The world of startup finance can feel like a maze of unfamiliar terms and acronyms. As a founder, you don’t need to be a financial expert, but understanding the basics is non-negotiable – especially when you’re talking to investors, negotiating deals, or planning your growth strategy.

Here’s a straightforward guide to key financial terms every founder should know, so you can navigate conversations with confidence and avoid getting lost in the jargon.

Revenue vs Profit

• Revenue: This is the total income your business generates from sales or services before any expenses are deducted. It’s often referred to as the “top line.”
• Profit: This is what’s left over after all expenses (like salaries, rent, and production costs) are subtracted from your revenue. Profit is also called the “bottom line.”

Think of revenue as the size of the pie, and profit as the slice you get to keep.

Burn Rate

Burn rate refers to how quickly your startup is spending its cash reserves. It’s a critical metric for understanding your runway (how long your money will last).

• Gross Burn Rate: The total amount of cash you spend each month.
• Net Burn Rate: The amount of cash you’re losing each month after accounting for revenue.

Understanding your burn rate helps you plan funding rounds and avoid running out of cash unexpectedly.

Runway

Runway is the amount of time your startup can continue operating before it runs out of cash, based on your burn rate. For example:

If you have £500,000 in the bank and a net burn rate of £50,000 per month, your runway is 10 months.

EBITDA

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It’s a measure of your company’s profitability, excluding certain expenses to give a clearer picture of operational performance. Investors often look at EBITDA to compare startups without the noise of varying tax rates or capital investments.

Customer Acquisition Cost (CAC)

CAC is the cost of acquiring a single customer. It includes expenses like marketing, sales efforts, and onboarding.

Formula: Total Acquisition Costs ÷ Number of New Customers

Knowing your CAC is essential for understanding the efficiency of your growth strategies.

Lifetime Value (LTV)

LTV estimates the total revenue a customer will bring to your business over their relationship with you. It’s a key metric for subscription or recurring revenue models.

Formula: Average Revenue Per Customer × Customer Lifetime

A strong LTV-to-CAC ratio (typically 3:1 or higher) is a good indicator of financial health.

Gross Margin

Gross margin shows how much of your revenue is left after covering the direct costs of producing your product or service.

Formula: (Revenue – Cost of Goods Sold) ÷ Revenue

High gross margins mean more money is available for things like marketing, salaries, and R&D.

Dilution

Dilution happens when new shares are issued, reducing the ownership percentage of existing shareholders. For example, raising a new funding round often involves issuing shares to investors, which can dilute the founder’s ownership.

Convertible Note

A convertible note is a type of short-term debt that converts into equity during a future funding round. It’s often used in seed rounds when setting a valuation for the startup might be premature.

• Why It Matters: It allows investors to participate early while deferring valuation discussions until later.

Cap Table

Short for capitalisation table, a cap table is a document that tracks your company’s ownership structure, including equity stakes, stock options, and convertible instruments. A clean cap table is critical for understanding who owns what and for attracting investors.

Vesting Schedule

A vesting schedule determines when employees or founders gain full ownership of their equity or stock options. For example, a common setup is a four-year vesting schedule with a one-year cliff, meaning you earn 25% of your shares after one year and the rest monthly over the next three years.

Term Sheet

A term sheet is a non-binding document outlining the key terms of an investment deal, such as valuation, equity percentage, and investor rights. It sets the stage for negotiations and final agreements.

Pre-Money vs Post-Money Valuation

• Pre-Money Valuation: Your startup’s valuation before new investment is added.
• Post-Money Valuation: Your startup’s valuation after the new investment is included.

For example:

If your pre-money valuation is £2M and you raise £500K, your post-money valuation is £2.5M.

Why Understanding These Terms Matters

Mastering financial jargon isn’t just about impressing investors – it’s about making informed decisions for your business. When you understand the language of finance, you can:

• Negotiate better deals.
• Communicate effectively with stakeholders.
• Build trust with investors.

Ready to Cut Through the Jargon?

Understanding financial terms doesn’t have to be overwhelming. With the right knowledge, you can approach every meeting, pitch, and negotiation with confidence.