Plain-English definitions of the metrics, formulas, and terms founders and CFOs actually use, the flagship ones with a worked example and the benchmark investors expect.
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A 409A valuation is an independent appraisal of a private company's common stock fair market value, named after the IRS tax code section that governs it. Companies use it to set the strike price on employee stock options. Getting one from a qualified provider creates a 'safe harbor' the IRS presumes reasonable.
Read moreAn 83(b) election tells the IRS to tax restricted stock at its (usually tiny) value on the grant date rather than as it vests. Founders and early employees must file within 30 days of the grant or early exercise, a strict deadline with no extensions, to lock in a low tax basis and start the capital-gains and QSBS holding clocks.
Read moreAccelerators and incubators both support early-stage startups, but differently. An accelerator is a fixed-term, cohort-based program (often a few months) that gives you a small investment and intense mentorship in exchange for equity, ending in a demo day. An incubator nurtures very early or idea-stage startups over a longer, looser timeline and often takes little or no equity.
Read moreThe accounting equation states that a company's assets always equal its liabilities plus owner's equity. It's the foundation of double-entry bookkeeping: everything a business owns is financed either by debt (liabilities) or by owners (equity). Because both sides must stay equal, the equation is what keeps your balance sheet balanced.
Read moreAccounts payable (AP) is money your startup owes suppliers and vendors, recorded as a liability. Accounts receivable (AR) is money customers owe you, recorded as an asset. AP is cash going out; AR is cash coming in. Under accrual accounting, both are booked when earned or incurred, not when cash moves.
Read moreAn accredited investor is a person or entity the SEC lets participate in private, unregistered securities offerings, the SAFEs and priced rounds most startups raise. Individuals qualify by meeting SEC income or net-worth thresholds, or by holding certain professional credentials. The idea is that they can absorb the risk of illiquid, high-risk private investments.
Read moreAccrual accounting records revenue when earned and expenses when incurred, regardless of when cash moves. Cash accounting records them only when money actually changes hands. Accrual gives a truer picture of a startup's economics, which is why ASC 606, GAAP, and most VCs require it for funded companies.
Read moreAccrued expenses are costs you've already incurred but haven't paid or been billed for yet, recorded as a liability so the expense lands in the period it belongs to. Common examples include wages earned before payday, utilities used before the bill arrives, and interest that's quietly building up. They keep expenses matched to activity.
Read moreAdvisory shares are equity you grant to an advisor in exchange for guidance rather than cash. They're usually small, a fraction of a percent up to around 1%, granted as non-qualified options or restricted stock, and subject to a short vesting schedule so the advisor earns the equity over time rather than all at once.
Read moreAmortization is the accounting method for spreading the cost of an intangible asset, like a patent, trademark, capitalized software, or acquired goodwill, over its useful life. Each period, a slice of the cost becomes a non-cash expense on the income statement. It's the intangible-asset counterpart to depreciation, which covers physical assets.
Read moreAn angel investor is an individual who puts their own money into early-stage companies, usually at pre-seed or seed, in exchange for equity or a convertible instrument like a SAFE. Unlike a venture fund, they invest personal wealth, write smaller checks, and often bring hands-on operating advice along with the money.
Read moreACV is the revenue a customer contract is worth over one year, normalized to an annual figure. It strips multi-year deals down to a per-year number so you can compare contracts of different lengths on equal footing. It's a go-to metric for sizing deals and measuring sales efficiency.
Read moreARR annualizes your active recurring contracts at a point in time; GAAP revenue is what your books recognize as earned in a period under ASC 606. ARR is a forward-looking run-rate for investors; revenue is the audited number on your income statement. They rarely match.
Read moreARPU is the average revenue you earn per user or account over a period, usually per month. It's a quick read on how much each customer is worth and whether pricing, packaging, and upsells are working. Rising ARPU means you're monetizing your base better, not just adding logos.
Read moreA balance sheet is a financial statement showing what a company owns (assets), what it owes (liabilities), and the owners' stake (equity) at a single point in time. It's built on the accounting equation, so assets always equal liabilities plus equity. It's a snapshot of financial position, not a period of activity.
Read moreA bank reconciliation is the process of matching your accounting records against your bank statement to confirm every transaction agrees. You account for timing gaps, outstanding checks, deposits in transit, and catch errors, bank fees, or fraud. When both balances tie out after adjustments, your cash records are verified as accurate.
Read moreBookings are the total value of contracts customers commit to; billings are what you actually invoice them in a period. Bookings capture future promises, billings capture near-term cash. The gap between them shows how much committed revenue is still waiting to be invoiced and collected.
Read moreA bridge round is a smaller, interim financing meant to carry a company from one major round to the next, 'bridging' the gap until it hits the milestones needed to raise a larger priced round. It's often structured as a convertible note or SAFE and typically comes from existing investors.
Read moreBurn multiple is a capital-efficiency metric that measures how much cash a startup burns to add one dollar of net new annual recurring revenue. Coined by investor David Sacks, it divides net burn by net new ARR over the same period. A lower burn multiple means you are growing more efficiently on less cash.
Read moreBurn rate is how much cash a startup spends each month to operate. Gross burn is your total monthly cash outflow; net burn subtracts the cash coming in from revenue. Burn rate, paired with your bank balance, sets your runway, how long you can operate before raising again.
Read moreCAC payback period is the number of months it takes to recover the cost of acquiring a customer from their gross-margin revenue. You divide CAC by monthly revenue times gross margin. Shorter payback means cash returns faster to fund more growth, under 12 months is strong, while beyond 18 months strains runway and burn.
Read moreA capitalization table (cap table) is a record of who owns what in a company, every share, option, warrant, and convertible security, listed by holder and class. It shows each stakeholder's ownership percentage on a fully diluted basis, and updates every time you raise money, grant equity, or convert a note.
Read moreCapitalizing versus expensing is the decision of whether a cost hits your income statement now or gets spread across future periods. You expense a cost when its benefit is consumed immediately; you capitalize it, recording it as an asset and depreciating or amortizing it over time, when it delivers value for years, like equipment or a major software build.
Read moreA cash flow statement tracks the actual cash moving into and out of a business over a period, grouped into operating, investing, and financing activities. Unlike the P&L, it strips out non-cash items like depreciation and accruals to show real cash generated or burned. It answers where your money actually went.
Read moreA chart of accounts (CoA) is the structured list of every account a company uses to record transactions, organized into assets, liabilities, equity, revenue, and expenses. A startup-appropriate CoA maps to how founders and investors actually read the financials, making the close faster and reporting cleaner.
Read moreChurn rate is the percentage of customers (or revenue) you lose over a set period, usually a month or year. It's the leaky-bucket metric: if you're adding customers faster than you're losing them, you grow; if not, you don't. Lower is better, and it directly caps how big you can get.
Read moreA cliff is an initial period during which no equity vests at all, then, on the cliff date, a chunk vests at once. The standard is a one-year cliff on a four-year schedule: leave before month twelve and you get nothing; stay past it and 25% vests immediately, with the rest vesting monthly.
Read moreCommon stock is the basic ownership share class held by founders, employees, and advisors, usually through options. It carries voting rights but sits at the bottom of the payout stack, behind preferred shareholders and creditors, in any exit or liquidation. Its fair market value, set by a 409A, determines option strike prices.
Read moreContribution margin is what's left from a sale after subtracting the variable costs of delivering it, the amount each sale contributes toward covering fixed costs and then profit. You can express it per unit, as a total, or as a percentage of revenue. It's the cleanest way to see how a product's economics actually work.
Read moreA convertible note is a short-term loan that converts into equity at a future priced round instead of being repaid in cash. Unlike a SAFE, it's actual debt: it accrues interest and has a maturity date, and it typically carries a valuation cap and/or a conversion discount.
Read moreCost of goods sold (COGS) is the direct cost of producing and delivering what you sell, raw materials, direct labor, payment processing, hosting for a software product. It sits right below revenue on the income statement and gets subtracted to reach gross profit. COGS scales with volume: sell more, and it rises with you.
Read moreCustomer acquisition cost is the total sales and marketing spend required to win one new customer over a period. You calculate it by dividing all acquisition costs (ad spend, salaries, tools, commissions) by the number of new customers gained. CAC is the denominator behind LTV:CAC and payback period, the two metrics investors scrutinize most.
Read moreCustomer lifetime value is the total gross profit a startup expects to earn from one customer across their entire relationship. You calculate it from average revenue per account, gross margin, and churn rate. LTV is the numerator in LTV:CAC, the metric that tells investors whether each customer is worth more than they cost to acquire.
Read moreDays sales outstanding is the average number of days it takes to collect cash after you invoice a customer. It turns your accounts receivable into a time figure, showing how quickly sales convert to cash. Lower DSO means faster collections and healthier cash flow; rising DSO signals collection or credit problems.
Read moreDefault alive vs default dead asks whether a startup reaches profitability on the cash it has left, assuming current revenue growth and constant expenses. If projected growth gets you to breakeven before the bank hits zero, you are default alive. If you run out first and must raise or cut to survive, you are default dead.
Read moreDeferred revenue is a liability representing cash collected before the product or service has been delivered. Under ASC 606 it sits on the balance sheet as a contract liability and is recognized as revenue only as you fulfill the obligation. It is central to SaaS accounting on annual prepaid contracts.
Read moreDelaware franchise tax is an annual tax on Delaware C-corps, due March 1, calculated two ways: the Authorized Shares Method (minimum $175) and the Assumed Par Value Capital Method (minimum $400). Startups with many authorized shares are often billed a huge default amount but can recalculate to the far lower figure, plus a $50 annual report fee.
Read moreDepreciation is the accounting method for spreading the cost of a tangible asset, like machinery, vehicles, or computers, across its useful life instead of expensing it all at once. Each period, a portion of the asset's cost hits the income statement as a non-cash expense. It matches the cost to the years the asset is used.
Read moreDilution is the reduction in your ownership percentage when a company issues new shares, typically in a funding round or when expanding the option pool. Your share count stays the same, but the total pie grows, so your slice shrinks. It's a normal cost of raising capital, not inherently bad if the company's value rises faster.
Read moreDouble-entry accounting records every transaction in at least two accounts, one debit and one matching credit, so the books always stay in balance. Buy a $10K laptop fleet with cash, and cash drops while equipment rises by the same amount. This built-in cross-check is why double-entry is the standard for reliable financial statements.
Read moreA down round is a funding round priced at a lower per-share valuation than the company's previous round. It usually signals the business missed expectations or the market cooled, and it hits harder than ordinary dilution, anti-dilution provisions can reprice earlier investors' shares, and it can dent morale and employee option value.
Read moreEBITDA stands for earnings before interest, taxes, depreciation, and amortization. It strips out financing costs, tax situations, and non-cash accounting charges to approximate a company's core operating profitability. Investors use it to compare businesses on a more apples-to-apples basis, since it ignores how a company happens to be financed or structured for tax.
Read moreExpansion revenue is the additional recurring revenue you earn from existing customers, through upsells, cross-sells, added seats, or usage growth. It grows accounts you already won, without new acquisition cost. It's often the cheapest, highest-margin revenue you can add and a key driver of net revenue retention above 100%.
Read moreFixed costs stay the same regardless of how much you sell, rent, salaries, software subscriptions. Variable costs rise and fall with volume, materials, payment processing, shipping. Most businesses run a mix, and knowing the split tells you your break-even point, how profit scales as you grow, and how much cushion you have when revenue dips.
Read moreA fractional CFO is a senior finance leader who works part-time across several companies instead of one full-time role. For seed and Series A startups, they own the financial model, board reporting, fundraising strategy, and cash management at a fraction of a full-time CFO's cost.
Read moreFree cash flow is the cash a business generates from operations after subtracting the capital it spends to maintain and grow itself. It's the money actually left over, and available to fund growth, repay debt, or build reserves. Unlike profit, FCF cuts through accounting to show real cash in and out.
Read moreFully diluted shares count every share that could exist if all options, warrants, convertible notes, SAFEs, and the unissued option pool converted into stock, not just the shares outstanding today. It's the denominator investors use to calculate real ownership percentages and price per share, because it captures future dilution already baked into the cap table.
Read moreFunding rounds are the sequential stages a company raises equity through as it grows, typically pre-seed, seed, then Series A, B, and C. Each round sells equity (usually preferred stock) to investors, ideally at a higher valuation than the last, in exchange for the capital to hit the next set of milestones.
Read moreThe general ledger is the master record of every financial transaction a company makes, organized by account, cash, revenue, payroll, and so on. It's the single source of truth that feeds your trial balance and financial statements. Every journal entry ultimately lands here, making the GL the backbone of your books.
Read moreGross margin is the share of revenue left after the direct cost of delivering your product, shown as a percentage. For software, those direct costs (COGS) are mainly hosting, third-party APIs, and support. Gross margin shows how much of each revenue dollar is free to fund growth.
Read moreGross profit is what's left from revenue after subtracting the direct cost of delivering your product or service (COGS). It's the money available to cover operating expenses and, ideally, turn a profit. Expressed as a percentage of revenue it becomes gross margin, one of the clearest signals of a business's underlying economics.
Read moreGross revenue retention measures how much recurring revenue you keep from existing customers over a year, counting only churn and downgrades and ignoring expansion. It caps at 100%, so it strips out upsell and exposes your true retention floor. It's the cleanest read on churn health.
Read moreAn income statement, also called a P&L, reports a company's revenue, expenses, and resulting profit or loss over a period of time, a month, quarter, or year. It starts with revenue at the top, subtracts costs and expenses, and ends with net income at the bottom. It shows performance, not position.
Read moreISOs and NSOs are the two kinds of stock options. Incentive stock options (ISOs) go only to employees and can qualify for capital-gains tax treatment if holding rules are met, with no ordinary income tax at exercise. Non-qualified stock options (NSOs) can go to anyone, but the spread at exercise is taxed as ordinary income.
Read moreA journal entry is the record of a single business transaction, listing the accounts affected and the debits and credits that keep them balanced. Every entry has equal debits and credits, and usually a date and short description. Journal entries are the raw building blocks that flow into the general ledger.
Read moreA line of credit is a flexible loan you can draw from up to a set limit, repay, and draw again as needed. You pay interest only on what you actually borrow, not the full limit. It's a cash-flow cushion for covering short-term gaps, like slow-paying customers or seasonal swings, rather than long-term funding.
Read moreA liquidation preference is the right of preferred shareholders to get paid back before common shareholders when a company is sold, wound down, or liquidated. It's usually written as a multiple of the original investment, a '1x' preference returns the amount invested first; higher multiples or 'participating' terms pay investors even more.
Read moreLogo churn counts how many customers you lose; revenue churn measures how much recurring revenue you lose. They can diverge sharply: lose a handful of tiny accounts and logo churn looks bad while revenue barely moves, or lose one whale and revenue churn spikes while logo churn stays low. Track both.
Read moreThe LTV:CAC ratio compares the lifetime gross profit from a customer to the cost of acquiring them. You divide customer lifetime value by customer acquisition cost. A ratio of 3:1 is the widely cited minimum for a viable model, under 1:1 means you lose money on every customer, while very high ratios can signal underinvestment in growth.
Read moreThe monthly close is the process of reconciling accounts, booking accruals, and finalizing financial statements for the prior month. Investor-ready startups close in roughly 5 to 10 business days. Continuous reconciliation throughout the month, rather than a scramble at month-end, is what shrinks that timeline.
Read moreMRR (monthly recurring revenue) and ARR (annual recurring revenue) both measure predictable subscription revenue; ARR is simply MRR × 12. Startups on monthly plans track MRR for granularity, while annual-contract and enterprise businesses report ARR. Both exclude one-time fees like setup or services.
Read moreNet income is the bottom line, what's left after subtracting every expense from revenue, including COGS, operating expenses, interest, and taxes. It's the truest measure of whether a company made or lost money in a period. Positive net income means profit; negative means a loss. It then flows into retained earnings on the balance sheet.
Read moreNet revenue retention measures how much recurring revenue you keep from existing customers over a year, including expansion and after subtracting downgrades and churn. Above 100% means your installed base grows on its own, before adding a single new logo. It's the clearest signal of durable, compounding SaaS growth.
Read moreOperating expenses are the costs of running your business that aren't tied directly to producing what you sell, salaries, rent, marketing, software, and admin. They sit below gross profit on the income statement and cover the overhead of simply operating. Often grouped as SG&A and R&D, OpEx is what gross profit has to cover.
Read moreAn option pool is a block of shares a company reserves to grant as equity to employees, advisors, and future hires. It's carved out of the cap table as a percentage of ownership and dilutes existing shareholders. Investors often require expanding it before a round, so the pool is sized to cover hiring until the next raise.
Read morePar value is the nominal, minimum legal value assigned to a share in a company's charter, often something tiny like $0.0001. It's an accounting and legal formality, not what the stock is actually worth. Shares can't be issued below par, and in Delaware par value feeds into the franchise-tax calculation.
Read morePre-money is a startup's valuation before new investment; post-money is that value plus the new cash raised. The distinction matters because ownership percentages are calculated on the post-money figure. Confusing the two changes how much of your company investors actually get.
Read morePreferred stock is the share class investors receive in a priced round, carrying rights that common stock lacks, a liquidation preference, anti-dilution protection, and often board seats or veto rights. It sits ahead of common in the payout stack, so preferred holders get paid first in an exit. Founders and employees hold common.
Read morePrepaid expenses are payments you've already made for goods or services you haven't received yet, recorded as an asset on the balance sheet instead of an immediate expense. As you consume the benefit, say, a month of insurance coverage, you move a portion to the income statement. Think annual software, insurance, or rent paid upfront.
Read moreA priced round is a funding round where investors buy shares at an agreed per-share price, set by a negotiated company valuation. Unlike a SAFE or convertible note, it establishes ownership immediately and issues preferred stock on the spot. Priced rounds involve more legal work but give everyone a clear, current cap table.
Read morePro rata rights let an existing investor buy enough of a future round to keep their ownership percentage from shrinking. If they own 10% and you raise a new round, they can invest enough to stay at roughly 10% instead of getting diluted. It's a contractual right, usually negotiated into the term sheet.
Read moreQSBS (IRC Section 1202) lets founders and investors exclude capital gains on qualifying C-corp stock from federal tax. For stock issued after July 4, 2025, the One Big Beautiful Bill Act created a tiered exclusion (50% at 3 years, 75% at 4, 100% at 5) with a $15M cap and $75M gross-asset limit. Earlier stock keeps the old 5-year, $10M rules.
Read moreThe R&D payroll tax offset lets a qualified small business apply its federal R&D credit against employer payroll taxes instead of income tax. Under the Inflation Reduction Act, the cap rose to $500,000 per year for tax years beginning after 2022, making it valuable for pre-profit startups with no income-tax liability.
Read moreThe R&D tax credit (IRC Section 41) rewards companies for qualified research done in the U.S., covering wages, supplies, cloud computing, and 65% of contractor costs. Qualified small startups can apply up to $500,000 per year against employer payroll taxes, turning the credit into cash even with no income-tax liability.
Read moreA restricted stock unit (RSU) is a company promise to give you shares once you vest, no purchase, no strike price. When they vest, the shares' value is taxed as ordinary income, like salary. RSUs are common at later-stage and public companies; early startups usually grant stock options instead.
Read moreRetained earnings are the cumulative profits a company has kept rather than paid out to owners as dividends or distributions. Each period, net income adds to the balance and any dividends subtract from it. Reported in the equity section of the balance sheet, retained earnings show how much earned profit has been reinvested.
Read moreThe Rule of 40 says a healthy SaaS company's revenue growth rate plus its profit margin should total at least 40%. Popularized by Brad Feld, it lets you trade growth for profitability, or the reverse, as long as the sum clears 40%. It's a fast read on balanced, efficient scaling.
Read moreRunway is how many months a startup can keep operating before it runs out of cash, assuming its current net burn rate. You calculate it by dividing the cash in the bank by net monthly burn. Runway is the clock every funded startup runs against between raises.
Read moreThe SaaS magic number measures how efficiently sales and marketing spend converts into new recurring revenue. It divides annualized net-new ARR in a quarter by the prior quarter's S&M spend. Above 0.75 means acquisition is efficient enough to justify pouring in more; below 0.5 means fix the funnel first.
Read moreThe SaaS quick ratio measures growth efficiency by comparing the recurring revenue you gain to the recurring revenue you lose. It divides new plus expansion MRR by churned plus contraction MRR. A ratio above 1 means you're growing net revenue; below 1 means losses are outrunning gains.
Read moreA SAFE is an agreement to convert an investor's cash into equity at a future priced round, without being debt. Created by Y Combinator, it has no interest or maturity date, just a valuation cap and/or discount that sets how much stock the investor gets when it converts.
Read moreSection 174 governs how R&D costs are deducted. From 2022-2024 companies had to capitalize and amortize them (5 years domestic, 15 foreign), inflating taxable income. The One Big Beautiful Bill Act restored immediate deduction of domestic R&D via new Section 174A for tax years beginning after 2024; foreign R&D still amortizes over 15 years.
Read moreA startup financial model is a spreadsheet that projects a company's future finances from a set of assumptions about growth, hiring, and costs. The gold standard links three statements, income statement, balance sheet, and cash flow, so revenue drivers, headcount, and spend flow through to runway, burn, and the cash balance investors scrutinize in diligence.
Read moreA term sheet is a short, mostly non-binding document that lays out the key terms of a proposed investment, valuation, amount raised, liquidation preference, board seats, and investor protections, before lawyers draft the final deal. Signing it signals serious intent and sets the framework both sides negotiate the definitive agreements against.
Read moreTCV is the full value of a customer contract over its entire term, including recurring subscription fees plus any one-time charges like setup or onboarding. Unlike ACV, it isn't annualized. It's the total dollar amount a customer has committed to across the whole life of the deal.
Read moreA trial balance is a report that lists every account in the general ledger with its ending debit or credit balance, then totals each column. If the books are properly kept, total debits equal total credits. Accountants run a trial balance before closing to catch errors and confirm the ledger is in balance.
Read moreA valuation cap is the maximum company valuation at which a SAFE or convertible note turns into equity, no matter how high the priced round's valuation actually lands. It rewards early investors for taking early risk: if you raise your next round above the cap, their money converts at the lower cap price and buys more shares.
Read moreVenture debt is a loan for venture-backed companies, typically used alongside or shortly after an equity round to extend runway without selling more ownership. Lenders usually charge interest plus warrants (a small equity kicker) and expect repayment over a fixed term. It's growth capital you pay back, not dilution.
Read moreA vesting schedule is the timeline over which someone earns their equity, rather than owning it all at once. The typical startup structure is four years with a one-year cliff: nothing vests until the first anniversary, then shares vest monthly or quarterly. It ties ownership to continued contribution and protects the cap table if someone leaves early.
Read moreWorking capital is the cash tied up in day-to-day operations, current assets minus current liabilities. It measures whether you have enough short-term resources (cash, receivables, inventory) to cover short-term obligations (payables, accrued expenses). Positive working capital means breathing room; negative can signal a looming cash crunch, even in a company that's profitable on paper.
Read moreZero cash date is the calendar day a startup's bank balance is projected to hit zero at its current net burn rate. It converts abstract runway into a real deadline. Founders divide cash on hand by monthly net burn to get months of runway, then count forward from today to pin the exact date they run out of money.
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