Glossary
of Common Terms in the Startup Ecosystem
The glossary below provides a list of common terms in the startup ecosystem, in addition to their definitions, in both English and Arabic
Non-disclosure agreement (NDA)
A legally binding contract that establishes a confidential relationship between the startup founders and prospective investors in a case where sensitive information, trade secrets or IPs that require protection being is being shared with the investors.
Alternative Term
Confidentiality Agreement
Shareholders’ Agreement (SA)
An agreement between two or more parties which contains the terms agreed on in the term sheet and the provisions that govern the management and operation of the start-up company.
Related Terms
Share Purchase Agreement (SPA)
An agreement between two or more parties in which the seller (the founder or founders) agrees to sell a number of shares to the buyer (the investor or investors) at a specific price.
Alternative Term
Preferred Stock Investment Agreement
Share Sale and Purchase Agreement
Related Terms
Founders’ vesting
This term is protective not only to the investors but also to founders themselves (in particular when there are multiple co-founders). The gradual vesting means that co-founders cannot just leave the company and keep their entire percentage if they decide to leave before the agreed timeframe (of usually 36-48 months). Depending on when they leave, they would keep part or the entire percentage.
Exit strategy
Refers to the investor selling their shares through a liquidation event that allows them to cash in on their investment in your company and make a return (and does not refer to you as a founder who sells their shares and leaves the company).
Treasury shares
Issued shares that belong to the company itself (usually repurchased from shareholders as a 'buy back').
Repurchase or buy out
The investors sell their shareholding back to the founder, usually at a premium.
Common shares
Represent a proportional share of a company’s ownership and share capital. Common shareholders have a subordinate claim to the excess profits of a firm, meaning they are the last to receive payment in the event of bankruptcy and liquidation and thus bear the highest risk. In the context of start-up investing, the ownership stake of a company’s founders and employees takes the form of common shares.
Issued shares
Shares issued by the company are either (i) issued to shareholders and are therefore outstanding, or (ii) belong to the company itself (treasury shares) and are therefore not outstanding.
Authorised shares
The maximum amount of shares that a company can ever issue.
Preferred shares
Represent partial ownership in a firm, like common shares, but include additional investor protection. This protection relates mainly to the fact that during bankruptcy preferred shareholders are paid out in full before any liquidation proceeds are given to common shareholders. Preferred shareholders could also benefit from favorable dividend provisions. Nearly all VC investors require preferred shares in exchange for their investment.
Unissued shares
The maximum amount of shares that a company can ever issue as per its Certificate of Incorporation (or other incorporation legal documents).
Representations and warranties
Contractual statements made by the seller on completion relating to the target company being acquired. They indicate that the investor possesses a requisite amount of information to make the purchase and that the company is in good standing to make the sale.
Reserved but unissued shares
Shares which are not yet issued but are set aside for certain purposes.
Alternative Term
Authorized unissued shares, Authorized reserved shares
Reserved unissued stock
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization
Total Available Market (TAM)
The total available market that you can reach, independent of your ability to reach and serve it as of yet, i.e. assuming without any competition or internal capacity limitations.
Related Terms
Exiting
Selling the investor’s shares in the portfolio company.
Valuation
The start-up's value (in SAR).
Debt finance
A type of finance that involves a lender extending credit or money to a firm (or individual) based on the overall creditworthiness of the firm and its expected future cash flows (as the primary source of repayment). The most common form of debt finance is bank loans.
Seed finance
Financing provided to research, test and develop its final product and marketing strategy, in order to start generating revenue.
Bootstrapping
The process of creating a business with very little outside financing. Founders employing this strategy initially finance their companies using their personal resources and hard work. It is an inexpensive way of financing as it utilizes unused opportunities that can be found within own business by simply managing business finances better.
Equity finance
A type of finance whereby the owner of a company sells an ownership stake in it, in exchange for a capital contribution. It is the most common form of start up financing.
Pre-seed finance
Financing provided to begin exploring and developing the business concept, usually by using personal funds and ‘bootstrapping’ with minimal financial resources.
Pivoting
It happens when you change or re-configure a fundamental - or sometimes a simpler - part of your business model (eg. product/service, production process, logistics) once you realize that your current business model is not working or some of your initial assumptions are wrong (for example, as a result of market feedback from customers or where revenues are not scaling).
Deal sourcing
Identifying potential deals and prospects through existing networks in the market.
Ownership dilution
The decrease in equity ownership for you (as founder) and other existing shareholders as the company issues new shares.
Alternative Term
Equity dilution
Founders’ undertakings
This is a standard term to ensure that the founder is a full-time resource to the company and that any Intellectual Property already developed is transferred to the company.
Post-money valuation
The value following an investment.
Pre-money valuation
The value prior to any cash investment or financing received.
Customer Acquisition Costs (CAC)
Shows the average sales, marketing and other expenses required to acquire a new customer. It informs you about the effectiveness of your sales and marketing strategy.
Early-stage finance
Financing provided for product development and initial marketing. At this stage, companies typically have not sold their product commercially and are in the process of being set up.
Growth (or Survival) stage finance
Financing for the expansion of an operating business.
Investment-readiness
The process of preparing your financial and fundraising capabilities to attract investors.
Capitalisation table
A record of ownership that shows the founders’ and investors’ percentage of ownership (number of shares and value of investment), any reserved shares, equity dilution and the value of equity in each round of investment to date.
Alternative Term
Cap table
Protective rights
These include terms that give the investors a veto or power block on specific types of corporate activity or action that affect their interests and investment.
Founders’ lock up
Founders cannot sell their shares for the first ‘X’ years after the investment so they can focus on growing their business until an exit event.
Elevator pitch
A succinct sales pitch that introduces your company and its unique selling point quickly and compellingly. A good elevator pitch should last no longer than 20 to 30 seconds.
Related Terms
Right of First Refusal (ROFR)
In the case that any shareholder decides to sell any of its shares to a third party buyer, the company can get the first chance to buy the shares, and if it does not exercise this right then other investors or preferred shareholders will have the prior right (but not obligation) to acquire such shares with the same terms and conditions as agreed with the third party buyer.
Drag-along rights
The right of an investor to force the company founders and the other shareholders to agree to an ownership change (for example, sale or merger) of all or part of the company.
Information and management rights
These rights determine what corporate information (about the business and its operations) investors will have access to and how often.
Tag-along rights
The tag-along right provides shareholders with the right to be "tagged" in a deal on the same terms and conditions with investors who want to sell all or part of their shares. This is significantly important for minority shareholders and common shareholders so that they can sell their stake along with the majority or preferred shareholders and not be left out of the sale.
Alternative Term
Co-sale right
Redemption rights
A redemption right is a feature of preferred shares that allows investors to require a company to repurchase their shares after a specified period of time.
Preference rights
These dictate what preferences the investors and preferred shareholders are entitled to in each financing round and especially in the event the company is sold (a liquidation event).
Conversion rights
The right to convert a security or class of shares to another.
Liquidation rights
This refers to how proceeds are shared among the shareholders in a liquidation event, i.e. when a company is sold. Liquidation preferences protect investors’ interests, especially in the event a company gets sold for an amount less than the amount of the invested capital or goes bankrupt.
Voting rights
As VC investors are often minority shareholders, and to protect themselves against the possibility of being voted out, they can insist on certain voting rights (through board seats or an ownership percentage of voting share classes). In addition, preferred investors often request specific voting rights that can protect them from the possibility of changes being made that could potentially harm or reduce the value of their investment.
Pre-emption rights
These give an existing shareholder the right to participate in a future financing round to the extent necessary to maintain its percentage stake in the company.
Participation rights
Preferred shares may be participating or non-participating. With “non-participating” preferred shares, upon liquidation of the company, the preferred holders are entitled to receive only the amount of their preference plus any accrued and unpaid dividends, if any. Whatever proceeds are left after that, they are distributed exclusively to the common shareholders. With “participating” preferred shares, preferred holders are entitled to receive their preference amount first, accrued and unpaid dividends second, and then any remaining proceeds are divided among holders of common shares and preferred shares.
Anti-dilution rights
This is a protective provision for investors in the event a future financing round values the company at a lower value than the previous funding round or the price the investor paid for it. The most typical dilution in the VC world occurs when a company issues new shares, thereby reducing the ownership percentage of current shareholders.
Convertible debt
A debt instrument with a maturity date and stated repayment terms that includes an option (i.e. a right with no obligation) to convert the debt into equity shares.
Venture capital (and rounds)
Is capital obtained from private sources in exchange for an ownership stake of the firm. Compared to other forms of external finance, a venture capital investor accepts more risk since they have no historic track record or collateral to rely on in the event the startup fails. As a result, the risk of losing their investment is high and they, therefore, expect a high return for their investment.
Serviceable Available Market (SAM)
Slices the Total Available Market (TAM) into the portion of the market that the company is looking to actually target with its specific product/service and within its current capabilities and ambitions.
Serviceable Obtainable Market (SOM)
The market share that you can realistically target to capture from Serviceable Available Market (SAM) within the short term, taking into account competition, resources and other external influences.
Limited Liability Company (LLC)
A company incorporated with a minimum capital of 500,000 SAR.
Unicorns
Companies with valuations above $1 billion.
Secondary purchase
This is when a shareholder (typically one of the founders or an early employee or an early investor) of a private company sells his or her shares to another buyer.
Conditions precedent
An investment may be made by the VC firm in the form of multiple payments that are linked to certain conditions being met prior to making a payment.
Non-solicitation clause
Prohibits the seller from soliciting the buyer’s customers or suppliers.
Non-competition clause
Prevents the seller from setting up a business in competition with the buyer.
Amended & restated certificate of incorporation and bylaws
Documents that reflect the change in the company’s internal rules and the shareholders’ economic and control rights following financing rounds that result in new shares being issued.
Warranties
Refers to the assurance by the company that specific facts or conditions are true, or will happen.
Warrants
It is the right granted to investors to purchase additional shares at a particular price (the exercise price) within a set period of time.
Initial Public Offering (IPO)
In an IPO a company starts floating on a stock market, selling a significant number of its shares in the process to institutional and non-institutional investors.
Discounted cash flows method
Valuation based on the sum of all future cash flows generated.
Comparable transactions method
Valuation based on a rule of three with a KPI from a similar company. It looks at price paid for similar companies in the past and at the current value of comparable companies that are public (or publicly listed) as an indicator of value.
Alternative Term
Market comps
Book value method
Valuation based on the tangible assets of a company.
Risk factor summation method
Valuation based on a base value adjusted for 12 standard risk factors
Venture capital method
Valuation based on the ROI expected by the investor.
Scorecard method
Valuation based on a weighted average value adjusted for a similar company.
Liquidation value method
Valuation based on the scrap value of the tangible assets.
First Chicago method
Valuation based on the weighted average of three valuation scenarios.
Berkus method
Valuation based on the assessment of 5 key success factors.
Return on Investment (ROI)
A financial metric that is widely used to measure the expected return from an investment. It is a ratio that compares the gain or loss from an investment relative to its cost.
Teaser
A short version of the investor presentation, which is the equivalent of an “elevator pitch”.
Pitch deck
A brief presentation used to provide your audience (during face-to-face or online meetings with potential investors, customers, partners, and co-founders) with a quick overview of your business plan. It is often created using PowerPoint or other software.
Related Terms
Restrictive covenants
These prevent the seller from competing with the buyer for a limited time once the sale is finalised.
Deal offer and structure
Gives an overview of the parties involved and the nature of the transaction, and all about the valuation and ownership percentages resulting from the deal. Key clauses cover the type of security to be issued, milestone-linked payments, and capitalisation table.
Mergers and Aquisitions (M&A)
Merging with a similar company or being bought by a larger company.
Commercial due diligence
The process of evaluating the commercial attractiveness of a business and assessing its capacity to grow within its internal and external environment.
Technical due diligence
Investigates the technical aspects of the business, including a thorough overview of the technology product; underlying infrastructure; defensibility (i.e. the state of your IP); compatibility, migration and standards; competition; technical team and staffing; product development process and roadmap for the coming few years.
Legal due diligence
Assesses various areas related to the legal standing of the business, such as its contractual obligations and existing agreements, past acquisitions and asset disposals, compliance with applicable laws, intellectual property rights, data protection, and any potential or pending legal liabilities.
Financial due diligence
Assesses the company’s financial position, cash flow projections, financial model, and valuations, and that the investor is aware of all existing assets and liabilities. It also includes taxation matters, such as tax compliance and liabilities.
Due diligence data room
Space used for housing data, usually of a secure or privileged nature. It can be a physical or virtual data room or data center. It is used for a variety of purposes, including data storage, document exchange, file sharing, financial transactions, legal transactions, and more. For star-ups it is a virtual warehouse of key documents developed by the startup to facilitate access by investors to the company’s important documents in an organised, controlled and confidential manner.
Due diligence
The process of assessing and evaluating the business as related to its technical, commercial, financial and legal state and future prospects through verifying information, statements and claims made by the company in its pitch material on current and projected future performance.
Pre-screening
The long-listing of companies that fit the investment thesis and minimum investment criteria of the investor.
Alternative Term
Initial screening
Financial statements
It is a group of three financial statements; the Income Statement (sometimes called profit & loss statement), Balance Sheet and Cash Flow Statement.
Terminal value
Anticipated exit value.
Customer Lifetime Value (LTV)
A prognosis of the total revenues that one client will generate on average during the full period that he/she is buying or using your services or products.
Term sheet
A document containing the key investment terms offered by the investor.
Customer retention rate
The percentage of customers who remain paying customers during a given period of time.
Runway
It refers to how long a startup can survive in the market if the income and expenses remain constant. If a startup does not have enough runway, they risk going out of business before they understand the market they are looking to serve. When the runway is short it is time to start looking for new financing as soon as possible (unless the company can manage to bootstrap).
Angel investor
Usually a wealthy individual who provides capital without provision of security, and therefore participates fully in the entrepreneurial risk of the business.
Institutional investor
An institutional investor is a company or organization that invests money on behalf of clients or members.
Monthly (or Weekly) Active Users (MAU/WAU)
Unique users who engage with the app or software in a month (or week). Understanding MAU/WAU is helpful in determining the revenue potential of a company or how well it is currently monetizing.
Legal Council/advisor
A specialist who can advise clients on corporate legal matters, including incorporating their company and how to manage the negotiations, execution and closing of an investment deal.
Financial advisor
A specialist who can advise a start-up founder on how to manage their investment deal structuring, negotiations and execution.
Accelerators and incubators
An accelerator - as the name suggests - accelerates the development of an idea with the hope of building out an initial product (MVP), develop the business model and perhaps incorporate a company, typically over a period of 3-6 months. An incubator will ‘incubate’ the business and help with the growth of the business model or company (usually over a 12-month period).
Intellectual Property (IP)
For startups, this refers to creations or inventions that form the basis of a product or service with a commercial potential. The IP may differentiate a startup or form its unique selling proposal. IP tools include copyrights, trademarks, and patents.
Shareholder and board written consents
A document that illustrates the board’s approval of this financing transaction.
Share option pool
The number of common shares allocated by the company to future employees, as a way to attract potential employees. Shares in an option pool usually cannot vest until a certain amount of time has elapsed and are usually taken from the founders' common shares.
Business model canvas
An organised way to lay out your assumptions across nine parts about not only the key resources and key activities of your value chain, but also your value proposition, customer relationships, channels, customer segments, cost structures, and revenue streams.
Investment closing phase
In this phase the company ensures that all legal documentation that is required by law to enact the investment is in place, and is acceptable and agreeable by all concerned parties to the transaction.
Churn rate
The percentage of customers that you lose over a given period of time.
Burn rate
The net cash outflow, usually expressed on a monthly basis, or total cash inflow minus total cash outflow. It helps you establish at what point in time your firm will be out of money based on your current cash flows.
Key Performance Indicators (KPIs)
Based on these metrics you track the performance of your company, experiment with different acquisition channels, business models and cost structures, and use them to make you and your co-founders focused on the targets you have defined.
Financial model
It is essentially a mathematical model that translates the operational performance of a business into financial figures. It is a dynamic tool that enables a company to link its assumptions about how prospective customers would behave to its financial performance and profits and losses.
Business model
A company’s business model is the story of how it makes money (or whichever metric you use to define your success).
Alternative Term
Equity story
Valley of death
The first 3 years of a start-up's life during which there is a high probability that a start-up firm will die off before it establishes a steady stream of revenues. During this phase, it may be difficult for startups to raise additional capital.
