Venture Capital: Terms and Concepts explained

Venture capital is a form of private equity financing provided by investors to startups and small businesses with long-term growth potential.

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Key terms and concepts include:

• Valuation: Pre-money and post-money.
  
• Equity vs Convertible Notes vs SAFEs.
  
• Term Sheet Components:
  
  • Valuation
    
  • Equity stake
    
  • Liquidation preference
    
  • Anti-dilution provisions
  • Board structure
    
• Cap Table (Capitalization Table)

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Here’s a very brief description of each concept:

Valuation

• Pre-money valuation: Company value before new investment.
  
• Post-money valuation: Company value after new investment is added.

Equity vs Convertible Notes vs SAFEs

1. Equity: Investor gets direct ownership (shares) immediately.
   
2. Convertible Notes: Loan that converts into equity in the future.
   
3. SAFE (Simple Agreement for Future Equity): Agreement to get equity later, no interest or maturity like a loan.
   

Term Sheet Components

1. Valuation: Sets company worth and how much equity the investor gets.
   
2. Equity Stake: The percentage ownership the investor receives.
   
3. Liquidation Preference: Determines who gets paid first and how much in an exit.
   
4. Anti-Dilution Provisions: Protects investor ownership if future shares are sold at a lower price.
   
5. Board Structure: Defines who controls the company’s board of directors.

Cap Table (Capitalization Table)

• A spreadsheet showing who owns what % of the company (founders, investors, employees, etc.).