Seed Lingo

Familiarizing yourself with words used by founders and investors about seed-stage startups will help you chat more comfortably with people in the space. This doc is sourced from Embroker.

A seed funding round is the first official equity funding stage. Startups usually go through a seed funding round if they’re still ironing out the details of their business model and figuring out the product-market fit.

This so-called “seed” funding can be analogous to planting a seed — with financial support and a sound business strategy, the startup will grow and mature. Seed funding allows companies to secure funding towards processes such as product development and determining target markets.

Startups may raise anywhere between $10,000 and up to $2 million in this stage.

1. Angel Investors

An angel investor is a high-net-worth-individual who provides funds for early-stage startups, usually in exchange for equity. Angel investors tend to focus on supporting the growth of businesses rather than on the potential returns.

Angel investments are usually around $600,000.

2. Valuation

Valuation is the process of determining the current or projected worth of a company by looking at the market forces of the industry, level of customer demand, and the projected revenue.

Pre-money valuation is how much your company is worth prior to funding, and post-money valuation is the value of the company plus the funding.

3. Convertible note

A convertible note is a type of convertible debt instrument that’s used to fund early and seed-stage startups. The investor loans money to a startup, and the convertible note “converts” the loan (principal plus interest) into equity that is repaid at the maturity date.

4. Cap

A convertible note usually comes with a Cap, or a maximum valuation the convertible note investment can convert into equity. This means “convertible note investors usually pay a lower price per share compared to other investors in the equity round,” according to Ycombinator.

5. Equity Financing

Equity financing is the process of raising capital by selling shares. Angel investors, VCs, and crowdfunding are sources of equity financing.

6. Debt Financing

Opposite of equity financing, debt financing is where businesses raise capital by securing a loan from a financial institution.

There are two types of debt financing — short-term, which is commonly used when there are temporary cash flow issues, and long-term, which applies when a business is purchasing assets.

7. Growth Stage

This describes the stage at which startups are refining their products, business strategies, and teams. Startups may also start seeking funding from VCs.

8. Customer Acquisition Cost (CAC)

This refers to an estimate of the total cost of acquiring a new customer, taking into account things like advertising, marketing, and customer service costs.

Thanks to an investment from an angel investor, Fly Buy was able to finalize their drone product and fine-tune their subscription-based business model.

Another investor also purchased $100,000 of convertible notes at a $1 million cap. Let’s say by next year, Fly Buy raised a $5 million valuation, which is higher than the Cap. This means their investment converted as if Fly Buy was worth $1 million rather than $5 million, giving them 10% equity in the company instead of just 2%.

After seed funding, Fly Buy launched their drone delivery service and got thousands of subscribers within two months. They hope to fund their growth efforts in the Series funding rounds.