Venture capital comes with its own language, so here’s a quick, founder-friendly guide to the jargon you’ll hear in every funding conversation.
- GP/LP: a partnership between limited partners (investors in the fund) and general partners (VC, managing the fund). The basic structure of most VC funds.
- 2 & 20: the fee structure most VC operate on. The fund pays 2% per year in management costs to the VC to operate their business. The VC is incentivized by getting 20% of the profits once investors have their initial money back. Even if these days management fees might be a little lower, 2&20 is still the phrase that's used.
- Carry: another word for the 20%. That 20% is then split inside the VC firm according to their own rules, often seniority based.
- Carry vehicle / Carry partnership: The way the VC receive their 20% is typically through a separate entity (the carry partnership) which is an LP in the GP/LP structure. Complications mainly for tax reasons.
- Term Sheet: the document outlining the key elements of the deal between you and the VC. It's not a binding contract, but definitely a statement of intent.
- Down round: a round of fundraising where your company is valued lower than the last time you raised.
- Dilution: "raising money" really means letting someone buy new shares in your company. And as a result people with existing shares will therefore own a little less of the pie.
- Anti-Dilution: the mechanics get complex, but sometimes investors will have terms that protect their share of the pie; typically these only activate in down rounds.
- liquidation preference (commonly referred to as "pref"): a common way for VC to protect their investment by setting a minimum hurdle rate (1 or more times initial investment usually). This hurdle is paid out before other investors get paid. As a founder, you are usually in the "other investors" category.