Below is a concise reference guide to some of the most essential terms you’ll hear in the angel investing space. Use this “cheat sheet” to quickly brush up on key concepts and sound like a pro at your next investor event.
Cap Table
Definition: Short for “capitalisation table.” A cap table is a spreadsheet or document that outlines the ownership structure of a company. It shows who holds shares, how many they hold, and at what value. Why It Matters: Cap tables help you see exactly how your equity position fits into the bigger picture. As an angel investor, you want a clean, accurate, and up-to-date cap table before committing funds.
EBITDA
Definition: An acronym for “Earnings Before Interest, Taxes, Depreciation, and Amortisation.” EBITDA is often used as a proxy for a company’s operating performance and cash flow generation. Why It Matters: It strips away factors that can vary significantly between companies (like depreciation policies) to give a clearer view of core profitability. For early-stage startups, EBITDA may be less relevant, but it’s still a concept worth understanding when evaluating business fundamentals.
ESOP
Definition: “Employee Share Option Plan.” This allows employees (and sometimes advisors) to acquire shares in the company, often at a discounted price or via an option at a fixed strike price. Why It Matters: ESOPs are a crucial tool for attracting and retaining top talent, especially in early-stage startups that cannot match market salaries. For investors, an ESOP can dilute your shareholding if not carefully monitored — but it can also help grow the company’s value over time.
IPO
Definition: “Initial Public Offering.” This is when a private company first lists its shares on a public stock exchange (e.g., the ASX in Australia). Why It Matters: An IPO can be a key exit event for early investors — often yielding significant returns. However, not all startups aim for an IPO; some prefer private acquisitions or continued private funding rounds.
Pre-Money Valuation
Definition: The company’s valuation before external investment is added. If a startup is valued at $5 million pre-money and seeks a $1 million investment, the total would be $6 million post-money. Why It Matters: Pre-money valuation determines how much equity you receive in exchange for your capital. It’s a negotiation point between founders and investors and will directly affect your percentage ownership.
Post-Money Valuation
Definition: The company’s valuation after the investment round has been added to the balance sheet. Continuing the previous example, if you invest $1 million at a $5 million pre-money valuation, the resulting post-money valuation is $6 million. Why It Matters: This is the official valuation once your investment closes, and it’s used to calculate your ownership stake. Keep in mind that new or future rounds of financing may change the valuation again.
Vesting
Definition: A mechanism by which founders, employees, or advisors earn ownership of their shares over time (e.g., monthly or yearly) rather than receiving them all upfront. A typical vesting schedule in Australia might run over four years with a one-year “cliff.” Why It Matters: Vesting encourages key players to remain committed to the company. For investors, it ensures that founders who leave prematurely don’t walk away with a large portion of equity unearned.
Dilution
Definition: Occurs when new shares are issued, decreasing the percentage ownership of existing shareholders. For example, if more shares are created in a subsequent funding round, your relative stake in the company becomes smaller unless you also participate in that round. Why It Matters: While dilution is a normal part of startup growth, you’ll want to understand how each new fundraising round impacts your holdings. Protections like pre-emptive rights or anti-dilution clauses can help you maintain your stake.
Runway
Meaning: The length of time a startup can operate before running out of cash, usually measured in months. Why It Matters: It’s a quick way of gauging how urgently a startup may need additional funding—or how aggressively it can pursue growth strategies.
Burn Rate
Meaning: The rate at which a company spends its capital (often on a monthly basis). Why It Matters: Helps investors understand how quickly funds are being used and whether the startup’s spending aligns with its plans for growth.
Convertible Note
Meaning: A loan that converts into equity at a later date (often the next funding round), rather than being repaid in cash. Why It Matters: Can simplify early-stage fundraising by postponing the need to determine a specific valuation right away.
SAFE (Simple Agreement for Future Equity)
Meaning: A popular alternative to convertible notes (originating in the U.S., but now sometimes used in Australia), allowing investors to buy future equity without setting a current valuation. Why It Matters: Reduces legal complexities and costs of early fundraising. There are Australian-adapted versions that address local corporate law requirements.
Cliff (in Vesting)
Meaning: The period (often 12 months) during which no shares vest; once the “cliff” passes, a fixed percentage vests immediately. Why It Matters: Ensures that if a founder or key employee leaves early, they don’t walk away with a substantial portion of unearned equity.
Waterfall
Meaning: The distribution mechanism showing the order in which returns from a sale, liquidation, or exit event are allocated among different shareholder classes. Why It Matters: If the company exits, the waterfall determines who gets paid first (e.g., preference shareholders) and how much everyone else receives.
Ratchet (Anti-Dilution)
Meaning: A specific anti-dilution provision where existing investors get their ownership “ratcheted” up if new shares are issued at a lower price. Common forms include “full ratchet” or “weighted average.” Why It Matters: If the company raises at a lower valuation in a later round, this provision can protect early investors from significant dilution.
Pro Rata Rights
Meaning: The right (but not the obligation) for existing investors to participate in future funding rounds in proportion to their current ownership. Why It Matters: Allows you to maintain your ownership percentage—or at least limit dilution—if you want to keep investing as the startup grows.
KPI (Key Performance Indicator)
Meaning: Quantifiable measures that show how effectively a startup is achieving its business objectives (e.g., monthly recurring revenue, user growth, or churn rate). Why It Matters: KPIs help investors assess traction and performance, guiding decisions about whether to invest more or adjust strategy.
Preferred Shares
Meaning: A class of shares that carries certain preferential rights (e.g., liquidation preferences, fixed dividends) ahead of ordinary shares. Why It Matters: Common in venture deals because they offer protection to investors in down-rounds or exit scenarios.
Bottom Line
These terms often appear in term sheets, pitch decks, and investor updates. Understanding them deepens your grasp of the startup’s strategy, risk profile, and governance. If you’re ever unsure how these concepts apply to a particular deal, seek tailored legal or financial advice to ensure you’re investing with full knowledge of the potential upsides and pitfalls.
