- Angel Investor
- Accredited Investor
- Seed Round
- Series A
- Burn Rate
- Carried Interest
Angel investors invest small amounts of money in startups. The term's origin is from the 1920's, to describe a new investor in a new Broadway play.
An Accredited Investor has over $1 million in net worth (minus their home) or earned over $200,000 for the past two years and expects the same this year ($300,000 if joint with spouse).
Some entities are also accredited investors:
- a bank, insurance company, registered investment company, business development company, or small business investment company;
- an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
- a charitable organization, corporation, or partnership with assets exceeding $5 million;
- a director, executive officer, or general partner of the company selling the securities;
- a business in which all the equity owners are accredited investors;
- a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes."
The first money a startup receives, typically from many angel investors, or on Wefunder. While there are exceptions, most seed rounds raise between $250,000 and $2 million.
This is what lawyers call a company when it is issuing securities.
The "A" is the first significant investment by a venture capitalist or very large investor.
In the past, startups raised between $2 and $5 million for their Series A. In recent years, some of the best startups have been receiving well over $10 million from their first venture capital investment. It's been getting cheaper for startups to make more progress with their seed funding, increasing their price when venture capitalists finally invest.
This is how much cash the startup is "burning" each month.
If a startup has $10,000 in revenue in April, but $100,000 in expenses, their burn rate is $90,000.
The amount of time (usually expressed in months) before the startup goes bankrupt without additional funding.
For example, if a startup has no revenues, has expenses of $20,000 per month, and has $100,000 in the bank, it has a "runway" of five months.
It's common for most startups to have between 6 to 18 months of runway.
A security is a fancy way of saying investment contract. It can be debt or equity.
In 1946, the Supreme Court defined a security as anything that meets these four criteria.
- It is an investment of money
- There is an expectation of profits from the investment
- The investment of money is in a common enterprise
- Any profit comes from the efforts of a promoter or third party
Carried Interest is a share of the profits from an investment. It's how venture capitalists make money from their own investors (called limited partners), typically when a startup is acquired or after an IPO.
Example: A venture capitalist invests $1M at a $10M valuation. In five years, the initial $1M of equity is sold for $300M. If carried interest is 20%, the venture capitalist would earn $59.8M [($300M - $1M) * 20%].
IRR stands for "internal rate of return". Unlike a simple exit multiple, IRR takes into account how long it took to earn a return.
It's a harsher way of judging the success of your investments. For instance, let's assume you invest $100, that six years later, is worth $200. Instead of saying, "Wow, that's a 200% return!", you'd say, "That's an IRR of 12.2%".
IRR for angel investors is very long-term. It can take up to 10 years to be able to sell your investments. So we often talk about realized and unrealized IRR. An realized return is when you sold the stock and have the cash. An unrealized return is the estimated amount the stock is worth, usually based on the last price other venture capitalists have recently paid for it.
Here's how to calculate it: The IRR on an investment is the annualized effective compounded return rate that would be required to make the net present value of the investment’s cash flows (whether they be cash in or cash out) equal to zero. NPV = NET*1/(1+IRR)^year). Or just use XIRR in Excel.