Capital raising cheat sheet.

Do you know your pre-money from your post-money, your SAFE from your Con-Note? 

If you’re serious about raising money to scale your climate solution, you’ve got to get the lingo down. Here are our top 10—just for starters.👇

1. Term Sheet 

It may sound like a school planner, but a term sheet is actually a preliminary agreement outlining the investment terms and conditions (including the amount, company valuation and timeline). While it helps to get the parties on the same page, it isn’t binding, so if you’ve got one that you like, put an investment agreement in front of your investors ASAP. 🏃🏽‍♀️

2. Convertible Note 

Not an old piece of paper you can trade in at Cash Converters, but a type of short-term debt that converts into equity at a later funding round, allowing startups to raise funds without a valuation. You may be expected to pay interest (which typically accrues until it converts into equity) and if there’s a maturity date, you may be required to repay the loan before you raise capital (a scenario you should generally try to avoid)! 💸

3. SAFE (Simple Agreement for Future Equity)

A SAFE (essentially, an advance agreement for future equity) is like a Con Note, except that it’s not classified as debt, no interest is payable, and there’s no maturity date. Is it any wonder SAFEs have overtaken Con Notes as the preferred way for early-stage founders to raise capital? A word of warning, though: before you start stacking your SAFEs, be sure you understand how this may dilute your stake in your own company. 🤝

4. Pre- vs Post-Money Valuation 

Here, as with most things in life, timing is everything. Pre-money is your startup’s valuation before new investments are made, while post-money takes those investments into account. Pay attention because this may affect your dilution significantly. For example, if an investor agrees to invest $250,000 on a $1M valuation:

$250,000 on $1M pre-money = 20% stake
$250,000 on $1M post-money = 25% stake

If you get the pre- v post- distinction wrong, BOOM 💥, just like that, you’ve given away an extra 5% of your company for the same investment. Needless to say—if you get one thing right, make sure it’s this! 💪

5. Liquid(ation) Preference 

Ours is a Toast Ale (made from leftover bread, as it happens), but—no—liquidation preferences are something you’d want to get your head around while sober. In effect, liquidation preferences pre-determine the order in which the shareholders are paid out when the company is sold, and they can be riddled with pitfalls, such as multiples, so get yourself some good advice before you sign on the dotted line. (Preferably over a Toast Ale. 🍻)

6. Cap Table

A record of a company's ownership structure, detailing the distribution of ownership among founders, investors and other stakeholders. As a solo founder, you may start with 100% ownership, but that will change as you agree to give away equity in exchange for money (investors), time (co-founders), or expertise (advisors). 🥵

7. Vesting 

A dangerously underused tool in a founder’s toolbox. Since no one knows what the future holds, co-founders frequently agree to vest their equity for a period of time (usually a number of years). That way, if someone leaves early (life happens!), they walk away with a fair amount of equity reflecting their contribution to date. Vesting makes founders feel more fully in-vest-ed and gives them additional incentive to stick around. ✌️

8. Impact Model 

Before backing your startup, (impact) investors will want to know: How does your climate solution address the climate and nature crisis? Is your impact built into the product/service and is it scalable? How will you measure, and report on, your performance? A robust impact model may just be the thing that gets prospective investors across the finish line. 🌱

9. Burn Rate & Runway 

Burn rate refers to the speed at which a startup spends its available funds. Runway is the estimated time a startup can operate with its current cash reserves before running out of money. A slower burn → a longer runway, providing you with more time to hit key milestones or secure more funding. 🛫

10. Due Diligence

The process by which investors assess the financial, legal, operational, and market aspects of your startup before making an investment. It can be a bit scary, which is why we’ve created a smart data room that guides you through the big “DD”. Remember, raising capital is 80% organisation, 20% pitching, so get your ducks in a row as early as you can. 🤓

What other fundraising terms baffle you? Let us know.