Venture vocabulary
Read an AI startup. 28 hand-written terms with real workplace examples.
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SAFE
An agreement where the investor pays now and gets shares later, when the startup raises a priced round. Short for Simple Agreement for Future Equity, it has no interest and no maturity date, so the wait for shares can be long.
Valuation Cap
The highest company valuation at which a SAFE or convertible note turns into shares. A lower cap means more shares for the early investor, so it protects their stake when the next round is priced far higher.
Dilution
The drop in each owner's percentage when a company issues new shares. Investors track it because every new round shrinks their slice, even if the company as a whole becomes more valuable.
Pro Rata
An investor's right to buy shares in later rounds so their ownership percentage stays the same. It lets an early investor avoid dilution in a company they still believe in, at the cost of new money each round.
Limited Partner
An investor who puts money into a venture fund but does not pick the deals, often called an LP. Pension funds, endowments and wealthy individuals fill this role, and the fund's managers report results back to them.
Carried Interest
The share of a fund's profits, commonly about 20 percent, that goes to the fund's managers after investors get their money back. Often called carry, it pays the managers only when the fund makes money for its investors.
Power Law
The pattern in venture returns where a few investments produce most of the gains and most return little or nothing. It is why investors back many companies and ask whether each one could grow very large.
Follow-On
A later investment in a company the investor already backs. Funds hold part of their money in reserve for it, so they can add to companies that are doing well and limit dilution of their stake.
Deal Flow
The stream of investment opportunities an investor sees. Quality counts as well as quantity, because an investor can only choose from the companies that reach them.
Investment Thesis
An investor's stated view of where they invest and why: the stage, the sector and the kind of founder. It works as a filter, so they can pass quickly on deals that fall outside it.
Syndicate
A group of investors who put money into one deal together, usually led by the person who found and negotiated it. Members can join with smaller amounts, so much depends on how well the lead did the homework.
Check Size
The amount one investor puts into one company in a round. It shapes how many companies an investor can back, and founders ask about it to see who fits their round.
Technical Diligence
Checking whether a startup's technology works as claimed and can scale. For an AI company, that means asking what is built in-house, which model it runs on, how it is evaluated and what each task costs.
Data Room
A secure shared folder where a startup puts documents for investors to review: financials, contracts, the cap table and key metrics. What it holds, and what is missing, shows how well the company knows its own numbers.
Reference Check
A call to someone who has worked with the founders or used the product, made to test what the pitch says. The most useful ones often include people the founder did not suggest.
Investment Memo
The written case for an investment: the company, the market, the risks, the terms and why now. A partnership decides on it, and writing it makes the investor state the reasoning before any money moves.
Thin Wrapper
A product that adds little beyond a model someone else makes. Investors worry about it because competitors can copy it quickly and the model maker can build the same feature into its own product.
Data Moat
An advantage that comes from data competitors cannot get, which makes the product better as it is used. For an AI startup, it only counts if the data is hard to copy and clearly improves results.
Model Dependency
How much a startup relies on one outside model provider for its product, its pricing and its roadmap. A price rise, an outage or a retired model at that provider can change the startup's costs and plans overnight.
Pilot Revenue
Revenue from trials and experimental budgets that customers have not committed to renew. AI tools are often bought this way first, so careful investors count it apart from ARR until pilots turn into lasting contracts.
LTV to CAC
Lifetime value to customer acquisition cost: the gross profit a customer brings over the time they stay, divided by the cost to win that customer. A common rule of thumb is about 3 to 1, and AI companies must count that profit after model costs.
Magic Number
This quarter's revenue minus last quarter's, times 4, divided by last quarter's sales and marketing spend. Around 0.75 or higher is commonly read as efficient, but it ignores gross margin, so high model costs can hide behind it.
Burn Multiple
Net cash burned divided by net new ARR in the same period. Lower is better, because it shows how many dollars a startup spends to add each dollar of recurring revenue.
Runway
Cash in the bank divided by monthly net burn, which gives the number of months a startup can keep operating. Investors check it to see how soon the company must raise again or reach profit.
MOIC
Multiple on Invested Capital: total value, meaning cash returned plus what is still held, divided by the amount invested. It counts paper value as well as cash, so part of a high figure may never be paid out.
DPI
Distributions to Paid-In: the cash a fund has actually paid back to its investors, divided by the cash they paid in. It counts only money returned, so a fund can show a high MOIC on paper and still have a low DPI.
Liquidation Preference
The right of preferred shareholders to be paid back first in a sale or wind-down, typically one times their investment, before common shareholders receive anything. It decides who gets what when a company sells for less than hoped.
Secondary Sale
A sale of existing shares from one holder to another, such as an early employee selling to a new investor. The company itself gets no new money, so ownership changes while its cash stays the same.
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