CLEVELAND, Feb. 27 /PRNewswire/ -- After they've tapped out their own
funds, not to mention their friends and families', many Entrepreneurs will
seek investments from venture capital firms in order to continue building
their business. While finding an investor is often a necessary step to grow
a successful business idea, the venture capital world can be unchartered
territory to many entrepreneurs, and like any industry, has its own
language. Entrepreneurs entering this land should make themselves as
familiar with venture capital terminology as possible in order to most
easily navigate through this process.
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"As with any specialized technical field, there are certain buzz words
that venture capitalists use that will be new to an entrepreneur," said
Lynn- Ann Gries, Chief Investment Officer of JumpStart Inc., the venture
development organization behind IdeaCrossing
[https://www.ideacrossing.org], a free online resource that connects
entrepreneurs with investors.
"First-time entrepreneurs need to realize that venture capital
investors will expect them to understand the common terms of their world
and won't necessarily be willing to educate them. Before speaking with a
venture capitalist, it is essential that the entrepreneur has done their
research," Gries concluded.
If a venture capital firm is interested in an entrepreneur's idea, they
will present the entrepreneur with a term sheet - a document that outlines
the key financial terms of the proposed investment. While term sheets
aren't usually binding agreements, they provide a roadmap for the direction
a venture capitalist is most likely going to take with their investment and
the conditions that need to be met along the way.
Here are just a few crucial phrases from a typical term sheet that all
entrepreneurs should be familiar with:
-- Capitalization: The debt/equity mix that funds the company's assets.
-- Dilution: The loss in percentage ownership that inures to existing
owners when shares are sold to new investors.
-- Board Representation: Companies are governed by a board of directors.
Typically venture investors will seek one or two board seats - enough
to have a meaningful impact on governance, in addition to the economic
ownership derived from purchasing stock.
-- Founder Shares: Shares issued to the founders of the company. Typically
at lower price then the one offered to investors.
-- Valuation: An analysis of financial condition of the company and the
developmental stage of its products or services, as well as the
company's prospects in the market. Usually includes the valuations of
-- Anti-dilution Provisions: An adjustment mechanism that provides the
holder the right to receive additional securities in order to maintain
a specific ownership percentage.
-- Liquidation Preference: This section spells out how much the investor
is entitled to receive when the company is sold.
The terms above are just a sampling of the verbiage that entrepreneurs
should expect when presented with a term sheet. When it comes to venture
financing and negotiating, do your research and don't go it alone. You need
to align with advisors who are looking out for your best interest - having
an experienced lawyer on your side is a good idea.
IdeaCrossing is a free Internet resource available to all individuals
and organizations with an interest in supporting and promoting
entrepreneurial activity. IdeaCrossing helps entrepreneurs find the
assistance and investment capital they need to launch promising new
business ventures. Additionally, IdeaCrossing serves the Angel and Venture
Capital community by identifying and screening new investment
opportunities. Simply stated, IdeaCrossing is about creating the
connections that build businesses.
SOURCE Jumpstart, Inc.