Startup Investing 101

A provision adjusting conversion terms when a company later issues shares at a lower price.

Example: A down round increases the number of ordinary shares received on conversion.

Anti-Dilution Protection is a provision adjusting conversion terms when a company later issues shares at a lower price; the transaction finances a company or asset before a public market provides daily pricing and easy liquidityThe ease and speed with which an investment can be converted into cash without a major price concession., so governance and contractual protection carry unusual weight.

A down round increases the number of ordinary shares received on conversion.

Before committing to Anti-Dilution Protection, identify who controls key decisions, what happens in a weak exit, whether more capital will be required and how ownership can be verified.

The right to appoint or occupy a position on a company's board.

Example: The lead investorA person or organisation that commits capital with the expectation of a financial return. receives one board seat.

Board Seat is the right to appoint or occupy a position on a company's board; the economic effect of the transaction should be traced through the capitalisation table: cash invested, securities issued, ownership, dilution, preference rights and exit proceeds.

The lead investor receives one board seat.

Model Board Seat across dilution and exit scenarios; read the legal documents rather than relying on the pitch deck's valuation or return illustration. A reported valuation is not the same as cash an investor can realise.

A record of a company's shareholders, securities, ownership percentages, and potential dilution.

Example: The cap table shows founders, employees, and investors before and after the round.

Cap Table is a record of a company's shareholders, securities, ownership percentages, and potential dilution; the economic effect of the transaction should be traced through the capitalisation table: cash invested, securities issued, ownership, dilution, preference rights and exit proceeds.

The cap table shows founders, employees, and investors before and after the round.

For Cap Table, review the cap table, securityA tradable financial claim or ownership interest, such as a share, bond, or fund unit. terms, investor rights, use of funds, runway, governance, reporting, follow-on needs and credible exit routes.

A minimum period before any vesting occurs.

Example: With a one-year cliff, an employee leaving after six months receives no vested options.

Cliff is a minimum period before any vesting occurs; the transaction operates in a negotiated market where valuation, investor rights, information access and exit terms are set by contract rather than continuous exchange trading.

With a one-year cliff, an employee leaving after six months receives no vested options.

For Cliff, review the cap table, security terms, investor rights, use of funds, runway, governance, reporting, follow-on needs and credible exit routes; successful companies can still dilute early investors heavily.

A debt instrument intended to convert into equity under specified conditions.

Example: The note converts into preferred shares at the next funding round.

Convertible Note is a debt instrument intended to convert into equity under specified conditions; the transaction operates in a negotiated market where valuation, investor rights, information access and exit terms are set by contract rather than continuous exchange trading.

The note converts into preferred shares at the next funding round.

Before committing to Convertible Note, identify who controls key decisions, what happens in a weak exit, whether more capital will be required and how ownership can be verified; successful companies can still dilute early investors heavily.

A reduction in an existing holder's ownership percentage after new securities are issued.

Example: A founder falls from 60% to 48% after a new financing.

Dilution is a reduction in an existing holder's ownership percentage after new securities are issued; the transaction operates in a negotiated market where valuation, investor rights, information access and exit terms are set by contract rather than continuous exchange trading.

A founder falls from 60% to 48% after a new financing.

Before committing to Dilution, identify who controls key decisions, what happens in a weak exit, whether more capital will be required and how ownership can be verified; successful companies can still dilute early investors heavily.

A percentage discount applied when converting an early investmentAn asset or commitment of money made with the expectation of future income, growth, or both. into shares in a later financing.

Example: A 20% discount lets the note convert at 80% of the next round's price.

Discount RateThe rate used to convert future cash flows into present value. on a Convertible is a percentage discount applied when converting an early investment into shares in a later financing. The transaction operates in a negotiated market where valuation, investor rights, information access and exit terms are set by contract rather than continuous exchange trading.

A 20% discount lets the note convert at 80% of the next round's price.

A private-market review of Discount Rate on a Convertible should test management claims against bank, customer and product data and should price the lack of liquidity explicitly.

A right allowing specified majority holders to require minority holders to join a company sale.

Example: The majority accepts an acquisitionThe purchase of control or ownership of a company or business. and drags all shareholders into the transaction.

Drag-Along Right is a right allowing specified majority holders to require minority holders to join a company sale; the economic effect of the transaction should be traced through the capitalisation table: cash invested, securities issued, ownership, dilution, preference rights and exit proceeds.

For example, the majority accepts an acquisition and drags all shareholders into the transaction.

Before committing to Drag-Along Right, identify who controls key decisions, what happens in a weak exit, whether more capital will be required and how ownership can be verified; minority rights matter most when founders and investors disagree.

Shares or options reserved for current and future employees.

Example: The company creates a 10% option pool before the investment round.

Employee Stock Option Pool describes shares or options reserved for current and future employees; the economic effect of the transaction should be traced through the capitalisation table: cash invested, securities issued, ownership, dilution, preference rights and exit proceeds.

The company creates a 10% option pool before the investment round.

Before committing to Employee Stock Option Pool, identify who controls key decisions, what happens in a weak exit, whether more capital will be required and how ownership can be verified; minority rights matter most when founders and investors disagree.

A restriction limiting a founder's ability to sell shares for a period.

Example: The founder cannot sell most shares before the investor exits.

Founder Lock-In is a restriction limiting a founder's ability to sell shares for a period; the transaction finances a company or asset before a public market provides daily pricing and easy liquidity, so governance and contractual protection carry unusual weight.

The founder cannot sell most shares before the investor exits.

A private-market review of Founder Lock-In should test management claims against bank, customer and product data and should price the lack of liquidity explicitly; illiquidity can last much longer than the original investment case assumes.

An anti-dilution method resetting the conversion price to the new lower issue price.

Example: A small down round substantially increases the investor's conversion entitlement.

Full-Ratchet Anti-Dilution is an anti-dilution method resetting the conversion price to the new lower issue price; the economic effect of the transaction should be traced through the capitalisation table: cash invested, securities issued, ownership, dilution, preference rights and exit proceeds.

For example, a small down round substantially increases the investor's conversion entitlement.

For Full-Ratchet Anti-Dilution, review the cap table, security terms, investor rights, use of funds, runway, governance, reporting, follow-on needs and credible exit routes.

A contractual right to receive financial, operational, or governance information.

Example: The investor receives quarterly management accounts.

Information Right is a contractual right to receive financial, operational, or governance information; the transaction operates in a negotiated market where valuation, investor rights, information access and exit terms are set by contract rather than continuous exchange trading.

The investor receives quarterly management accounts.

Before committing to Information Right, identify who controls key decisions, what happens in a weak exit, whether more capital will be required and how ownership can be verified; minority rights matter most when founders and investors disagree.

A right determining how proceeds are distributed to preferred shareholders before ordinary shareholders in a sale or liquidationThe process of selling an entity's assets, paying creditors, and distributing any remainder to owners..

Example: A 1x preference returns the investor's original amount before common holders share the remainder.

Liquidation Preference is a right determining how proceeds are distributed to preferred shareholders before ordinary shareholders in a sale or liquidation. The transaction finances a company or asset before a public market provides daily pricing and easy liquidity, so governance and contractual protection carry unusual weight.

For example, a 1x preference returns the investor's original amount before common holders share the remainder.

Before committing to Liquidation Preference, identify who controls key decisions, what happens in a weak exit, whether more capital will be required and how ownership can be verified; a reported valuation is not the same as cash an investor can realise.

Preferred shares that generally choose between the liquidation preference and conversion into ordinary shares.

Example: The investor takes whichever outcome produces more value.

Non-Participating Preferred describes preferred shares that generally choose between the liquidation preference and conversion into ordinary shares; the economic effect of the transaction should be traced through the capitalisation table: cash invested, securities issued, ownership, dilution, preference rights and exit proceeds.

The investor takes whichever outcome produces more value.

Model Non-Participating Preferred across dilution and exit scenarios; read the legal documents rather than relying on the pitch deck's valuation or return illustration. Illiquidity can last much longer than the original investment case assumes.

The right to attend board meetings and receive information without voting as a director.

Example: A smaller investor receives a board observer right.

Observer Right is the right to attend board meetings and receive information without voting as a director; the transaction finances a company or asset before a public market provides daily pricing and easy liquidity, so governance and contractual protection carry unusual weight.

A smaller investor receives a board observer right.

For Observer Right, review the cap table, security terms, investor rights, use of funds, runway, governance, reporting, follow-on needs and credible exit routes; minority rights matter most when founders and investors disagree.

Preferred shares that receive a liquidation preference and then also participate in remaining proceeds.

Example: The investor takes back 1x capital and still shares the balance.

Participating Preferred describes preferred shares that receive a liquidation preference and then also participate in remaining proceeds; the headline valuation is only one term. Liquidation preference, conversion, anti-dilution, control and follow-on rights can change the actual payoff.

The investor takes back 1x capital and still shares the balance.

Before committing to Participating Preferred, identify who controls key decisions, what happens in a weak exit, whether more capital will be required and how ownership can be verified; minority rights matter most when founders and investors disagree.

A company's value immediately after adding new investment capital.

Example: A ₦100 million investment for 20% implies a ₦500 million post-money valuation.

Post-Money Valuation is a company's value immediately after adding new investment capital; the economic effect of the transaction should be traced through the capitalisation table: cash invested, securities issued, ownership, dilution, preference rights and exit proceeds.

For example, a ₦100 million investment for 20% implies a ₦500 million post-money valuation.

Model Post-Money Valuation across dilution and exit scenarios; read the legal documents rather than relying on the pitch deck's valuation or return illustration. A reported valuation is not the same as cash an investor can realise.

A right giving existing shareholders first opportunity to buy newly issued sharesShares that a company has formally created and allocated to shareholders..

Example: Shareholders may subscribe before the company offers shares to outsiders.

Pre-Emption Right is a right giving existing shareholders first opportunity to buy newly issued shares; the transaction operates in a negotiated market where valuation, investor rights, information access and exit terms are set by contract rather than continuous exchange trading.

Shareholders may subscribe before the company offers shares to outsiders.

Model Pre-Emption Right across dilution and exit scenarios; read the legal documents rather than relying on the pitch deck's valuation or return illustration. Minority rights matter most when founders and investors disagree.

A company's agreed value immediately before a new investment.

Example: A ₦400 million pre-money valuation plus ₦100 million investment gives ₦500 million post-money value.

Pre-Money Valuation is a company's agreed value immediately before a new investment; the transaction finances a company or asset before a public market provides daily pricing and easy liquidity, so governance and contractual protection carry unusual weight.

A ₦400 million pre-money valuation plus ₦100 million investment gives ₦500 million post-money value.

Before committing to Pre-Money Valuation, identify who controls key decisions, what happens in a weak exit, whether more capital will be required and how ownership can be verified; illiquidity can last much longer than the original investment case assumes.

The right to invest in later rounds to maintain an ownership percentage.

Example: An investor uses pro rata rights to keep a 10% stake.

Pro Rata Right is the right to invest in later rounds to maintain an ownership percentage; the transaction operates in a negotiated market where valuation, investor rights, information access and exit terms are set by contract rather than continuous exchange trading.

An investor uses pro rata rights to keep a 10% stake.

Model Pro Rata Right across dilution and exit scenarios; read the legal documents rather than relying on the pitch deck's valuation or return illustration.

A decision requiring special investor, shareholderA person or entity that owns one or more shares in a company., or board approval.

Example: Issuing new shares is a reserved matter under the investment agreement.

Reserved Matter is a decision requiring special investor, shareholder, or board approval; the headline valuation is only one term. Liquidation preference, conversion, anti-dilution, control and follow-on rights can change the actual payoff.

Issuing new shares is a reserved matter under the investment agreement.

Model Reserved Matter across dilution and exit scenarios; read the legal documents rather than relying on the pitch deck's valuation or return illustration. Minority rights matter most when founders and investors disagree.

A right to match a proposed sale of shares before they are sold to another buyer.

Example: The company may match a third-party offer for an employee's shares.

Right of First Refusal is a right to match a proposed sale of shares before they are sold to another buyer; the headline valuation is only one term. Liquidation preference, conversion, anti-dilution, control and follow-on rights can change the actual payoff.

The company may match a third-party offer for an employee's shares.

For Right of First Refusal, review the cap table, security terms, investor rights, use of funds, runway, governance, reporting, follow-on needs and credible exit routes; illiquidity can last much longer than the original investment case assumes.

A contract providing a right to future equity under specified financing or liquidity events, without being ordinary debt.

Example: The startup raises money through a SAFE with a valuation cap.

SAFE is a contract providing a right to future equity under specified financing or liquidity events, without being ordinary debt; the transaction operates in a negotiated market where valuation, investor rights, information access and exit terms are set by contract rather than continuous exchange trading.

The startup raises money through a SAFE with a valuation cap.

A private-market review of SAFE should test management claims against bank, customer and product data and should price the lack of liquidity explicitly; illiquidity can last much longer than the original investment case assumes.

A right allowing minority holders to join a sale by major shareholders on similar terms.

Example: A founder selling control must allow the small investor to tag along.

Tag-Along Right is a right allowing minority holders to join a sale by major shareholders on similar terms; the headline valuation is only one term. Liquidation preference, conversion, anti-dilution, control and follow-on rights can change the actual payoff.

A founder selling control must allow the small investor to tag along.

A private-market review of Tag-Along Right should test management claims against bank, customer and product data and should price the lack of liquidity explicitly; illiquidity can last much longer than the original investment case assumes.

A preliminary document outlining the main commercial terms of a proposed investment.

Example: The term sheet states valuation, board rights, and liquidation preference.

Term Sheet is a preliminary document outlining the main commercial terms of a proposed investment; the economic effect of the transaction should be traced through the capitalisation table: cash invested, securities issued, ownership, dilution, preference rights and exit proceeds.

The term sheet states valuation, board rights, and liquidation preference.

A private-market review of Term Sheet should test management claims against bank, customer and product data and should price the lack of liquidity explicitly; minority rights matter most when founders and investors disagree.

The maximum valuation used to convert a SAFE or convertible instrument into equity.

Example: A ₦300 million cap rewards early investors if the next round values the company at ₦600 million.

Valuation Cap is the maximum valuation used to convert a SAFE or convertible instrument into equity; the economic effect of the transaction should be traced through the capitalisation table: cash invested, securities issued, ownership, dilution, preference rights and exit proceeds.

For example, a ₦300 million cap rewards early investors if the next round values the company at ₦600 million.

Before committing to Valuation Cap, identify who controls key decisions, what happens in a weak exit, whether more capital will be required and how ownership can be verified.

The gradual earning of ownership rights over time or after milestones.

Example: A founder's shares vest monthly over four years.

Vesting is the gradual earning of ownership rights over time or after milestones; the transaction finances a company or asset before a public market provides daily pricing and easy liquidity, so governance and contractual protection carry unusual weight.

A founder's shares vest monthly over four years.

Before committing to Vesting, identify who controls key decisions, what happens in a weak exit, whether more capital will be required and how ownership can be verified.

An anti-dilution method adjusting conversion price based on both the lower price and number of new shares.

Example: The protection is less severe than a full ratchet.

Weighted-Average Anti-Dilution is an anti-dilution method adjusting conversion price based on both the lower price and number of new shares; the economic effect of the transaction should be traced through the capitalisation table: cash invested, securities issued, ownership, dilution, preference rights and exit proceeds.

The protection is less severe than a full ratchet.

A private-market review of Weighted-Average Anti-Dilution should test management claims against bank, customer and product data and should price the lack of liquidity explicitly; illiquidity can last much longer than the original investment case assumes.