Business finance terms, explained simply.

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409A Valuation

A 409A valuation is an independent appraisal of a private company's common share fair market value (FMV), required under IRS Section 409A before granting stock options.

Advisory shares

Advisory shares are equity grants, typically stock options, issued to advisors in exchange for guidance, introductions, or domain expertise rather than employment.

Annual Recurring revenue

Annual recurring revenue (ARR) is the annualised value of a company's recurring subscription revenue, normalised to a 12-month period.

Anti-Dilution

Anti-dilution provisions protect investors from future funding rounds priced below their original price per share (a down round).

Bridge financing

Bridge financing is short-term capital raised to sustain a startup between two larger equity rounds.

Burn Multiple

Burn multiple is a capital efficiency metric that measures how much net cash a startup burns for every dollar of net new ARR it generates.

Burn rate

Burn rate is the amount of cash a startup consumes each month, net of any revenue it generates.

Client Retainer

A client retainer is an arrangement in which a client pays a recurring fee to secure ongoing access to services or to reserve capacity, typically providing the firm with predictable revenue and the client with priority access.

Data room

A data room (or virtual data room) is a secure, access-controlled document repository that a startup shares with investors, acquirers, or lenders during due diligence.

Down Round

A down round occurs when a startup raises new equity capital at a valuation lower than its last round.

Drag along rights

Drag along rights allow a majority shareholder group to compel minority shareholders to join in the sale of the company on the same terms.

Founders Agreement

A founders agreement governs the co-founder relationship: equity split, vesting schedules, IP ownership, roles and responsibilities, decision-making authority, and departure terms.

Fully diluted shares

Fully diluted shares is the total number of shares that would be outstanding if every instrument convertible into or exercisable for equity were exercised or converted: issued common shares, issued preferred shares (on an as-converted basis), all options (vested and unvested), all warrants, all convertible notes (at their conversion price), and all SAFEs (at their conversion caps).

Investor rights agreement

An investor rights agreement (IRA) is signed at the close of a priced round and grants investors formally documented rights as shareholders.

Lead Investor

A lead investor is the investor who takes primary responsibility for a funding round: negotiating the term sheet, setting the price and terms, committing the largest portion of the round (often 30-60%), and typically taking a board seat.

Option Pool

An option pool (also called an employee stock option pool or ESOP pool) is a portion of a company's fully diluted equity set aside exclusively for future grants to employees, advisors, and contractors.

Post-Money Valuation

Post-money valuation is the total agreed value of a company immediately after a new funding round closes.

Pre Money Valuation

Pre-money valuation is the agreed value of a company immediately before a new round closes.

Pro Rights data

Pro rata rights (also called pre-emptive rights or participation rights) give an existing investor the right, but not the obligation, to invest in a future funding round in proportion to their current ownership stake.

Right of first refusal

A right of first refusal (ROFR) gives an existing shareholder the ability to purchase shares before the selling shareholder can sell them to a third party.

Stock Options (Startup)

Stock options are a contractual right to purchase company shares at a predetermined strike price at a future date.

Tag along Rights

Tag along rights (also called co-sale rights) give a minority shareholder the contractual right to join in any sale of shares by a majority shareholder, on the same price and terms.

Vesting cliff

A vesting cliff is the earliest date on which any equity under a vesting schedule can vest.

Waterfall Analysis

A waterfall analysis is a financial model that maps how proceeds from a company sale or liquidation event flow through the cap table, respecting the priority order set by each share class's liquidation preferences.