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Essential Startup Terms Every Founder Should Know

Essential Startup Terms Every Founder Should Know

This article is based on a Raw Startup video. Please find a link to the video at the bottom of this article.

In the fast-paced world of startups, mastering the vocabulary is as crucial as understanding your business model. Whether you're preparing for your first investor meeting or trying to communicate effectively with potential partners, knowing these key terms will give you the confidence and credibility you need.

Let's explore the essential terminology every founder should know, organized into four critical categories.

Business Fundamentals

These are the terms you'll encounter daily as you build your business:

Bootstrapping

  • Definition: Building your company without external funding, using your own money or revenue
  • Key Insight: Provides full control but can limit growth speed
  • Real Example: Companies like Vivino (initially), eBay, and SpaceX started this way

Burn Rate

  • Definition: How much money your startup spends monthly (minus any revenue)
  • Key Insight: Simple but crucial metric to track
  • Formula: Total monthly expenses - monthly revenue

Runway

  • Definition: How many months you can survive with current funds
  • Key Insight: Directly tied to your burn rate
  • Formula: Current bank balance ÷ monthly burn rate

Unit Economics

  • Definition: Revenue minus costs per unit sold
  • Key Insight: If you don't understand this, you don't understand your business
  • Why It Matters: Good unit economics can turn around a money-losing business

CAC (Customer Acquisition Cost)

  • Definition: Cost to acquire one new customer
  • Example: $1,000 in ads ÷ 100 new customers = $10 CAC
  • Goal: Lower is better

LTV (Lifetime Value)

  • Definition: Expected profit from a customer over their entire relationship with your company
  • Key Insight: Higher LTV justifies higher CAC
  • Golden Rule: LTV should exceed CAC

Business Models: B2B, B2C, B2B2C

  • B2B: Business to Business
  • B2C: Business to Consumer
  • B2B2C: Business to Business to Consumer
  • Key Insight: Each requires different strategies and metrics

ARR (Annual Recurring Revenue)

  • Definition: Contracted recurring revenue normalized for one year
  • Key Insight: Critical for SaaS companies and investors love it
  • Why: Shows predictable, stable income

KPIs (Key Performance Indicators)

  • Definition: The vital metrics tracking your business health
  • Example: For Vivino: wines scanned, active users, wine purchases
  • Key Insight: Choose carefully as they drive decision-making

Moat

  • Definition: Competitive advantage that's difficult for others to replicate
  • Types: Technology, network effects, data, brand
  • Key Insight: The wider your moat, the safer your business

Funding Terms

Learn these before your first investor meeting:

Funding Rounds

  • Pre-seed: Friends, family, angels (earliest stage)
  • Seed: First professional round
  • Series A: Requires significant traction
  • Series B/C: For scaling what's already working

Term Sheet

  • Definition: Document outlining investment conditions
  • Key Insight: Not legally binding but 99% of terms remain unchanged
  • Advice: Read carefully—details matter here

Valuation

  • Pre-money: Company worth before investment
  • Post-money: Company worth after investment
  • Example: $5M pre-money + $1M investment = $6M post-money

Cap Table

  • Definition: Shows who owns what percentage of your company
  • Key Insight: Keep it clean and simple early on
  • Why: Messy cap tables scare away future investors

Dilution

  • Definition: Reduction in ownership percentage after raising money
  • Example: 100% ownership → 20% dilution = 80% ownership
  • Key Insight: Good dilution funds growth

Convertible Note

  • Definition: Loan that converts to equity in next funding round
  • Key Insight: Delays valuation decisions
  • When Used: Especially popular in early stages

SAFE (Simple Agreement for Future Equity)

  • Definition: Simpler version of convertible note
  • Origin: Created by Y Combinator
  • Key Insight: Streamlines early investment process

Vesting

  • Definition: How equity is earned over time
  • Standard: 4 years with 1-year cliff
  • Key Insight: Keeps founders and employees committed

Option Pool

  • Definition: Shares reserved for current/future employees
  • Typical Size: 10-15% of company
  • Key Insight: Essential for recruiting top talent

Liquidation Preference

  • Definition: Investors' right to get paid first in an exit
  • Types: 1x (fair), 2x or higher (concerning)
  • Key Insight: 1x is standard; be wary of anything higher

Product Terms

These terms focus on building and scaling your product:

Product Market Fit (PMF)

  • Definition: When your product perfectly satisfies market demand
  • How You Know: Growth becomes almost effortless
  • Key Insight: Before PMF, everything is hard; after PMF, things get easier

Market Size Terminology

  • TAM (Total Available Market): Everyone who could theoretically buy your product
  • SAM (Serviceable Available Market): The portion you can actually reach
  • SOM (Serviceable Obtainable Market): What you can realistically capture
  • Example: For Vivino, TAM was all wine drinkers, SAM was wine drinkers with smartphones

North Star Metric

  • Definition: The one metric that best captures company success
  • Examples: Facebook's daily active users, Vivino's monthly active users
  • Key Insight: Guides all strategic decisions

Pivot

  • Definition: Significant change in business strategy
  • Example: Instagram from check-in app to photo-sharing platform
  • Key Insight: A rare event that can save or sink a company

MVP (Minimum Viable Product)

  • Definition: Simplest version of your product that tests core hypothesis
  • Key Insight: Launch first, improve later
  • Purpose: Validate ideas with minimal resources

Churn Rate

  • Definition: Percentage of customers lost in a given period
  • Key Insight: Like a leaky bucket—you need new customers to offset losses
  • Goal: Minimize through product improvements and customer success

Growth Hacking

  • Definition: Creative, low-cost strategies to grow user base
  • Example: Airbnb automatically posting to Craigslist
  • Key Insight: Being clever when you can't afford traditional marketing

Unicorn

  • Definition: Startup valued at over $1 billion
  • Key Insight: Once rare, now hundreds exist
  • Reality Check: Sustainable business matters more than valuation

Traction

  • Definition: Evidence that people want what you're building
  • Forms: Revenue, users, partnerships
  • Key Insight: Overrules everything else—proves your product works

Freemium

  • Definition: Basic product free, premium features paid
  • Examples: Spotify, LinkedIn, Vivino
  • Key Insight: Great for user acquisition but must convert to paid

Technical Terms

Essential terms for all founders, especially non-technical ones:

API (Application Programming Interface)

  • Definition: How software components communicate
  • Analogy: Like a waiter taking orders from customers to the kitchen
  • Key Insight: Building blocks for modern software products

SDK (Software Development Kit)

  • Definition: Package of tools for building applications
  • Analogy: Like a LEGO set with pre-made pieces
  • Key Insight: Speeds up development

Tech Stack

  • Definition: Combination of technologies your product uses
  • Analogy: Recipe ingredients—choosing right ones matters
  • Key Insight: Even non-technical founders should understand this

Technical Debt

  • Definition: Code or setup that needs future fixing
  • Analogy: Like credit card debt for your codebase
  • Key Insight: Sometimes necessary but expensive if not managed

DevOps

  • Definition: Combining development and operations
  • Key Insight: Ensures product can be built, deployed, and run efficiently
  • Purpose: Streamlines the technical process

Wireframe

  • Definition: Blueprint for your product's interface
  • Analogy: Sketching a house before construction
  • Key Insight: Much cheaper to change designs early

SaaS (Software as a Service)

  • Definition: Software delivered over internet with subscription model
  • Examples: Salesforce, Slack
  • Key Insight: Investors love predictable revenue

UI/UX (User Interface/User Experience)

  • UI: What users see
  • UX: How they feel using it
  • Key Insight: Both are crucial—beautiful but unusable interfaces fail

Agile

  • Definition: Development methodology focused on iterative progress
  • Key Insight: Build, learn, adjust rather than planning everything upfront
  • Purpose: Adapts to changing requirements

Scrum

  • Definition: Implementation of agile with sprints and daily meetings
  • Key Insight: Helps teams stay focused and adapt quickly
  • When Used: Common in software development

Conclusion

The startup world has its own language, and mastering these terms is a crucial step toward success. While they might seem overwhelming at first, you'll be using them naturally before you know it.

The key is understanding not just what these terms mean, but how they affect your business decisions. Using them correctly signals to investors, partners, and team members that you understand the landscape and are prepared for the journey ahead.

Watch the full Raw Startup video