Congratulations! 🎉 You’ve joined a startup, and they greeted you with a sign-on bonus and a hefty number of options. Amidst all the hype of joining the unicorn 🦄 of your dream, you start realising that the financial lingo goes far above your head.

Let’s decipher the key elements of financial knowledge you need to follow along the CFO bi-annual stand-up. What’s more! They use the same terms in big and small companies, learn once, use always. By the end of the article, you will hopefully be able to understand that rumble! 🤞

Financial lingo

Key metrics

The metrics or KPI stands for Key Performance Indicator. Financial KPIs are quantifiable measures to check if strategic and operational goals are met.

  • 💰 EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. (pronounce it ee-bit-da) It shows if a company generates cash and is profitable with its core business, without counting the expenses (interest, taxes, depreciation, and amortization) used to run the business.

Why is EBITDA so important?

Because it shows that the company core business is profitable even when the Net profit is negative. This helps convince investors that the company is worth investing in.

  • 💸 Gross Profit is the profit a company makes after deducting the operating costs. It’s the revenue, minus the cost of goods sold (COGS), and is a measure of the company’s efficiency in producing and selling its products.

  • 🔃 ARR is Annual Recurring Revenue. Mostly for a subscription-based business model, it measures recurring revenue normalized to a one-year period. This is also linked with customer retention and show a predictable revenue stream.

  • 📦 GMV: Gross Merchandise Value measures the total value of merchandise sold over a period of time. Mostly for e-commerce type of business, it doesn’t take into account discounts, returns, or cancellations. It is different from Gross Profit.

Company financial glossary

Aside from the KPIs which are presented, you may have heard some terms that are common in the financial world. Let’s describe some of the most common ones:

  • Growth can be reflected in a company by:
    1. market penetration and expansion: selling more of the same product in current or new markets.
    2. Diversification and product development: creating and selling new products or services.
    3. Acquisition: Buying another company to grow the business. (Which can be a mix of the previous 2)

Now growth doesn’t mean profitability, it inflates the revenue and earnings, but it has a “cost” that once deduced gives the profit. With market expansion we can see an increase in the cost of goods sold, even with numerical product for localisation of the software and support. With diversification, we can see an increase in the R&D cost, and with acquisition, the revenue is not guaranteed as integrating an entire company into your own, migrating tools and so on is not an easy task.

  • OPEX vs CAPEX: OPEX and CAPEX are two types of business expenses.
    • OPEX: Operational Expenditure refers to the ongoing costs of running the business. This could include salaries, utilities, and maintenance costs.
    • CAPEX: Capital Expenditure refers to the funds used by a company to increase their assets, including improvements or upgrades. This could include physical property like buildings or equipment as well as intangible assets like software or patents.

This is usually discussed when managing projects, where it’s easier for a company to invest capital in a project that’s going to be profitable and increase the value of the company asset. Reducing OPEX is key to profitability, and so we’d rather spend as little as necessary to keep the business running. This sounds awfully capitalistic 😵‍💫, and with salaries and employees are often on the operational side, it is important to keep the balance between the two. Profit is good, but not at all costs, there is more to consider than just the financial bottom line for a company to succeed.

Start Up specifics

Investment Series

Startup investment rounds, often referred to as Series A, B, C, etc., represent different stages in the growth and funding of a startup. Here’s a brief explanation of what each series typically represents:

  • 🏚️ Seed Funding: This is the initial capital used to start the business. Seed funding is used to move from a business idea to the first steps, such as product development or market research. (It can often be preceded by a Pre-seed round)

  • 🏠 Series A: After the startup has shown some promise and needs capital to optimize its product or user base, Series A funding is typically sought. This round is used to further develop the business model and is often the first series involving institutional investors.

  • 🏘️ Series B: By the time a startup reaches Series B, it has typically developed a significant user base and has a proven business model. The funding is used to scale the company, growing the business rapidly through new hires, market expansion, or even acquisitions.

  • 🏢 Series C: Series C funding is used to scale the company even further, often to prepare for an Initial Public Offering (IPO). At this stage, the company is typically profitable and looking to expand into new markets, develop new products, or acquire other businesses.

  • 💸 Series D, E, F, and beyond: These rounds are less common and are typically used to prepare for an IPO or to support a company that is struggling to stay afloat. They can also be used for additional scaling, though this is less common.

Each round involves different types of investors, with the risk level decreasing with each subsequent round. The terms of each round, including the amount of equity given up and the valuation of the company, are negotiated between the startup and the investors.

Financing

A startup can finance itself through various means; there are the obvious ones, like loans, personal savings (bootstrapping), or receiving help from friends and family. But let’s look at the more startup-specific ones:

  • 👼 Angel Investors: These are individuals who provide capital for a startup in exchange for convertible debt or ownership equity. They can also provide valuable advice and connections.

  • 👔 Venture Capital: Venture capitalists (VCs) are firms that invest in startups and small companies that have potential for long-term growth. VCs provide substantial capital in exchange for equity and often play a hands-on role in the company, including having a say in company decisions (by being part of the Board).

  • 🏆 Grants: Some government agencies, foundations, and corporations offer grants to startups, especially those in certain industries or those that meet specific criteria. Grants do not need to be paid back, but they can be highly competitive and often come with stipulations on how the money can be used.

  • 🏫 Accelerators and Incubators: These programs provide startups with funding, mentorship, office space, and educational resources in exchange for equity. They typically culminate in a “demo day” where startups pitch their business to potential investors.

It’s important for startups to carefully consider each financing option and choose the one that best fits their business model, growth plans, and values.

Exits strategy?

An exit strategy is a plan for how a startup’s founders and investors will cash out of their investment. It usually boils down to two main options:

  1. Once a startup is ready, they can go public though an IPO (Initial Public Offering).
    • IPO: An Initial Public Offering (IPO) is the process by which a private company becomes publicly traded on a stock exchange. This is often done to raise capital for expansion, but it also comes with increased regulatory scrutiny and reporting requirements.
  2. Depending on the startup, it can be subject to acquisition or merger by another company.
    • Acquisition: The shares of the startup are bought by the acquiring company or converted into shares of the acquiring company, which can be either public or private.

Not all startups go public or get acquired, and some exit strategies could be specific to the company. However, once a company is publicly traded, the equity compensation can change.

Those are not startup-specific though, but let’s check what’s usually offered:

  • RSU: Restricted Stock Units are a promise to give an employee shares at a future date once certain conditions are met.
  • Stock Option: Stock Options give an employee the right to buy a certain number of shares at a predetermined price (the “strike price”) after a certain period of time.

Stock Options are mostly used in a private company with a private strike price that should be lower than the strike price once publicly traded. However, there are some tax questions to answer when buying options as you will need depending on your country to pay taxes on the current value of the stock when you exercise the option.

Both RSUs and Stock Options are usually vested overtime, meaning they get accessible by the employee over a certain period. Usually a 4-year vesting period with a 1-year cliff, meaning that after 1 year you get 25% of the shares and then every month you get 1/48th of the remaining shares. This is usually intended to boost employee retention and motivation to stay in the company.

Conclusion

Take the information with a bit of salt as it might not be exactly what you are experimenting in your own company. I hope it gives the fundamentals to understand the financial lingo. Looking back at the article, it might look as boring as those financial meetings you were half listening to while finalising that last feature.

As I am not well versed in all I have written about, don’t hesitate to point out any mistakes, typos, or inaccuracies. And if you feel like it, feel free to share your own experience with how your start up succeeded, failed or got somewhere in between 🥳