For startup founders and SME owners, understanding fundraising and financial language can be intimidating. However, once understood, applying these concepts is very useful for navigating through the early and growth stages of your business. This ever-evolving guide provides a glossary of key terms that we hope will help you demystify the world of startup finance. We will keep on updating this glossary based on subscriber requests.
Business Financing and Cash Management
Angel Investment
Capital from affluent individuals for startups, usually for equity or convertible debt, bringing not just funds but also advice and connections.
Asset Financing
Using company assets as collateral for borrowing, offering a flexible way to finance growth or manage cash flow.
Bootstrapping
Self-funding a business through personal finances or revenue, allowing full control and ownership retention.
Business Loan
Specific loans for business purposes, essential for securing appropriate financing.
Cash Conversion Cycle (CCC)
Measures the time between inventory investment and receiving cash from sales, crucial for improving liquidity.
Cash Flow Management
Monitoring and optimising cash receipts minus expenses, vital for maintaining business operations and avoiding financial distress.
Credit Line
An arrangement establishing a maximum loan balance a business can access, key for short-term financing needs.
Crowdfunding
Raising funds from many people online, offering a way to finance projects with market validation.
Debt Financing
Borrowing funds to be repaid with interest, a traditional financing method that avoids diluting ownership.
Equity Financing
Selling company shares to raise capital, useful for investment without incurring debt.
Factoring
Selling accounts receivable at a discount for immediate cash, improving cash flow by accelerating receivables.
Financial Forecasting
Estimating future business performance, critical for strategic planning and attracting investors.
Initial Public Offering (IPO)
Offering private corporation shares to the public, a significant step for accessing capital in public markets.
Invoice Financing
Selling invoices to a third party for quick cash, crucial for improving cash flow.
Merchant Cash Advance
An advance on future sales, providing quick capital with careful cost consideration.
Overdraft Protection
A service preventing bounced checks by allowing accounts to be overdrawn to a specified limit, useful for short-term liquidity.
Revenue-Based Financing
Funding in exchange for a percentage of ongoing gross revenues, aligning investor returns with company performance.
Seed Funding
The initial capital for starting a business, essential for early-stage company growth.
Venture Capital
Investors providing capital to businesses with growth potential in exchange for equity, critical for significant funding needs.
Working Capital
The capital used in daily operations, calculated as current assets minus liabilities, key for maintaining liquidity and operational health.
Financial Operations and Reporting
Accrual Accounting
Recognising revenue and expenses when they are incurred, regardless of when cash is exchanged. Essential for more accurate financial reporting and understanding the true financial health of a business.
Audit
An independent examination of financial records to ensure accuracy and compliance with accounting standards. Important for maintaining trust with investors, grantors, regulators, and financial institutions.
Balance Sheet
A financial statement that displays a company's assets, liabilities, and shareholders' equity at a specific point in time. Crucial for assessing the financial stability and liquidity of a business.
Cash Flow Forecasting
Estimating the flow of cash in and out of the business over a specific period. Vital for ensuring that the business can meet its financial obligations and for planning future investments.
See our 13-week cashflow article here for more information.
Cost of Goods Sold (COGS)
The direct costs attributable to the production of the goods sold by a company. Important for understanding the profitability of products and managing pricing strategies.
Depreciation
The systematic allocation of the cost of a tangible asset over its useful life.
Financial Statements
Reports that provide an overview of a company's financial condition, including the balance sheet, income statement, and cash flow statement. Often required by investors to inform investment decisions and strategic planning.
General Ledger
The master set of accounts that summarise all transactions occurring within an organisation. Essential for the accurate tracking of financial transactions and the foundation of a company’s financial reporting.
Gross Margin
The difference between revenue and COGS, expressed as a percentage of revenue. Key for assessing the profitability and financial health of a company's core activities.
Income Statement (Profit and Loss Statement)
A financial report showing a company's revenues, expenses, and profits over a specific period. Critical for understanding the company's operational efficiency and profitability.
Inventory Management
The oversight of non-capitalised assets (inventory) and stock items. Important for optimising inventory levels, reducing costs, and ensuring timely fulfilment of orders.
Liquidity Ratios
Financial metrics used to determine a company's ability to pay off its short-term debts obligations. Crucial for assessing the financial health and operational efficiency of a business.
Operating Expenses
Expenses incurred through normal business operations, such as rent, utilities, and salaries. Essential for budgeting and managing the costs of running a business.
Payroll
The total amount of wages paid by a company to its employees and contractors. Critical for managing cash flow and ensuring compliance with tax and employment laws.
Profit Margin
A measure of a company's profitability, calculated as net income divided by revenue. Key for evaluating the financial success of a company's strategy and operations.
Reconciliation
The process of matching two sets of records to ensure figures are accurate and in agreement. Vital for maintaining accurate financial records and preventing fraud.
Return on Investment (ROI)
A performance measure used to evaluate the efficiency of an investment. Important for assessing the profitability of various investment options and guiding strategic decisions.
Trial Balance
A bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account column totals. Useful for identifying any discrepancies in the accounting records.
Variable Costs
Costs that change in proportion to the level of goods or services a company produces. Important for budgeting and financial planning, especially in manufacturing and production industries.
Working Capital
The difference between a company's current assets and current liabilities. Critical for ensuring that a company can continue its operations and meet its short-term obligations.
Employee Incentives
Annual Bonus
A once-a-year payment to employees based on individual, team, or company performance. Encourages employees to meet or exceed their goals.
Benefits Package
A collection of non-wage compensations provided to employees in addition to their normal salaries or wages. Tailoring benefits to employee needs can increase job satisfaction and retention.
Cliff
Refers to the period an employee must work to earn vesting rights in an equity compensation plan. Ensuring clarity on vesting cliffs prevents misunderstandings about equity ownership.
Commission
A performance-based incentive paid to employees based on the sales they generate. Motivates sales personnel to increase sales and revenue.
Deferred Compensation
A portion of an employee's compensation that is set aside to be paid at a later date, typically to provide a retirement benefit. Offers long-term incentives for employees to stay with the company.
Equity Compensation
Granting of shares or options to purchase shares in the company as part of an employee's remuneration package. Aligns employees' interests with the long-term success of the company.
ESOP (Employee Stock Ownership Plan)
A program that provides a company's workforce with an ownership interest in the company. Encourages commitment and long-term thinking among employees.
Flexible Working Hours
Allowing employees to choose their working hours within agreed limits. Enhances work-life balance and can increase job satisfaction.
Golden Handcuffs
Financial incentives designed to encourage valuable employees to remain with a company for a certain period. Reduces talent churn and ensures continuity.
Health Insurance
A common employee benefit that covers the cost of an employee's medical and surgical expenses. A key factor in attracting and retaining employees.
Incentive Pay
Additional compensation awarded to employees for achieving defined performance targets. Drives performance and rewards exceptional achievement.
Long-term Incentive Plans (LTIPs)
Incentive plans designed to improve employees' long-term performance and retention. Encourages alignment with the company’s long-term goals.
Merit Pay
An increase in pay based on a set of criteria set by the employer, usually linked to performance. Promotes a culture of excellence and achievement.
Non-monetary Rewards
Incentives that do not involve direct payment, such as public recognition, professional development opportunities, and work-life balance enhancements. Important for holistic employee motivation.
Pension Scheme
A retirement plan that requires an employer to make contributions into a pool of funds set aside for an employee's future benefit. Provides employees with financial security in retirement.
Performance Bonus
A bonus given to employees based on their contributions to the company's performance. Motivates employees to contribute to the company's success.
Profit Sharing
A plan that gives employees a share in the company's profits, based on its quarterly or annual earnings. Helps employees feel more invested in the company's success.
Stock Options
The right to buy company stock at a future date at a price set today. Offers employees potential for significant financial rewards based on the company's performance.
Training and Development
Programs offered by employers to improve employees' job skills and knowledge. Essential for career development and job satisfaction.
Vesting Period
The time period employees must wait to gain full ownership of equity compensation or benefits. Critical for ensuring long-term commitment and aligning employee and company goals over time.
Workplace Wellness Programs
Initiatives aimed at improving the health and well-being of employees, ranging from gym memberships to mental health support. Contributes to a healthier, more productive workforce.
Fundraising (General)
Advanced Subscription Agreement (ASA)
A financing tool for startups to raise funds by selling shares at a future date, usually at a discount. Investors pay upfront, with the valuation set during the next funding round. ASAs provide immediate capital without immediate ownership dilution, beneficial for early-stage growth and bridging to significant investments.
Angel Investors
Wealthy individuals investing in startups for equity or convertible debt, crucial for early-stage funding and valuable for their mentorship and network.
Bootstrap Financing
Using personal finances or revenues to fund growth, important for maintaining control and minimising debt in the initial stages.
Convertible Notes
Debt that converts into equity, typically used in early financing to delay valuation discussions, useful for simplifying early-stage investments.
Debt Financing
Raising funds through loans or bonds, essential for founders needing capital without diluting ownership, suitable for businesses with stable revenue.
Enterprise Investment Scheme (EIS)
Offers tax relief to investors in small companies, encouraging investment and making it a key consideration for UK-based startups seeking funding.
Equity Crowdfunding
Raising capital from many people in exchange for equity, beneficial for startups looking to validate their business model while raising funds. Platforms we used before are Seedrs and Crowdcube.
Equity Financing
Raising capital through selling shares, used to obtain funding without incurring debt.
Growth Equity
Funding for more mature startups seeking expansion, valuable for businesses at a pivotal growth point without altering control structures.
Initial Public Offering (IPO)
Offering shares to the public, a significant milestone for successful startups aiming for expansion and increased market presence.
Leveraged Buyout (LBO)
Acquiring a company using borrowed funds, relevant for ambitious expansions or takeovers, offering a path to rapid growth.
Mezzanine Financing
A blend of debt and equity financing, useful for businesses seeking flexible funding options during transitions or growth phases.
Private Equity
Investments in private companies for equity, significant for later-stage startups seeking large capital injections for major growth or restructuring.
Seed Enterprise Investment Scheme (SEIS)
Provides tax relief for investors in very small startups. For UK startups in the earliest stages needing initial funding.
Secondary Market Offerings
Selling new shares post-IPO, useful for raising additional capital for expansion while increasing market liquidity.
Series Funding
Staged investment rounds (Pre-Seed, Seed, Series A, Series B etc.), essential for scaling startups as they progress through growth phases, each offering a valuation reflection.
Share Option Schemes
Allowing employees to purchase shares, important for attracting and retaining talent by aligning their interests with the company's success.
Syndicate Investing
Investors pooling resources for larger projects, beneficial for accessing more significant investments and diversifying funding sources.
Term Sheets
Outlining investment terms, crucial for negotiation clarity between startups and investors, setting expectations for both parties.
Venture Capital
Financing from investors to small businesses with significant growth potential. For significant early to mid-stage funding beyond angel investment capabilities.
Venture Capital Trusts (VCTs)
Investment companies offering tax incentives for investing in small businesses, important for UK startups seeking diverse investment sources.
Fundraising (Term Sheets)
Anti-Dilution Provisions
Protects investors from dilution in subsequent financing rounds by adjusting the price per share of the equity they own.
Board Composition
Outlines the makeup of a company's board of directors post-investment. Critical for ensuring a balanced representation of founders, investors, and independent members.
Cap Table
A spreadsheet or table providing an analysis of the company’s percentages of ownership, equity dilution, and value of equity in each round of investment. Understanding the cap table is crucial for both founders and investors to grasp the effect of the investment on ownership.
Conversion Rights
The right for investors to convert their preferred shares into common shares, often used in the context of an IPO or sale.
Drag-Along Rights
Allows majority shareholders to force minority shareholders to join in the sale of a company. Understanding drag-along rights is crucial for both controlling and minority shareholders during a sale.
Due Diligence
The process of investigation and evaluation, conducted by investors, into the details of a potential investment, such as examining financial records and anything else deemed material to an investor. It's a critical step before finalising any investment, and you should usually plan for institutional due diligence to take 2–3 months.
Earn-Out
A contractual provision stating that the sellers of a business will receive additional future compensation based on the business achieving certain financial goals. Vital for aligning incentives post-transaction.
Equity
Ownership interest in a company, typically in the form of shares. It's crucial for founders to understand how equity is allocated and affected by new investments.
Exclusivity Period
A timeframe during which the seller agrees not to seek or accept offers from other potential buyers. Important for investors looking to finalise terms without competition.
Liquidation Preference
Gives certain shareholders the right to get paid before others in the event of a liquidation. Key for investors to minimise risk on their investment.
Non-Compete Agreement
Prevents founders or employees from starting or working for a competing business within a certain timeframe and geography. Protects the company’s interests by safeguarding intellectual property and market position.
Option Pool
Shares of stock reserved for future issuance to employees, directors, advisors, and consultants. Critical for startups to attract and retain talent with equity incentives.
Participation Rights
Allows investors to “participate” in the proceeds of a sale along with common shareholders after receiving their liquidation preference. Essential for investors seeking to maximize returns.
Pre-Emptive Rights
Gives existing shareholders the right to buy new shares before the company offers them to outside investors, allowing shareholders to maintain their ownership percentage.
Preferred Stock
A class of ownership in a corporation that has a higher claim on assets and earnings than common stock. Preferred stock typically comes with rights that are beneficial for investors, such as dividends and liquidation preferences.
Redemption Rights
The right of investors to require a company to repurchase their shares after a certain period, providing an exit strategy for investors if the company is not publicly traded or acquired.
Representations and Warranties
Statements of fact made by the seller to the buyer, covering aspects like financial status, legal compliance, and absence of litigation. They are crucial for providing assurances to investors.
Vesting Schedule
The timeline over which employees earn equity or options. Essential for incentivising long-term commitment from team members.
Voting Rights
The rights of shareholders to vote on company matters. Critical for investors and founders to understand how control and decision-making are shared.
UK Taxation and Incentives
Annual Investment Allowance (AIA)\
Provides 100% tax relief on qualifying capital expenditure in the year of purchase, crucial for startups making significant investments in equipment.
Business Rates
Property taxes paid by businesses on commercial premises. Small business rate relief can significantly reduce overhead costs for eligible SMEs.
Capital Allowances
Tax reliefs that allow businesses to deduct the cost of certain capital expenditures from their taxable profit, essential for tax planning and reducing overall tax liability.
Capital Gains Tax (CGT)
Tax on the profit when you sell or dispose of an asset that has increased in value. It's crucial for businesses and entrepreneurs to understand CGT implications on business assets.
Corporation Tax
A tax on the profits of limited companies in the UK. Understanding and efficiently managing this tax is crucial for maximising profitability.
Creative Industry Tax Reliefs
A group of tax reliefs that allow qualifying companies in the creative sector to claim additional deductions and, in some cases, payable tax credits, encouraging cultural production.
Dividend Tax
Tax paid on income you receive as dividends from shares. For business owners and shareholders in planning their income and taxes.
Employment Allowance
Allows eligible employers to reduce their annual National Insurance liability, offering a way to lower employment costs.
Enterprise Investment Scheme (EIS)
A tax relief scheme designed to encourage investments in small and medium-sized growth companies. Understanding EIS can help startups attract more investors.
Making Tax Digital (MTD)
An HMRC initiative to make it easier for businesses and individuals to keep track of their taxes and submit returns electronically. Compliance is key to avoiding penalties.
National Insurance Contributions (NICs)
Payments made by employers and employees to fund state benefits. Understanding NIC thresholds and rates helps in accurate payroll processing and budgeting.
Patent Box
A tax regime for UK companies that reduces the Corporation Tax on profits earned from patented inventions and certain other innovations, beneficial for companies investing in R&D.
Pay As You Earn (PAYE)
The system HM Revenue & Customs (HMRC) uses to collect Income Tax and National Insurance Contributions from employment. Proper management is essential for compliance and avoiding penalties.
Research and Development (R&D) Tax Credits
A government incentive designed to reward UK companies for investing in innovation. These can significantly reduce a startup's tax bill or provide a cash rebate, encouraging innovation.
Seed Enterprise Investment Scheme (SEIS)
Offers tax reliefs to individual investors who buy new shares in your company, encouraging early-stage investment in your startup.
Value Added Tax (VAT)
A tax on the value added to goods and services sold within the UK. SMEs need to manage VAT compliance and may benefit from schemes like the Flat Rate Scheme to simplify the process.
VAT Mini One Stop Shop (Moss)
A simplified way to pay VAT on digital services sold within the EU. Although the UK has left the EU, understanding VAT obligations for sales to EU customers remains important.
Venture Capital Trusts (VCT)
Investment companies that offer tax reliefs to individuals who invest in small and growing companies. A relevant consideration for raising capital.
