Startup Finance Terms: The Complete Guide

The rate at which your startup spends cash each month, measured as either gross burn (total spending) or net burn (spending minus revenue). Burn rate is the clock that governs every decision — it determines how long you can operate, how aggressively you can hire, and when you need to raise again.

Net burn is the number that matters for runway calculations, but gross burn matters for understanding your cost structure. If your net burn is $50K/month because you spend $150K and earn $100K, losing one big customer could jump your net burn to $150K overnight.

The number of months your startup can continue operating at its current burn rate before running out of cash. Runway is simply cash in the bank divided by monthly net burn. It is the single most important number for survival — everything else is secondary if you run out of time.

Start fundraising with 6-9 months of runway remaining. Fundraising takes longer than you think, and investor conversations go better when you are choosing between offers rather than negotiating from desperation. Below 3 months of runway, your negotiating leverage essentially disappears.

The definitive record of who owns what percentage of your company — founders, investors, employees with options, and anyone else with equity. The cap table tracks every share issued, every option granted, and every convertible instrument that will eventually become equity.

Cap table mistakes compound over time and are expensive to fix later. Get a cap table management tool early and keep it updated with every equity event. By Series A, investors will scrutinize your cap table closely, and errors or messy records raise red flags about operational discipline.

The reduction in existing shareholders' ownership percentage when new shares are issued, typically during a fundraise or option pool expansion. Dilution is not inherently bad — if raising capital increases the company value more than it reduces your percentage, you own a smaller slice of a much bigger pie.

Founders typically dilute 15-25% per round. After seed and Series A, a founder who started at 50% might own 30-35%. The key question is not how much you dilute, but whether the capital raised creates proportionally more value than the ownership you gave up.

The estimated total value of your company, used to determine how much equity investors receive for their capital. At the startup stage, valuation is more art than science — it is based on market size, traction, team, and comparable deals rather than traditional financial models.

Do not optimize solely for valuation. A higher valuation means less dilution today, but it also sets a higher bar for your next round. If you raise at a $20M valuation and do not grow into it, your next round becomes a down round — which creates legal, morale, and signaling problems.

Company valuation divided by annual revenue, used as a rough benchmark for startup valuations. A startup valued at $30M with $3M ARR has a 10x revenue multiple. Revenue multiples vary by market, growth rate, and sector — high-growth SaaS companies trade at 10-20x while slower-growth businesses trade at 3-5x.

Revenue multiples compress as interest rates rise and investor sentiment shifts. What traded at 20x ARR in 2021 might trade at 8x in a tighter market. Understanding your multiple helps set realistic fundraising expectations and valuation targets.

The revenue and costs associated with a single unit of your business — one customer, one order, or one transaction. Positive unit economics means each incremental unit of business is profitable. Negative unit economics means you lose money on every customer, and growth just accelerates the losses.

Investors have shifted from 'grow at all costs' to 'prove your unit economics work.' Before your next fundraise, know your LTV:CAC ratio, contribution margin per customer, and payback period. These numbers tell investors whether scaling your business creates value or destroys it.

Pre-money valuation is what your company is worth before new investment. Post-money valuation is pre-money plus the investment amount. If your pre-money valuation is $8M and you raise $2M, your post-money valuation is $10M — and the investor owns 20% ($2M / $10M).

Always clarify whether a term sheet references pre-money or post-money valuation, and whether the option pool is included pre-money or post-money. These details significantly change the actual dilution. A $10M pre-money with a 15% option pool included means a lower effective valuation for existing shareholders.

Simple Agreement for Future Equity — a Y Combinator-created instrument that gives investors the right to receive equity in a future priced round. SAFEs are not debt and have no interest rate or maturity date. They convert to equity when a trigger event occurs, usually the next equity financing round.

SAFEs are the standard for pre-seed and seed rounds because of their simplicity and low legal costs. However, stacking multiple SAFEs at different valuation caps can create complex dilution math that surprises founders when they eventually do a priced round. Model the conversion scenarios before signing.

Short-term debt instruments that convert to equity in a future financing round, typically at a discount to the next round's valuation. Unlike SAFEs, convertible notes are actual debt with an interest rate and maturity date, meaning they must eventually be repaid or converted.

Convertible notes carry a maturity date (usually 18-24 months), which creates a deadline for raising your next round. If the note matures before you raise, the investor can technically demand repayment. In practice, most negotiate an extension — but it gives them leverage you may not want them to have.

Revenue minus the direct costs of delivering your product or service, expressed as a percentage. For startups, gross margin signals what kind of business you are building. Software businesses with 80%+ gross margins scale very differently than services businesses with 40% margins — and investors price them accordingly.

Investors care deeply about gross margin because it determines how much of each revenue dollar can fund growth, R&D, and eventually profit. A startup growing 100% year-over-year with 80% gross margin is far more valuable than one growing at the same rate with 30% gross margin.

Projecting future revenue, expenses, and cash flow based on assumptions about growth, costs, and market conditions. For startups, forecasting is less about predicting the future precisely and more about understanding the key drivers that determine whether the business works financially.

Investors expect to see a financial model with your fundraise materials. The model itself matters less than the assumptions behind it. Be ready to explain and defend every key assumption — growth rate, CAC trends, churn, hiring plan. A thoughtful model with clear assumptions signals founder competence.