Venture Capital terms

54
terms

Venture and startups24

ARR (annual recurring revenue, MRR): Annual recurring revenue: the yearly value of subscription contracts in force today. Software companies and their investors use it instead of reported revenue because it shows the run rate at a point in time.ExampleA startup billing $50k a month in subscriptions (its MRR) has $600k of ARR.See also Net revenue retention, Burn rate, Series A
Burn rate (burn, runway): How much cash a company loses each month. Runway is cash on hand divided by burn: the months left before it must raise money, cut costs, or turn profitable.ExampleWith $2m in the bank and a net burn of $150k a month, runway is about 13 months, so the founders start raising with at least six months to spare.See also ARR, Seed round, Unit economics
Cap table (capitalization table): The list of who owns a company's shares, options, SAFEs, and notes, and what each would own once everything converts (fully diluted). Every round and exit payout is worked out from it.ExampleFounders 8m shares, seed investors 2m, option pool 1.5m, Series A 3.5m: 15m fully diluted shares, so the founders hold 53%.See also Dilution, Option pool, Liquidation preference
Convertible note: A short-term loan to a startup that converts into shares at the next priced round instead of being repaid, usually at a discount to that round's price or at a valuation cap, whichever gives the investor more shares. Unlike a SAFE it accrues interest and has a maturity date.ExampleA $1m note has a 20% discount and an $8m cap. The Series A prices at $1.00 a share on a $16m pre-money. The cap gives $0.50 and the discount $0.80, so the note converts at $0.50 into 2m shares, before interest.See also SAFE, Valuation cap, Series A
Customer acquisition cost (CAC): Sales and marketing spend divided by the number of new customers it brought in over the same period. Read next to lifetime value: a customer worth less than it cost to win loses money.ExampleA company spends $300k on sales and marketing in a quarter and adds 600 customers, a CAC of $500.See also Lifetime value, Unit economics, Burn rate
Dilution: The drop in an existing holder's ownership percentage when new shares are issued, in a funding round, an option grant, or a stock-funded acquisition. The holder keeps the same shares but owns a smaller slice.ExampleA founder owns 60% before a round that sells 20% of the company to new investors. Afterward the founder owns 60% x 0.80 = 48%.See also Cap table, Option pool, Accretion/dilution analysis
Down round: A round priced below the previous round's post-money valuation. It dilutes existing holders more than planned, can trigger anti-dilution protections for earlier investors, and is hard on employee morale.ExampleA company raised at a $100m post-money two years ago and now raises at a $60m pre-money: a 40% markdown for everyone who bought in last time.See also Post-money valuation, Dilution, Liquidation preference
Lifetime value (LTV, LTV/CAC): The gross profit a customer brings in over the whole time they stay. A simple version is monthly gross profit per customer divided by the monthly churn rate. Investors often want LTV at three times CAC or more.ExampleA customer pays $100 a month at an 80% gross margin, so $80 of gross profit. With 2% monthly churn the average customer stays 50 months: LTV is $4,000, eight times a $500 CAC.See also Customer acquisition cost, Unit economics, Net revenue retention
Liquidation preference (liq pref): The right of preferred shareholders to get their money back, or a multiple of it, before common holders when the company is sold or wound down. With a standard 1x non-participating preference, the investor takes the greater of its money back or its ownership share.ExampleAn investor paid $10m for 20%. Sold for $30m, 20% would be $6m, so it takes its $10m back first. Sold for $80m, it converts and takes 20%, or $16m.See also Series A, Cap table, Term sheet
Net revenue retention (NRR, net dollar retention): Revenue this year from the customers you had a year ago, divided by what they paid then. It counts upgrades and expansion and subtracts downgrades and churn. Above 100% means the existing base grows with no new customers.ExampleCustomers paying $10m of ARR a year ago pay $11.5m today after some leave and others buy more: NRR of 115%.See also ARR, Lifetime value
Option pool: Shares set aside for future employee stock options. Investors usually ask for the pool to be created or enlarged before their money comes in, so the dilution falls on existing holders, which lowers the effective pre-money valuation.ExampleA $40m pre-money, $10m round needs a pool equal to 10% of the $50m post-money. That $5m of pool comes out of the pre-money, so existing holders are really valued at $35m.See also Dilution, Cap table, Vesting
Post-money valuation (post-money): A startup's value right after a funding round, including the new cash. If an investor puts in $5 million for 20% of the company, the post-money valuation is $25 million.ExampleA seed fund invests $3m at a $15m post-money valuation and owns 20%. If the next round sets a $60m pre-money valuation, that 20% stake is worth $12m on paper before the new round dilutes it.See also Pre-money valuation, Venture capital, Term sheet
Power law: The pattern in venture returns where a few investments produce most of a fund's gains and most of the rest return little or nothing. It is why venture investors ask whether a company could be very large, not just whether it will survive.ExampleA $100m fund writes a $2m check into a company later worth enough for that stake to be $200m. That one investment returns the fund twice over, even if most of the other 29 fail.See also Venture capital, TVPI and DPI
Pre-money valuation (pre-money): A startup's value just before new money comes in: post-money minus the investment. With $5 million for 20%, post-money is $25 million and pre-money is $20 million.ExampleA VC invests $10m at a $40m pre-money valuation. Post-money is $50m, so the VC owns $10m / $50m = 20%, not 25%.See also Post-money valuation, Venture capital
Pro rata rights (pro rata): An investor's right to buy into later rounds to keep its ownership percentage. Funds value it in their best companies, where later rounds are hard to get into.ExampleA fund owns 8% and the company raises a $20m round. To stay at 8% it may invest 8% of the round, or $1.6m.See also Dilution, Term sheet, Series A
Product market fit (PMF, product-market fit): The point where a product meets a real need well enough that customers stay, pay, and bring others without being pushed. Investors look for it in retention curves that flatten rather than slide to zero.ExampleOf users who signed up in January, 40% are still active in month six and that share has stopped falling: the cohort curve has flattened.See also Seed round, Net revenue retention
SAFE (simple agreement for future equity): A contract in which an investor pays now for the right to shares at the next priced round, usually at a valuation cap, a discount, or both. It is not debt: no interest and no maturity date.ExampleAn investor puts $500k into a post-money SAFE with a $10m cap. When the Series A happens, the SAFE converts into 5% of the company as it stood just before the new money, before the Series A dilutes everyone.See also Valuation cap, Convertible note, Seed round
Seed round (seed): A startup's first sizeable outside money, usually to find product market fit. Often raised on SAFEs or convertible notes rather than priced shares, from angels and seed funds.ExampleTwo founders with a prototype raise $2m on post-money SAFEs with a $12m valuation cap, enough for about 18 months of a five-person team.See also SAFE, Series A, Valuation cap
Series A (Series B, priced round): The first priced equity round, usually led by a venture fund that takes a board seat. New preferred shares are sold at a set price, and earlier SAFEs and notes convert into them. Later rounds take the next letters.ExampleA startup with $1.5m of ARR raises $12m at a $48m pre-money valuation. Post-money is $60m, so the new investors own 20%.See also Seed round, Pre-money valuation, Liquidation preference
Term sheet: A short document setting out the main terms of an investment: valuation, amount, liquidation preference, board seats, and investor rights. It is mostly non-binding, but the final legal documents follow it closely.ExampleA term sheet for an $8m Series A: $32m pre-money valuation ($40m post, so 20% to investors), a 1x non-participating liquidation preference, one board seat for the lead, and pro rata rights.See also Venture capital, Pre-money valuation
TVPI and DPI (TVPI, DPI): Two fund performance multiples. DPI (distributions to paid-in) is the cash returned to investors divided by what they paid in. TVPI (total value to paid-in) adds the estimated value of what the fund still holds. DPI is realized; TVPI is partly on paper.ExampleInvestors paid in $100m, have received $40m, and the remaining holdings are marked at $110m: DPI is 0.4x and TVPI is 1.5x.See also Multiple of invested capital, Internal rate of return, Limited partner
Valuation cap: The highest valuation at which a SAFE or convertible note converts. If the priced round comes in above the cap, early investors convert as if it were at the cap, which rewards them for going in first.ExampleA SAFE has a $5m cap and the Series A prices at a $20m pre-money. The SAFE converts at a quarter of the new investors' price, so it gets four times as many shares per dollar.See also SAFE, Convertible note, Pre-money valuation
Venture capital (VC): Funds that buy minority stakes in early-stage startups, expecting most to fail and a few to return the fund many times over. Rounds run from seed through Series A, B, and later stages.ExampleA $100m fund backs 30 startups. Twenty fail, nine return $50m between them, and one returns $250m: $300m in total, a 3.0x fund carried by a single company.See also Growth equity, Term sheet, Post-money valuation
Vesting (cliff): Earning shares or options over time rather than all at once. A common startup schedule is four years with a one-year cliff: nothing until the first anniversary, then a quarter, then the rest monthly.ExampleAn employee granted 48,000 options on a four-year schedule with a one-year cliff owns nothing if they leave at month 10 and 18,000 if they leave at month 18.See also Option pool, Stock-based compensation

LBOs and private equity6

Carried interest (carry): The general partner's share of a fund's profits, typically 20%, paid after investors get their money back plus a hurdle return. It is where most senior PE wealth comes from.ExampleA $1bn fund returns $2bn. LPs get their $1bn back plus the hurdle, and with a full catch-up the GP ends up with 20% of the $1bn profit: $200m of carry.See also Hurdle rate, Management fee, General partner
Growth equity: Investments, often minority stakes, in fast-growing companies that are profitable or close to it, using little or no debt. It sits between venture capital and buyouts in both risk and return.ExampleA growth fund puts $50m into a profitable software company growing 40% a year, for a 20% minority stake and a board seat, with no debt in the deal.See also Venture capital, Leveraged buyout, Private equity
Hurdle rate (preferred return): The minimum annual return, often 8%, that a fund's limited partners receive before the general partner earns carried interest.ExampleLPs commit $100m with an 8% hurdle. Before the GP earns any carry on a five-year deal, they need back about $147m, since 1.08 to the fifth power is about 1.47.See also Carried interest, Limited partner, Internal rate of return
Internal rate of return (IRR): The annualized return on an investment: the discount rate at which the present value of all its cash flows equals zero. Doubling your money in five years is about a 15% IRR; tripling it in five years is about 25%.ExampleInvest $100m and get $200m back in five years: the IRR is about 14.9%, since 1.149 to the fifth power is about 2.0. Get the same $200m in three years and the IRR is about 26%.See also Multiple of invested capital, Leveraged buyout, Paper LBO
Multiple of invested capital (MOIC, cash-on-cash): Total value returned divided by equity invested. Putting in $100 million and getting $250 million back is a 2.5x MOIC. Unlike IRR, it ignores how long the money was tied up.ExampleTwo deals each return 2.0x. One took 3 years, about a 26% IRR; the other took 7 years, about a 10% IRR. Same MOIC, very different results for the fund.See also Internal rate of return, Leveraged buyout
Portfolio company (portco): A company a PE or VC fund owns a stake in. A firm's portfolio companies are where its value creation work and its eventual returns happen.ExampleA mid-market fund owns 12 portfolio companies. Its operating team helps one cut procurement costs by $5m a year, which at a 10x exit multiple adds $50m of value.See also Sponsor, Add-on acquisition

Recruiting6

Coffee chat (informational interview): A short call or meeting, usually 15 to 30 minutes, with someone at a firm to learn about their job. It is the core of networking, and a good one ends with a referral or another name to contact.ExampleA sophomore emails a second-year analyst from her school, gets 20 minutes on Thursday, asks three questions about the group, sends a thank-you that night, and is introduced to a VP the next week.See also Networking, Fit interview
Diversity program: An early insight program or internship track for students from underrepresented groups. Many open earlier than the main summer analyst program, some to freshmen and sophomores, and some lead straight to an internship offer.ExampleA bank's sophomore diversity program takes applications in the fall, runs a two-day event in spring, and gives strong participants an early interview for the junior summer analyst class.See also Sophomore program, Summer analyst
Fit interview (behavioral interview): The questions about you: walk me through your resume, why this firm, why this path, a time you led or failed. Every finance process has them, and weak answers sink otherwise strong technical candidates.ExampleWhy investment banking? A strong answer names something you did (a valuation for your investment club), what you liked about the work, and why this seat gives you more of it.See also Technical interview, Superday, HireVue
Networking: Building relationships with people at firms through emails, coffee chats, and events, so someone knows your name when applications open. It matters more in finance than in most industries, especially from schools where banks do not recruit on campus.ExampleTwenty emails in September lead to eight calls, and two of those turn into referrals. When the program opens in January, two people at the firm can put your name forward.See also Coffee chat, On-campus recruiting
Return offer: A full-time job offer given to an intern at the end of the summer. At most banks it is the main path into a full-time analyst job, so the internship works like a ten-week interview.ExampleA class of 80 summer analysts is reviewed in August. 65 return offers is an 81% rate, and the 15 without one recruit again in the fall.See also Summer analyst, Exploding offer
Technical interview: Questions that test finance knowledge: accounting, valuation, DCF, and LBO for banking and PE; markets for trading; probability and mental math for quant. Expect prompts like walk me through a DCF, or how does $10 of depreciation flow through the three statements.ExampleDepreciation rises $10 at a 25% tax rate. Net income falls $7.50; cash rises $2.50 after adding back the $10; PP&E falls $10; assets fall $7.50 and so does retained earnings.See also Fit interview, Discounted cash flow, Paper LBO

Accounting5

Balance sheet: A snapshot of what a company owns (assets), what it owes (liabilities), and what is left for shareholders (equity) on one date. It always balances: assets = liabilities + shareholders' equity.ExampleA company with $500m of assets and $300m of liabilities has $200m of shareholders' equity. Borrow $50m of cash and assets go to $550m, liabilities to $350m, and equity stays at $200m.See also Income statement, Cash flow statement, Goodwill
Deferred revenue: Cash a customer paid before the company delivered, like an annual software subscription billed up front. It starts as a liability and becomes revenue month by month as the service is provided.ExampleA customer prepays $1,200 in January for a year of software. Deferred revenue starts at $1,200, and $100 moves to revenue each month, so $600 is left on the balance sheet after June.See also Accrual accounting, Net working capital
EBITDA: Earnings before interest, taxes, depreciation, and amortization: operating income with D&A added back. It is a rough proxy for operating cash flow that ignores how the company is financed, and the denominator in most valuation and leverage multiples. It ignores capex and working capital, so it is not free cash flow.ExampleRevenue of $100m and operating costs of $60m, including $10m of D&A, give operating income of $40m. Add back the $10m of D&A and EBITDA is $50m.See also Operating income, EV/EBITDA multiple, Leverage ratio
Gross margin: Revenue minus the direct cost of making or delivering what was sold (cost of goods sold), as a share of revenue. It shows how much each sale leaves to pay for everything else: sales, research, overhead, interest, and tax.ExampleRevenue of $100m and cost of goods sold of $60m leave $40m of gross profit, a 40% gross margin. A software business might run 75%; a grocer nearer 25%.See also Income statement, Operating income, Unit economics
Stock-based compensation (SBC): Pay given to employees in shares or options instead of cash. It is an expense on the income statement but added back on the cash flow statement as non-cash. Many investors still treat it as a real cost because it dilutes shareholders.ExampleA software company grants $40m of stock to employees in a year. Operating income falls $40m, cash from operations adds the $40m back, and existing shareholders are diluted by the new shares.See also Cash flow statement, Treasury stock method

Funds and investing5

Capital call (drawdown): When a PE or VC fund asks its limited partners to send part of the money they committed, usually to fund a specific deal. LPs commit up front but wire cash only as it is called.ExampleAn LP commits $50m to a buyout fund. In year one the GP calls 15%, or $7.5m, to fund two acquisitions, and the LP wires it within ten business days.See also Limited partner, Dry powder
Dry powder: Capital a fund has raised from investors but not yet invested. When there is a lot of it across the industry, competition for deals tends to push prices up.ExampleA $5bn fund that has invested $2bn in its first two years has $3bn of dry powder, and pressure to put it to work before its investment period ends.See also Capital call, Private equity
General partner (GP): The firm that manages a private fund: it makes the investments and earns the management fee and carried interest. GPs also put in some of their own money, often 1% to 5% of the fund.ExampleA GP raising a $2bn fund commits 2%, or $40m, of its partners' own money alongside the LPs, charges the management fee, and makes every investment decision.See also Limited partner, Carried interest, Management fee
Limited partner (LP): An investor in a private fund, such as a pension, endowment, sovereign wealth fund, or family office. LPs commit capital and pay fees but do not choose the investments.ExampleA state pension commits $100m to a buyout fund. It wires money when called, gets quarterly reports, and receives distributions as companies are sold, but has no vote on what the GP buys.See also General partner, Capital call, Hurdle rate
Management fee (2 and 20): The annual fee a fund charges on assets or committed capital to cover salaries and costs, traditionally 2%. Paired with 20% carried interest or performance fee, that is the classic 2 and 20.ExampleOn a $1bn fund, a 2% management fee is $20m a year whether returns are good or bad. Carry at 20% only pays once profits clear the hurdle.See also Carried interest, Assets under management, General partner

Consulting5

Break-even analysis (break-even, breakeven): Finding the volume at which revenue covers all costs: fixed costs divided by contribution margin per unit. Cases use it to test whether a launch, a new plant, or a price cut can pay for itself.ExampleFixed costs of $2m and a $20 contribution per unit ($50 price, $30 variable cost) break even at 100,000 units.See also Contribution margin, Fixed and variable costs, Market sizing
Contribution margin: Price minus variable cost per unit: what each extra sale adds toward fixed costs and then profit. It answers whether growing volume helps, and by how much.ExampleA product sells for $50 with $30 of variable cost, so each unit contributes $20. Sell 10,000 more units and profit rises $200,000, with fixed costs unchanged.See also Fixed and variable costs, Break-even analysis, Unit economics
Fixed and variable costs (fixed costs, variable costs): Fixed costs stay the same whatever the volume (rent, salaried staff, software licences); variable costs rise with each unit made or served (materials, shipping, card fees). The split decides how fast profit grows or shrinks as volume changes.ExampleA bakery pays $8,000 a month in rent and wages whether it sells 1,000 loaves or 5,000, and $1.20 of flour and energy per loaf on top.See also Contribution margin, Break-even analysis, Profitability framework
Market sizing (guesstimate): Estimating the size of a market from logic and round numbers, such as how many coffees are sold in Chicago each day. Interviewers care about a clear structure and a sanity check, not the exact answer.ExampleCoffee shop cups sold in the US each day: 330m people, about half drink coffee, a third of those buy one out daily. 330m x 0.5 x 1/3 is about 55m cups.See also Case interview, Issue tree
Unit economics: Revenue and cost for one unit of the business (an order, a customer, a store) rather than the whole company. If one unit loses money, more volume makes losses bigger, whatever the growth rate.ExampleA meal kit sells for $60; food is $25, shipping $10, packaging $5, so each order contributes $20. With $80 to acquire a customer, that customer must order four times before paying back.See also Contribution margin, Customer acquisition cost, Lifetime value

M&A and deals2

Due diligence: The buyer's investigation of a target before signing: financials, contracts, legal exposure, customers, and management. What turns up can change the price or end the deal.ExampleDiligence finds that one customer is 30% of revenue and its contract renews in six months. The buyer cuts its bid from $400m to $350m or asks for part of the price as an earnout.See also Data room, Commercial due diligence, Letter of intent
Initial public offering (IPO): A private company's first sale of shares to the public on a stock exchange. The underwriting banks market the deal to investors, build the order book, set the price, and allocate the shares.ExampleA company sells 20m shares at $25, raising $500m. With a 6% underwriting spread, the banks keep $30m and the company receives $470m before legal and other fees.See also Underwriting, Follow-on offering

Valuation1

Comparable companies analysis (trading comps, comps): Valuing a company by how the market prices similar public companies, using multiples like EV/EBITDA or P/E. You pick peers by industry, size, and growth, take a range of their multiples, and apply it to the target's numbers.ExampleFive software peers trade at 12x to 16x EV/EBITDA. Applied to a target with $40m of EBITDA, that range implies an enterprise value of $480m to $640m.See also Precedent transactions, EV/EBITDA multiple, Price-to-earnings ratio, Football field

Venture and startups24

ARR (annual recurring revenue, MRR)

Annual recurring revenue: the yearly value of subscription contracts in force today. Software companies and their investors use it instead of reported revenue because it shows the run rate at a point in time.ExampleA startup billing $50k a month in subscriptions (its MRR) has $600k of ARR.See also Net revenue retention, Burn rate, Series A

Burn rate (burn, runway)

How much cash a company loses each month. Runway is cash on hand divided by burn: the months left before it must raise money, cut costs, or turn profitable.ExampleWith $2m in the bank and a net burn of $150k a month, runway is about 13 months, so the founders start raising with at least six months to spare.See also ARR, Seed round, Unit economics

Cap table (capitalization table)

The list of who owns a company's shares, options, SAFEs, and notes, and what each would own once everything converts (fully diluted). Every round and exit payout is worked out from it.ExampleFounders 8m shares, seed investors 2m, option pool 1.5m, Series A 3.5m: 15m fully diluted shares, so the founders hold 53%.See also Dilution, Option pool, Liquidation preference

Convertible note

A short-term loan to a startup that converts into shares at the next priced round instead of being repaid, usually at a discount to that round's price or at a valuation cap, whichever gives the investor more shares. Unlike a SAFE it accrues interest and has a maturity date.ExampleA $1m note has a 20% discount and an $8m cap. The Series A prices at $1.00 a share on a $16m pre-money. The cap gives $0.50 and the discount $0.80, so the note converts at $0.50 into 2m shares, before interest.See also SAFE, Valuation cap, Series A

Customer acquisition cost (CAC)

Sales and marketing spend divided by the number of new customers it brought in over the same period. Read next to lifetime value: a customer worth less than it cost to win loses money.ExampleA company spends $300k on sales and marketing in a quarter and adds 600 customers, a CAC of $500.See also Lifetime value, Unit economics, Burn rate

Dilution

The drop in an existing holder's ownership percentage when new shares are issued, in a funding round, an option grant, or a stock-funded acquisition. The holder keeps the same shares but owns a smaller slice.ExampleA founder owns 60% before a round that sells 20% of the company to new investors. Afterward the founder owns 60% x 0.80 = 48%.See also Cap table, Option pool, Accretion/dilution analysis

Down round

A round priced below the previous round's post-money valuation. It dilutes existing holders more than planned, can trigger anti-dilution protections for earlier investors, and is hard on employee morale.ExampleA company raised at a $100m post-money two years ago and now raises at a $60m pre-money: a 40% markdown for everyone who bought in last time.See also Post-money valuation, Dilution, Liquidation preference

Lifetime value (LTV, LTV/CAC)

The gross profit a customer brings in over the whole time they stay. A simple version is monthly gross profit per customer divided by the monthly churn rate. Investors often want LTV at three times CAC or more.ExampleA customer pays $100 a month at an 80% gross margin, so $80 of gross profit. With 2% monthly churn the average customer stays 50 months: LTV is $4,000, eight times a $500 CAC.See also Customer acquisition cost, Unit economics, Net revenue retention

Liquidation preference (liq pref)

The right of preferred shareholders to get their money back, or a multiple of it, before common holders when the company is sold or wound down. With a standard 1x non-participating preference, the investor takes the greater of its money back or its ownership share.ExampleAn investor paid $10m for 20%. Sold for $30m, 20% would be $6m, so it takes its $10m back first. Sold for $80m, it converts and takes 20%, or $16m.See also Series A, Cap table, Term sheet

Net revenue retention (NRR, net dollar retention)

Revenue this year from the customers you had a year ago, divided by what they paid then. It counts upgrades and expansion and subtracts downgrades and churn. Above 100% means the existing base grows with no new customers.ExampleCustomers paying $10m of ARR a year ago pay $11.5m today after some leave and others buy more: NRR of 115%.See also ARR, Lifetime value

Option pool

Shares set aside for future employee stock options. Investors usually ask for the pool to be created or enlarged before their money comes in, so the dilution falls on existing holders, which lowers the effective pre-money valuation.ExampleA $40m pre-money, $10m round needs a pool equal to 10% of the $50m post-money. That $5m of pool comes out of the pre-money, so existing holders are really valued at $35m.See also Dilution, Cap table, Vesting

Post-money valuation (post-money)

A startup's value right after a funding round, including the new cash. If an investor puts in $5 million for 20% of the company, the post-money valuation is $25 million.ExampleA seed fund invests $3m at a $15m post-money valuation and owns 20%. If the next round sets a $60m pre-money valuation, that 20% stake is worth $12m on paper before the new round dilutes it.See also Pre-money valuation, Venture capital, Term sheet

Power law

The pattern in venture returns where a few investments produce most of a fund's gains and most of the rest return little or nothing. It is why venture investors ask whether a company could be very large, not just whether it will survive.ExampleA $100m fund writes a $2m check into a company later worth enough for that stake to be $200m. That one investment returns the fund twice over, even if most of the other 29 fail.See also Venture capital, TVPI and DPI

Pre-money valuation (pre-money)

A startup's value just before new money comes in: post-money minus the investment. With $5 million for 20%, post-money is $25 million and pre-money is $20 million.ExampleA VC invests $10m at a $40m pre-money valuation. Post-money is $50m, so the VC owns $10m / $50m = 20%, not 25%.See also Post-money valuation, Venture capital

Pro rata rights (pro rata)

An investor's right to buy into later rounds to keep its ownership percentage. Funds value it in their best companies, where later rounds are hard to get into.ExampleA fund owns 8% and the company raises a $20m round. To stay at 8% it may invest 8% of the round, or $1.6m.See also Dilution, Term sheet, Series A

Product market fit (PMF, product-market fit)

The point where a product meets a real need well enough that customers stay, pay, and bring others without being pushed. Investors look for it in retention curves that flatten rather than slide to zero.ExampleOf users who signed up in January, 40% are still active in month six and that share has stopped falling: the cohort curve has flattened.See also Seed round, Net revenue retention

SAFE (simple agreement for future equity)

A contract in which an investor pays now for the right to shares at the next priced round, usually at a valuation cap, a discount, or both. It is not debt: no interest and no maturity date.ExampleAn investor puts $500k into a post-money SAFE with a $10m cap. When the Series A happens, the SAFE converts into 5% of the company as it stood just before the new money, before the Series A dilutes everyone.See also Valuation cap, Convertible note, Seed round

Seed round (seed)

A startup's first sizeable outside money, usually to find product market fit. Often raised on SAFEs or convertible notes rather than priced shares, from angels and seed funds.ExampleTwo founders with a prototype raise $2m on post-money SAFEs with a $12m valuation cap, enough for about 18 months of a five-person team.See also SAFE, Series A, Valuation cap

Series A (Series B, priced round)

The first priced equity round, usually led by a venture fund that takes a board seat. New preferred shares are sold at a set price, and earlier SAFEs and notes convert into them. Later rounds take the next letters.ExampleA startup with $1.5m of ARR raises $12m at a $48m pre-money valuation. Post-money is $60m, so the new investors own 20%.See also Seed round, Pre-money valuation, Liquidation preference

Term sheet

A short document setting out the main terms of an investment: valuation, amount, liquidation preference, board seats, and investor rights. It is mostly non-binding, but the final legal documents follow it closely.ExampleA term sheet for an $8m Series A: $32m pre-money valuation ($40m post, so 20% to investors), a 1x non-participating liquidation preference, one board seat for the lead, and pro rata rights.See also Venture capital, Pre-money valuation

TVPI and DPI (TVPI, DPI)

Two fund performance multiples. DPI (distributions to paid-in) is the cash returned to investors divided by what they paid in. TVPI (total value to paid-in) adds the estimated value of what the fund still holds. DPI is realized; TVPI is partly on paper.ExampleInvestors paid in $100m, have received $40m, and the remaining holdings are marked at $110m: DPI is 0.4x and TVPI is 1.5x.See also Multiple of invested capital, Internal rate of return, Limited partner

Valuation cap

The highest valuation at which a SAFE or convertible note converts. If the priced round comes in above the cap, early investors convert as if it were at the cap, which rewards them for going in first.ExampleA SAFE has a $5m cap and the Series A prices at a $20m pre-money. The SAFE converts at a quarter of the new investors' price, so it gets four times as many shares per dollar.See also SAFE, Convertible note, Pre-money valuation

Venture capital (VC)

Funds that buy minority stakes in early-stage startups, expecting most to fail and a few to return the fund many times over. Rounds run from seed through Series A, B, and later stages.ExampleA $100m fund backs 30 startups. Twenty fail, nine return $50m between them, and one returns $250m: $300m in total, a 3.0x fund carried by a single company.See also Growth equity, Term sheet, Post-money valuation

Vesting (cliff)

Earning shares or options over time rather than all at once. A common startup schedule is four years with a one-year cliff: nothing until the first anniversary, then a quarter, then the rest monthly.ExampleAn employee granted 48,000 options on a four-year schedule with a one-year cliff owns nothing if they leave at month 10 and 18,000 if they leave at month 18.See also Option pool, Stock-based compensation

LBOs and private equity6

Carried interest (carry)

The general partner's share of a fund's profits, typically 20%, paid after investors get their money back plus a hurdle return. It is where most senior PE wealth comes from.ExampleA $1bn fund returns $2bn. LPs get their $1bn back plus the hurdle, and with a full catch-up the GP ends up with 20% of the $1bn profit: $200m of carry.See also Hurdle rate, Management fee, General partner

Growth equity

Investments, often minority stakes, in fast-growing companies that are profitable or close to it, using little or no debt. It sits between venture capital and buyouts in both risk and return.ExampleA growth fund puts $50m into a profitable software company growing 40% a year, for a 20% minority stake and a board seat, with no debt in the deal.See also Venture capital, Leveraged buyout, Private equity

Hurdle rate (preferred return)

The minimum annual return, often 8%, that a fund's limited partners receive before the general partner earns carried interest.ExampleLPs commit $100m with an 8% hurdle. Before the GP earns any carry on a five-year deal, they need back about $147m, since 1.08 to the fifth power is about 1.47.See also Carried interest, Limited partner, Internal rate of return

Internal rate of return (IRR)

The annualized return on an investment: the discount rate at which the present value of all its cash flows equals zero. Doubling your money in five years is about a 15% IRR; tripling it in five years is about 25%.ExampleInvest $100m and get $200m back in five years: the IRR is about 14.9%, since 1.149 to the fifth power is about 2.0. Get the same $200m in three years and the IRR is about 26%.See also Multiple of invested capital, Leveraged buyout, Paper LBO

Multiple of invested capital (MOIC, cash-on-cash)

Total value returned divided by equity invested. Putting in $100 million and getting $250 million back is a 2.5x MOIC. Unlike IRR, it ignores how long the money was tied up.ExampleTwo deals each return 2.0x. One took 3 years, about a 26% IRR; the other took 7 years, about a 10% IRR. Same MOIC, very different results for the fund.See also Internal rate of return, Leveraged buyout

Portfolio company (portco)

A company a PE or VC fund owns a stake in. A firm's portfolio companies are where its value creation work and its eventual returns happen.ExampleA mid-market fund owns 12 portfolio companies. Its operating team helps one cut procurement costs by $5m a year, which at a 10x exit multiple adds $50m of value.See also Sponsor, Add-on acquisition

Recruiting6

Coffee chat (informational interview)

A short call or meeting, usually 15 to 30 minutes, with someone at a firm to learn about their job. It is the core of networking, and a good one ends with a referral or another name to contact.ExampleA sophomore emails a second-year analyst from her school, gets 20 minutes on Thursday, asks three questions about the group, sends a thank-you that night, and is introduced to a VP the next week.See also Networking, Fit interview

Diversity program

An early insight program or internship track for students from underrepresented groups. Many open earlier than the main summer analyst program, some to freshmen and sophomores, and some lead straight to an internship offer.ExampleA bank's sophomore diversity program takes applications in the fall, runs a two-day event in spring, and gives strong participants an early interview for the junior summer analyst class.See also Sophomore program, Summer analyst

Fit interview (behavioral interview)

The questions about you: walk me through your resume, why this firm, why this path, a time you led or failed. Every finance process has them, and weak answers sink otherwise strong technical candidates.ExampleWhy investment banking? A strong answer names something you did (a valuation for your investment club), what you liked about the work, and why this seat gives you more of it.See also Technical interview, Superday, HireVue

Networking

Building relationships with people at firms through emails, coffee chats, and events, so someone knows your name when applications open. It matters more in finance than in most industries, especially from schools where banks do not recruit on campus.ExampleTwenty emails in September lead to eight calls, and two of those turn into referrals. When the program opens in January, two people at the firm can put your name forward.See also Coffee chat, On-campus recruiting

Return offer

A full-time job offer given to an intern at the end of the summer. At most banks it is the main path into a full-time analyst job, so the internship works like a ten-week interview.ExampleA class of 80 summer analysts is reviewed in August. 65 return offers is an 81% rate, and the 15 without one recruit again in the fall.See also Summer analyst, Exploding offer

Technical interview

Questions that test finance knowledge: accounting, valuation, DCF, and LBO for banking and PE; markets for trading; probability and mental math for quant. Expect prompts like walk me through a DCF, or how does $10 of depreciation flow through the three statements.ExampleDepreciation rises $10 at a 25% tax rate. Net income falls $7.50; cash rises $2.50 after adding back the $10; PP&E falls $10; assets fall $7.50 and so does retained earnings.See also Fit interview, Discounted cash flow, Paper LBO

Accounting5

Balance sheet

A snapshot of what a company owns (assets), what it owes (liabilities), and what is left for shareholders (equity) on one date. It always balances: assets = liabilities + shareholders' equity.ExampleA company with $500m of assets and $300m of liabilities has $200m of shareholders' equity. Borrow $50m of cash and assets go to $550m, liabilities to $350m, and equity stays at $200m.See also Income statement, Cash flow statement, Goodwill

Deferred revenue

Cash a customer paid before the company delivered, like an annual software subscription billed up front. It starts as a liability and becomes revenue month by month as the service is provided.ExampleA customer prepays $1,200 in January for a year of software. Deferred revenue starts at $1,200, and $100 moves to revenue each month, so $600 is left on the balance sheet after June.See also Accrual accounting, Net working capital

EBITDA

Earnings before interest, taxes, depreciation, and amortization: operating income with D&A added back. It is a rough proxy for operating cash flow that ignores how the company is financed, and the denominator in most valuation and leverage multiples. It ignores capex and working capital, so it is not free cash flow.ExampleRevenue of $100m and operating costs of $60m, including $10m of D&A, give operating income of $40m. Add back the $10m of D&A and EBITDA is $50m.See also Operating income, EV/EBITDA multiple, Leverage ratio

Gross margin

Revenue minus the direct cost of making or delivering what was sold (cost of goods sold), as a share of revenue. It shows how much each sale leaves to pay for everything else: sales, research, overhead, interest, and tax.ExampleRevenue of $100m and cost of goods sold of $60m leave $40m of gross profit, a 40% gross margin. A software business might run 75%; a grocer nearer 25%.See also Income statement, Operating income, Unit economics

Stock-based compensation (SBC)

Pay given to employees in shares or options instead of cash. It is an expense on the income statement but added back on the cash flow statement as non-cash. Many investors still treat it as a real cost because it dilutes shareholders.ExampleA software company grants $40m of stock to employees in a year. Operating income falls $40m, cash from operations adds the $40m back, and existing shareholders are diluted by the new shares.See also Cash flow statement, Treasury stock method

Funds and investing5

Capital call (drawdown)

When a PE or VC fund asks its limited partners to send part of the money they committed, usually to fund a specific deal. LPs commit up front but wire cash only as it is called.ExampleAn LP commits $50m to a buyout fund. In year one the GP calls 15%, or $7.5m, to fund two acquisitions, and the LP wires it within ten business days.See also Limited partner, Dry powder

Dry powder

Capital a fund has raised from investors but not yet invested. When there is a lot of it across the industry, competition for deals tends to push prices up.ExampleA $5bn fund that has invested $2bn in its first two years has $3bn of dry powder, and pressure to put it to work before its investment period ends.See also Capital call, Private equity

General partner (GP)

The firm that manages a private fund: it makes the investments and earns the management fee and carried interest. GPs also put in some of their own money, often 1% to 5% of the fund.ExampleA GP raising a $2bn fund commits 2%, or $40m, of its partners' own money alongside the LPs, charges the management fee, and makes every investment decision.See also Limited partner, Carried interest, Management fee

Limited partner (LP)

An investor in a private fund, such as a pension, endowment, sovereign wealth fund, or family office. LPs commit capital and pay fees but do not choose the investments.ExampleA state pension commits $100m to a buyout fund. It wires money when called, gets quarterly reports, and receives distributions as companies are sold, but has no vote on what the GP buys.See also General partner, Capital call, Hurdle rate

Management fee (2 and 20)

The annual fee a fund charges on assets or committed capital to cover salaries and costs, traditionally 2%. Paired with 20% carried interest or performance fee, that is the classic 2 and 20.ExampleOn a $1bn fund, a 2% management fee is $20m a year whether returns are good or bad. Carry at 20% only pays once profits clear the hurdle.See also Carried interest, Assets under management, General partner

Consulting5

Break-even analysis (break-even, breakeven)

Finding the volume at which revenue covers all costs: fixed costs divided by contribution margin per unit. Cases use it to test whether a launch, a new plant, or a price cut can pay for itself.ExampleFixed costs of $2m and a $20 contribution per unit ($50 price, $30 variable cost) break even at 100,000 units.See also Contribution margin, Fixed and variable costs, Market sizing

Contribution margin

Price minus variable cost per unit: what each extra sale adds toward fixed costs and then profit. It answers whether growing volume helps, and by how much.ExampleA product sells for $50 with $30 of variable cost, so each unit contributes $20. Sell 10,000 more units and profit rises $200,000, with fixed costs unchanged.See also Fixed and variable costs, Break-even analysis, Unit economics

Fixed and variable costs (fixed costs, variable costs)

Fixed costs stay the same whatever the volume (rent, salaried staff, software licences); variable costs rise with each unit made or served (materials, shipping, card fees). The split decides how fast profit grows or shrinks as volume changes.ExampleA bakery pays $8,000 a month in rent and wages whether it sells 1,000 loaves or 5,000, and $1.20 of flour and energy per loaf on top.See also Contribution margin, Break-even analysis, Profitability framework

Market sizing (guesstimate)

Estimating the size of a market from logic and round numbers, such as how many coffees are sold in Chicago each day. Interviewers care about a clear structure and a sanity check, not the exact answer.ExampleCoffee shop cups sold in the US each day: 330m people, about half drink coffee, a third of those buy one out daily. 330m x 0.5 x 1/3 is about 55m cups.See also Case interview, Issue tree

Unit economics

Revenue and cost for one unit of the business (an order, a customer, a store) rather than the whole company. If one unit loses money, more volume makes losses bigger, whatever the growth rate.ExampleA meal kit sells for $60; food is $25, shipping $10, packaging $5, so each order contributes $20. With $80 to acquire a customer, that customer must order four times before paying back.See also Contribution margin, Customer acquisition cost, Lifetime value

M&A and deals2

Due diligence

The buyer's investigation of a target before signing: financials, contracts, legal exposure, customers, and management. What turns up can change the price or end the deal.ExampleDiligence finds that one customer is 30% of revenue and its contract renews in six months. The buyer cuts its bid from $400m to $350m or asks for part of the price as an earnout.See also Data room, Commercial due diligence, Letter of intent

Initial public offering (IPO)

A private company's first sale of shares to the public on a stock exchange. The underwriting banks market the deal to investors, build the order book, set the price, and allocate the shares.ExampleA company sells 20m shares at $25, raising $500m. With a 6% underwriting spread, the banks keep $30m and the company receives $470m before legal and other fees.See also Underwriting, Follow-on offering

Valuation1

Comparable companies analysis (trading comps, comps)

Valuing a company by how the market prices similar public companies, using multiples like EV/EBITDA or P/E. You pick peers by industry, size, and growth, take a range of their multiples, and apply it to the target's numbers.ExampleFive software peers trade at 12x to 16x EV/EBITDA. Applied to a target with $40m of EBITDA, that range implies an enterprise value of $480m to $640m.See also Precedent transactions, EV/EBITDA multiple, Price-to-earnings ratio, Football field