
Series B The name usually given to the second investment round in a company by external investors.
Series C The name usually given to the third investment round in a company by external investors.
Shareholders' Equity The sum of all shareholder investments plus retained earnings.
Short-Term Liability (aka Short-Term Debt) Any liability that is due with one year.
Spoilage (aka Waste) That percent of raw materials or inventory that will be discarded and never used for customer sale.
Statement of Cash Flows (see Cash Flow Statement)
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.
Strike Price (aka Exercise Price) 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.
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.
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.
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.
Telephone An expense of your company, incurred when you pay a telephone company for either office phones or employee-held cellular phones.
Travel An expense of your company, incurred when you pay for your employees to travel or reimburse them for meals and entertainment.
Unallocated Costs of Goods Sold Labor expenses allocated to Cost of Goods Sold but not to any specific product.
Undiluted Refers to the total number of shares in the company that have been issued, excluding stock options. Contrast with fully diluted.
Unearned Revenue (See Deferred Revenue)
Unit of Manufacture (aka Lot Size) The number of products created during one production run.
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.
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.
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%.
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.
Virality Rate The rate at which current customers attract others to become customers.
Warrant 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.
Waste (see Spoilage)
