Key terms and concepts for understanding startup finance, investment, and intellectual property
| Financial Model | Ratio | Key Questions | Assessment Criterion |
|---|---|---|---|
| Investment Model | Assets/Equity | How much capital is needed? What's the ownership structure? What returns are expected? | Return |
| Revenue Model | Income/Assets | What drives revenue? How large is the market? Can this scale? | Opportunity, Scalability |
| Cost Model | Profit/Income | What's the margin structure? Can you achieve unit economics at scale? | Scalability, Execution |
| Cash Model | Cash/Profit | Can you manage working capital? When do you run out of cash? | Execution |
Rate at which company spends cash reserves, measured monthly.
Spreadsheet showing who owns what % and how ownership changes with funding.
Reduction in existing shareholders' ownership when new shares are issued.
Company valuation before receiving new investment.
How long company can operate before running out of cash. Runway = Cash ÷ Monthly burn.
The value of recurring subscription revenue normalized to a one-year period.
The percentage of customers who cancel in a given period. Monthly churn of 3% = 36% annual churn.
Revenue from a cohort one year later as % of starting revenue. NRR = (Starting + Expansion - Churn) ÷ Starting.
The point where your product satisfies strong market demand.
The revenue and costs for a single 'unit' (customer, transaction, ride, etc.).
Total sales/marketing expenses ÷ new customers acquired.
Revenue - Variable Costs, as %. Shows profitability per additional unit sold.
% of revenue after subtracting COGS. Gross Margin = (Revenue - COGS) ÷ Revenue × 100.
Total gross profit from a customer over their relationship. LTV = Avg Revenue × Gross Margin % × Lifespan.
Degree to which profit grows faster than revenue due to fixed costs spread over more units.
Days between paying suppliers and receiving cash from customers. CCC = DIO + DSO - DPO.
Average days to collect payment after a sale. DSO = (AR ÷ Revenue) × 365.
Cash generated by operations minus capital expenditures. FCF = Operating Cash Flow - Capex.
Current Assets - Current Liabilities. Money tied up in day-to-day operations.
Working capital required as % of revenue.
Protection if company raises at lower valuation (down round). Full Ratchet = repriced to new valuation. Weighted Average = repricing weighted by amount raised.
Basic ownership shares in a company. Founders and employees typically hold common stock. Common shareholders are last in line during liquidation.
A short-term debt instrument that converts into equity at a future financing round. Key terms: principal, interest rate (2-8%), maturity date (12-24 months), conversion discount (10-25%), valuation cap.
Preferred stock that can be converted into common stock at a specified ratio (e.g. 1:1). Conversion usually happens automatically upon IPO or at investor's option.
Financing round at lower valuation than previous round. Occurs when company misses targets or market worsens.
Gives majority shareholders (investors) right to force minority (founders) to join in sale of company.
Amount investors get paid before common shareholders in exit. '1x' = get money back first. '2x' = get 2x investment back first. Participating = get preference PLUS share remaining proceeds.
Convertible preferred that "participates" in distributions: investors receive liquidation preference AND participate with common shareholders in remaining proceeds.
Existing investors must invest pro-rata in future rounds or lose certain rights (anti-dilution, preferred status).
A class of shares with special rights over common stock: liquidation preference, voting rights, board seats, anti-dilution protection, and often conversion rights.
Investor's right to invest in future rounds to maintain ownership %. If own 20%, can invest 20% of next round.
Neither debt nor equity—a contract for future equity. Created by Y Combinator. No interest, no maturity date, no repayment. Key terms: investment amount, valuation cap, discount (10-20%).
The right to purchase shares at a fixed "strike price" within a specific time period. Granted to employees/advisors. Typically vest over 4 years with 1-year cliff.
Process by which founders/employees earn equity over time. Typically 4 years with 1-year cliff.
Which decisions require investor approval. 'Protective provisions' give veto over major decisions.
Government-granted monopoly (typically 20 years) to exclude others from making, using, or selling an invention. Must be novel, non-obvious, and useful.
Protection for brand names, logos, slogans. Rights established through use, but registration provides stronger protection.
Automatic protection for original creative works (software code, written content, designs). Lasts 70 years after author's death.
Confidential business information providing competitive advantage (formulas, processes, customer lists, algorithms).
Legal contract preventing parties from sharing confidential information. Mutual = both sides protected. One-way = only one side.
Legal transfer of IP ownership. Employee/contractor agreements should include IP assignment to company.
Analysis of whether your product/service infringes others' IP rights (especially patents).
Granting permission to use your IP. Exclusive = only licensee can use. Non-exclusive = multiple licensees. Territory and field restrictions common.
Software license allowing free use, modification, distribution. Permissive (MIT, Apache) vs. Copyleft (GPL—derivatives must be open).
Existing public knowledge that can invalidate a patent claim. Includes publications, products, public use.