This article is the second part on our financial literacy glossary for startups. You can also view LegalVision’s Glossary for Startups: Financial Literacy (Part One).
Methods of Valuation: Before a business is sold it must be valued, and there are various methods of valuation that are available for businesses. This is the amount that a third party is willing to pay for your business. Common valuation methods can include:
- Earnings multiplier method;
- Asset-based method;
Net profit: This is the total sales revenue with deductions for all total expenses including cost of goods sold, payroll, tax, overhead and interest payments.
Non-disclosure agreement (NDA): NDAs are a legal document used by businesses before they talk with potential employees, business partners, customers and investors. These non-disclosure agreements mainly impose confidentiality obligations on the parties.
Opportunity cost: This is the cost of an opportunity (generally a profit or benefit) that must be given up for the business to pursue another path or action.
Pivot: This is a particular price level that is significant as it either indicates the market has failed to penetrate the price or a breakout through the price level has occurred.
Professional investors: In comparison to angel investors, professional investors usually refer to venture capitalists. These individuals are experts that invest only after studying the market and invests in business for its development and a high return. Professional investors associate themselves to a venture capital firm and usually has more stringent and structured criteria that businesses looking for capital must meet.
Promissory note: This is a legal negotiable instrument which sets out the terms under which one party pays a set monetary sum to another party. Unlike a loan, only the issuer of the money needs to sign the note for it to be valid.
Quality assurance: The systematic process of maintaining a specific level of quality in a service or product. Many businesses will dedicate specific personnel for maintaining good quality assurance.
Reconciliation: A process used in accounting to ensure the numbers are accurate by comparing two sets of records and reconciling them, such as checking that the money going out of an account matches the money spent.
Risk profile: A risk profile identifies two key points of business:
- The level of willingness of a business to take risks;
- The risks and threats faced by the business.
Seed Funding: This refers to the initial capital used to start a business and often comes from the founders’ own assets or family and friends. These funds are not necessarily a large amount as the startup is still in its initial conceptual stages and revenue has not yet been generated.
Sophisticated Investor: These are investors that have a sufficient amount of investment experience and knowledge to weigh properly the risks involved with an investment opportunity. They usually have a net worth of certain value before they can qualify to be a sophisticated investor.
Sweat Equity: This is the value of hard work that has been put into the business by the owner(s). For those start-up entrepreneurs that are lacking capital, sweat equity is the best way to build up their business’s value.
Tangible assets: Tangible assets are physical assets, the most common of which include land, equipment, furniture, inventory and cash. It can be divided into current or fixed assets; the former refers to inventory or items that can be turned into cash, while the latter refers to items that will not be sold in the business, such as land.
Traction: Also known as ‘business traction’, this refers to the progress of a start-up when he begins to gain momentum and grow as a business. While there is no specific way to measure it, businesses will look at customer responses and revenue as indicators of whether their business is gaining traction.
Unicorns: This is a specific term used only in the business industry to describe a company, usually startups, which has a stock market valuation of over $1 billion. The rarity of this occurrence is so high that finding one is as difficult as finding a unicorn. Both Google and Facebook are well known ‘super-unicorns’.
Venture capital (VC) money: This is money provided by investors to startups and small businesses in exchange for above average returns or equity. Often, this is provided by venture capital firms or angel investors.
Vendor finance: This is where a business finances, or lends money, to one of its customers so the customer can buy one of the business’s products. It is used by businesses to increase sales even though they are buying their products. It has risks as the customer may not be able to pay back the debt.
Vesting: This is the right that employees gain to employer-provided assets over time, such as employer contributions made to an employee’s superannuation. It is an incentive for an employee to do well and stay with the company. These rights will grow accrue in proportion to how long the employee has been with the company.
Web 3.0: This has been the term used to describe the evolution of the internet from a sharing-focused platform (Web 2.0) to a more interactive, user-focused platform. Web 3.0 will understand how to analyse a user’s likes and dislikes from their internet activity and adjust accordingly to your internet activity.