VC Investing 101: A Glossary

Sebastian
Jun 19
9 min read

This glossary is designed for newcomers to angel investing, particularly those interested in participating in syndicates or investing in early-stage startups. It covers key concepts, structures, legal terms, and the roles of investors.

📌 The Basics

Angel Investor

An individual who provides capital to startups at an early stage, typically in exchange for equity or convertible securities. These investors are often high-net-worth individuals and often have entrepreneurial experience.

Lead Investor

A lead investor is the primary investor in a funding round who oversees the investment process, often taking a significant stake (usually the majority of a financing round) in the company. They lead the due diligence, negotiate terms, and often take a board seat, influencing the company's direction. Lead investors also play a crucial role in attracting other investors to the round.

Co-Investor

An investor who joins a deal alongside the lead investor, typically contributing smaller amounts and relying on the lead's due diligence and negotiation skills. Co-investors benefit from the lead’s expertise without conducting full due diligence themselves.

Startup

A new business venture with high-growth potential aiming to solve a problem or meet a market need, often through technology.

Equity

Ownership in a company, usually represented by shares. Investors receive equity proportional to their investment.

Syndicate

A group of angel investors who pool money together to invest in a startup. Syndicates are managed by a ‘syndicate lead’ who sources deals, performs due diligence, interacts with founders, and shares investment opportunities with syndicate members.

Lead Investor in a Syndicate

The main investor in a syndicate who takes the lead role in deal sourcing, evaluating the deal, negotiating terms, and coordinating with other syndicate members to invest.

Follow-on Investment

Additional investments are made in a startup after the initial round, often during later funding rounds.

Venture Capital (VC)

Professional firms that invest pooled money from institutions or wealthy individuals into high-growth startups, typically at later stages than angels.

Pitch Deck

A presentation created by founders to pitch their startup to investors. Typically includes problem, solution, market size, traction, team, and financials.

Cap Table (Capitalisation Table)

A table showing ownership stakes in a company, including how much each investor owns and what percentage they hold.

💼 Fundraising & Stages

Bootstrapping

When founders fund the business themselves without outside investment.

Friends and Family (F&F) Round

The first informal funding round is when founders raise small amounts of capital from personal connections, such as friends, family, or close associates. This is often used to build a prototype or validate an idea.

Pre-Seed Round

The earliest form of external funding used to validate ideas, build prototypes, or conduct market research. Often funded by angel investors.

Seed Round

The first formal fundraising round used to launch the product, acquire early customers, and grow the team. Typically led by angel investors or early-stage VCs.

Series A

First major institutional funding round following seed stage. Focuses on proving product-market fit and building a scalable business model. Usually led by venture capital firms.

Series B

Funding round aimed at scaling operations, expanding the team, and entering new markets. Companies are more mature and have proven traction. Led by growth-focused VCs.

Series C

Used to accelerate growth, expand internationally and develop new products. May include late-stage VCs, private equity firms, or hedge funds.

Series D and Beyond

Later-stage financing rounds that may occur if the company continues to scale without going public or being acquired.

Growth Round

A general term for Series B and beyond, focused on scaling revenue, user base, or geographic reach.

Late-Stage Funding / Pre-IPO Financing

Capital raised when a company is mature, profitable (or near-profitable), and preparing for an IPO or acquisition. Investors may include large institutional players.

📜 Investment Structures & Contracts

Convertible Note

A short-term debt instrument that converts into equity during a future priced round. Common in early-stage financing.

SAFE (Simple Agreement for Future Equity) Note

A contract giving investors the right to receive equity in a future priced round. Not debt like a convertible note. SAFEs can include features such as a valuation cap and/or a discount rate.

A valuation cap is the maximum valuation at which a SAFE or convertible note will convert into equity. Protects early investors from dilution if the company becomes very valuable.

The discount rate is a percentage discount on the price per share that SAFE holders receive compared to new investors in a priced round.

Uncapped Note

A type of convertible note (or SAFE) that does not have a valuation cap, meaning there is no upper limit on the price at which the note will convert into equity during a future priced round.

This creates risks for early investors if the company becomes highly successful, the valuation at conversion could be extremely high.

Priced Round

A funding round where the company sets a valuation, and investors buy shares at a fixed price per share.

Preference vs Ordinary Shares

Preferred Shares: Issued to investors, come with special rights like liquidation preference and anti-dilution.
Ordinary (Common) Shares: Usually held by founders and employees, with fewer rights.

Pro-Rata Rights

The right of an investor to maintain their ownership percentage in future funding rounds by investing additional capital.

Super Pro-Rata Rights

Allows investors to invest more than their pro-rata share in future rounds, sometimes up to double.

Pay-to-Play Clause

Requires existing investors to participate in future financings to retain certain rights or avoid penalties.

Liquidation Preference

Determines who gets paid first and how much when a company has an exit (aka as a liquidity event). For example a “1x non-participating preferred” preference means that investor receives 1x their invested capital during an exit or liquidity event before others.

Anti-Dilution Provision

Protects investors from dilution if the company issues new shares at a lower price in the future.

Drag-Along Rights

Allows majority shareholders to force minority shareholders to join in the sale of the company.

Vesting

Shares earned over time (typically 4 years), ensuring long-term commitment from founders and key team members.

🧾 Due Diligence & Risk Assessment

Due Diligence

The process of investigating and validating a startup’s financials, customers, legal documents, product, team, and market before investing.

Term Sheet

A non-binding document outlining key investment terms proposed by an investor or lead. Sets the foundation for legal agreements.

Traction

Evidence that a startup is gaining momentum, such as users, revenue, regulatory approvals or licenses, or partnerships.

Market Size (TAM/SAM/SOM)

TAM: Total Addressable Market – overall demand for a product/service.
SAM: Serviceable Available Market – segment of TAM targeted by the product.
SOM: Serviceable Obtainable Market – realistic portion of SAM the company can capture.

Burn Rate

How fast a startup spends its cash, especially before generating revenue. This is usually expressed as a dollar figure and time period. For example, the company is burning $20k per month.

Runway

How long a startup can operate before running out of money, based on current burn rate. For example, the company has 12 months of runway left based on a $20k monthly burn (implying it has ~$240k in cash reserves).

Illiquidity

Refers to how hard it is to sell or exit an investment. Startups are typically illiquid until acquisition or IPO.

🤝 Legal & Governance

Board of Directors

A group of individuals elected to represent shareholders and oversee company management.

Board Observer

A non-voting participant in board meetings, usually appointed by an investor or a group of investors. They can attend meetings, participate in discussions, and ask questions, but they don't have voting power or the same legal obligations as a formal director.

Majority/Minority Shareholder

Majority : Owns more than 50% of shares.
Minority : Owns less than 50%.

Right of First Refusal

Gives existing shareholders the first opportunity to buy shares if another shareholder wants to sell.

Information Rights

Gives investors the right to receive regular updates about the company’s financial performance and operations.

Side Letter

A private agreement between an investor (or syndicate) and the startup, used to negotiate specific terms not included in standard documents — such as information rights or observer seats.

Founder Stock

Shares issued to founders, usually common stock, which has fewer rights than preferred stock issued to investors.

Preferred Stock

Type of equity given to investors that comes with special rights like liquidation preference, anti-dilution protection, etc.

🏁 Exits & Returns

Exit (aka liquidity event)

How investors realise returns — typically through acquisition, IPO, or secondary sale.

Acquisition

One company buys another - a typical exit strategy for startups.

IPO (Initial Public Offering)

When a private company offers shares to the public for the first time.

Secondary Sale

Sale of shares by existing shareholders (like angels, founders or employees) to new investors or other parties. This often occurs before an IPO or acquisition, but is increasingly common in earlier rounds as companies are staying private for longer.

Carry / Carried Interest

In syndicates, the share of profits that the lead investor receives as compensation for managing the deal, typically around 20%.

Holding Period

The length of time an investor holds an asset before selling.

MOIC (Multiple on Invested Capital)

Measures return on investment as a multiple. e.g., MOIC of 3x means $3 returned for every $1 invested.

🔍 Syndicate-Related Terms

Syndicate Lead

The person organising and leading the syndicate. They source deals, perform due diligence, recruit syndicate members, and negotiate terms.

Deal Flow

The number and quality of investment opportunities available to a syndicate or investor. Syndicate leads often have multiple channels to source leads, including founders, LPs, syndicate members, accelerators, incubators, VC funds, and industry contacts.

Platform Syndicate

A syndicate formed via an angel investment platform, where the lead invests directly and others follow via a rolling fund or direct allocation.

Professional Investor (aka Accredited Investor)

In Hong Kong, a "professional investor" (also called an “accredited investor”) is typically defined as an individual holding a portfolio of HK$8 million or equivalent in investments, cash, or cash equivalents.

Rolling Fund

A recurring fund structure where members commit to investing a set amount each quarter and choose which deals to participate in.

Cheque Size

The amount of money an angel or syndicate typically invests in a single deal.

Allocation

The amount of capital a syndicate is allowed to invest in a particular deal. For example, a syndicate may be allocated $200k out of a $6m deal in a Series-A round.

SPV (Special Purpose Vehicle)

A special purpose vehicle (SPV) is a fundraising structure that allows multiple investors to pool their capital and make a single investment together.

A company can also set up an SPV as a separate legal entity for a specific purpose, such as to isolate financial risk or to conduct a financial transaction.

🏦 Fund Structure & Roles: LPs, GPs, and Fund Terms

General Partner (GP)

The fund manager responsible for fundraising, making investment decisions, managing the portfolio, and overseeing fund operations. In angel syndicates, this is often the lead investor or fund operator.

Limited Partner (LP)

An investor in a fund who contributes capital but does not participate in day-to-day management or decision-making. LPs rely on the GP to source and manage investments.

Management Fee

The GP charges an annual fee to cover operational costs of running the fund (for example, salaries, legal, administrative, and travel expenses). Typically 1–2% of committed capital.

Carry / Carried Interest

Performance-based compensation for the GP, usually 20% of profits above a hurdle rate (if applicable). This aligns the GP’s incentives with LP returns.

Blind Pool Fund

A blind pool fund in venture capital is an investment vehicle where investors commit capital to a fund without knowing the specific investments the fund will make. The term "blind" signifies that investors are trusting the fund manager's expertise and investment strategy rather than knowing the specific investments upfront.

Hurdle Rate

A minimum return threshold that must be met before the GP can receive carry - not always used in early-stage angel funds.

Fund Term

The lifespan of a fund, typically 7–10 years, during which investments are made and exited.

Commitment

The amount of capital an LP agrees to invest in a fund over time.

Capital Call

A capital call, also known as a drawdown, is a request by a venture capital fund manager to its investors (limited partners) for a portion of the capital they committed to invest. This is done when the fund needs capital to make new investments or cover operating expenses.

Drawdown

The process by which a GP calls capital from LPs to make investments.

Distribution Waterfall

The order in which returns are distributed among LPs and the GP. Usually follows this pattern:

Return of capital to LPs
Hurdle return (if applicable)
Carry to GP
Remaining profit shared between LPs and GP

🆕 Additional Terms

Dilution

Occurs when new shares are issued, reducing the ownership percentage of existing shareholders.

Down Round

A funding round where the valuation is lower than the previous round - often bad news for earlier investors.

No-Shop Clause

A term or condition preventing the startup from soliciting bids from other investors for a set period of time.

Employee Option Pool

Shares reserved for future employees. Can affect investor ownership if created before or after a funding round.

Full Ratchet Anti-Dilution

An aggressive form of anti-dilution protection that adjusts investor ownership significantly if new shares are sold cheaper.

Warrant

A security giving the holder the right to buy shares at a fixed price in the future.