A guest article by Startup & VC
An angel investor is a person who invests personal funds directly in a startup, usually in the pre-seed or seed stage. As the capital is being invested in a super early stage of the company life cycle, the angel investor must be able to lose the entire investment. Normally angel investors are high-net-worth individuals who have founded and exited a company in the past or are working in executive positions.
Carried Interest or "Carry"
The portion of any gains realized by the fund to which the fund managers are entitled, generally without having to contribute capital to the fund. Carried interest payments are a vehicle in the venture capital industry, in order to create a significant incentive for the general partners to achieve capital gains and participate on the fund performance.
The method a fund intends to use to liquidate its holdings while maximizing its return. These strategies depend on the overall market conditions and industry trends. Exit strategies can include selling or distributing the portfolio company's shares after an initial public offering (IPO), a sale of the portfolio company, or a recapitalization. General Partner (GP) In a limited partnership, the general partner is responsible for the partnership's management decisions. The general partner (GP) has a fiduciary duty to act in the best interests of the limited partners (LPs) and is fully responsible for his or her actions.
When making a large investment, the entire risk is often shared among a group of investors (VCs, angel investors etc.). Typically, one investor will take the lead in negotiating investment terms and overseeing due diligence.
Liquidation preferences are among the standard clauses in venture capital financing, through which the investors receive their investment (and, if applicable, a certain return on it) in priority to the founders from the exit proceeds. By agreeing to such preferential and additional proceeds, the investors secure their investment.
An investment fund's general partner is typically compensated annually to cover administration costs, expenses related to investor relations, and to compensate them for their services and expertise.
Analogous to the pre-money valuation, the post-money valuation serves to create clarity about the value of a startup after an investor has contributed capital in a financing round.
In principle, the result of the pre-money valuation (the startup is worth 1 million euros without the investor's funds) and the venture capitalist's investment (500,000 euros) are added together. The result is the post-money valuation. This can also serve as a basis for later financing rounds. In this way, a post-money valuation, which is carried out after a first round of financing, would become a pre-money valuation for the next investors and investment round.
The right to buy or sell a stock at a set price for a set period of time. It is a common method of incentivizing and compensating employees in startups. An employee of a startup company is usually given the option to buy the company's stock at a specific price, which is below market price for a set period of time.
A non-binding agreement that outlines the major aspects of a planned investment into a startup. A term sheet lays the foundation for the development of detailed legal documents. Vesting Investors have a great interest in the founders being tied to their startup and not leaving the company at the first crisis. To achieve this, there is a so-called vesting clause for the founders in the investment agreement. Vesting is a mechanism by which the company can withdraw part of a founder's shares if he or she leaves the startup prematurely. This is intended to prevent the founder from participating fully in a successful exit years later, even though he or she did not contribute to the success over the entire period.