5 Investment Terms You Need to Know ASAP
Tuesday, November 24, 2020, 6:00 AM | Leave Comment
It’s not a secret that the global investment market saw enormous ups and downs in 2020. They practically crashed at the start of the COVID-19 pandemic. As the year ended, investments started to stabilize.
This doesn’t mean everyone who could invest has decided to put their money back in the markets or businesses. Needless to say, both areas have been transformed.
Some people are waiting for the dust of politics and pandemics to settle down before they do anything remotely connected to investment.
Others are on the lookout for startups that need funding assistance.
You might be one of these latter individuals. If you are, then you want to be prepared with the most important investment terms when it comes to startups.
Here are five terms that you need to know ASAP.
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Seed Funding
You’ve probably heard the term seed money. In the past, this was a loan given to a new business to cover infrastructure and expenses while they built their revenue streams. In today’s investment world, seed funding has taken the place of these personal loans.
In seed funding, securities connected to a startup are offered to investors. In exchange for their generosity, they receive some form of an equity stake in the business instead of monetary return. In many cases, this takes the form of convertible notes.
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Convertible Notes
Why is a convertible Note definition important? It’s one of the ways fund administrators like Assure convert debt into equity. It’s for investors who want to increase their investment options with a bit of risk.
Convertible notes are at the lower end of the risk scale for a startup that utilizes this as the initial round of funding and those who make the investments. Instead of receiving their money back with interest, they receive a series of preferred stocks.
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Series Stocks
Initial investments into new businesses are done through several rounds. During each one, a series of stocks are released to investors for purchase. A new group is distributed at the end of the previous round.
These are called series stocks. Each round is given a letter representation. So, the first round distributes Series A stocks, the second gives out Series B stocks, and so on. This continues until the business has reached or near 100 percent funding.
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Angel Investor
Before any series stocks or convertible notes are released, startup businesses can receive funding from one individual. This person is designated as an Angel Investor. Normally, this type of entity supplies a large sum of their own money to the organization.
In turn, the angel investor gains a share of the company. Whether this is only a small part or half of the organization depends on the amount of money and what the business wants to do. While some situations have resulted in bad blood between the angel investor and business, most have been agreeable and allowed the business to quickly get on its feet.
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Burn Rate
Once investments are in place, the startup’s goal is to use what’s needed while performing the necessary tasks to increase revenue. In investing terms, this is known as the burn rate. How much cash that’s spent over capital might determine the organization’s lifespan.
To get the burn rate, companies divide their capital by the amount of money already spent. A low or negative amount might result in another round of funding. More revenue than spending capital might represent a pause in investment.
These definitions are a small percentage of the terms people should know before they invest in a company. While they help them move forward, investors need to know more before the presentation of funds.
An investment course is the best path to this understanding. There are plenty of online sources that provide detailed explanations and classes that relate to business investment. Their goal is to ensure an individual comes away with a clear understanding of how seed funding works.
Without clarity of these and other terms, the investor can feel lost. As a result, they might invest in the wrong company or think they get a monetary return on investment instead of part of the organization. Knowing can make them an angel investor for many startups.
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