ANGEL INVESTOR GLOSSARY A comprehensive reference of terms, acronyms, and definitions every angel investor should know.

# A

Accredited Investor (AI) An individual or entity meeting SEC thresholds — net worth over $1M excluding primary residence, or income over $200K individually ($300K jointly) for two consecutive years. Angel investing is generally restricted to accredited investors under Regulation D.

Angel Investor A high-net-worth individual who provides capital to early-stage startups, typically in exchange for equity or convertible debt. Angels often invest personal funds and bring strategic value beyond money, including introductions, mentorship, and domain expertise.

Anti-Dilution Protection A clause protecting investors from dilution in future down rounds. Two main forms: full ratchet (harshest — reprices shares to the new lower price) and weighted average (more common — blends old and new prices proportionally).

# B

Board of Directors The governing body of a company responsible for major strategic decisions including hiring/firing the CEO, approving budgets, and major transactions. Term sheets often specify board seat rights. Angels may receive observer rights rather than a full voting seat.

Board Observer Rights The contractual right to attend board meetings and receive board materials without a formal voting seat. A common concession given to angels who invest significant capital but below the threshold warranting a full directorship.

Bridge Loan / Bridge Financing Short-term debt financing used to keep a company operational while it raises a larger priced equity round. Often structured as convertible notes. "Burning the bridge" is slang for when a bridge loan fails to convert into equity.

Burn Rate The pace at which a company spends its cash reserves. Gross burn is total monthly spend. Net burn is monthly spend minus revenue. Essential for calculating runway. Angels should track this across all portfolio companies.

# C

Cap Table (Capitalization Table) A spreadsheet or ledger showing all equity ownership in a company, including founders, employees with options, and all investors by round. Angels should review the cap table carefully before investing to understand their ownership percentage and dilution risk.

Capital Call A request from a fund manager or syndicate lead to investors to contribute their previously committed capital. Most relevant when investing through an SPV or angel fund rather than writing a direct check.

Carried Interest (Carry) The share of investment profits — typically 20% — that a fund manager or syndicate lead earns after returning invested capital to LPs. On a $10M gain after returning principal, the lead retains $2M. The primary incentive compensation for fund managers.

Cliff In a vesting schedule, the minimum period before any shares vest. Standard is a 1-year cliff: no equity vests for 12 months, then a lump sum vests at the cliff date, followed by monthly vesting thereafter.

Common Stock Basic equity ownership typically held by founders and employees. Ranks below preferred stock in liquidation — preferred holders get paid first in a sale or dissolution. Professional angels almost always receive preferred stock, not common.

Convertible Note A short-term debt instrument that converts into equity at a future financing event rather than being repaid in cash. Key terms: interest rate, maturity date, discount rate, and valuation cap. Popular for early-stage investing due to speed and simplicity.

Conversion Discount A reduction — typically 15–25% — applied to the per-share price when a convertible note or SAFE converts into equity at the next round. Rewards early investors for taking greater risk before the company established its valuation.

Co-Investment / Pro-Rata Rights The contractual right — but not obligation — to invest additional capital in future rounds to maintain one's current ownership percentage. One of the most valuable rights an angel can negotiate for in a term sheet.

Cram Down A financing round structured to heavily dilute existing shareholders, often in financial distress. Previous investors may see their ownership reduced to near zero, particularly if they lack anti-dilution protection.

# D

Deal Flow The pipeline of investment opportunities available to an angel. Quality deal flow — sourced through warm networks, accelerators, syndicates, and referrals — is one of the most important competitive advantages an active angel investor can build.

Dilution The reduction in an existing shareholder's ownership percentage caused by the issuance of new shares. Occurs at every funding round, option grant, and instrument conversion. Pro-rata rights and anti-dilution provisions are the primary tools to manage it.

Discount Rate In a convertible note, the percentage reduction from the next round's price per share that the noteholder receives upon conversion. A 20% discount means the angel converts at $0.80 for every $1.00 paid by Series A investors.

Down Round A financing round priced at a valuation lower than the company's previous round. Signals deteriorating performance or market conditions. Triggers anti-dilution provisions for investors who hold them.

Drag-Along Rights A provision allowing a defined majority of shareholders to compel minority shareholders to vote in favor of a company sale on the same terms. Prevents small investors from blocking an otherwise-approved acquisition.

Due Diligence (DD) The investigative process conducted before committing capital. Covers financials, legal documents, team background, market sizing, product, customer references, IP, and the cap table. Quality of DD is a primary determinant of investment outcomes.

# E

EBITDA Earnings Before Interest, Taxes, Depreciation, and Amortization. A proxy for operating cash flow. Less relevant for pre-revenue startups but critical when evaluating growth-stage or profitable companies.

Employee Stock Option Pool (ESOP) A block of shares — typically 10–20% of equity — reserved for future grants to employees and advisors. Term sheets often require the pool be established before investment closes, meaning existing shareholders bear the dilution cost, not new investors.

Equity Crowdfunding Raising capital from many small investors via regulated platforms (e.g., Wefunder, Republic, StartEngine) under Regulation CF or Regulation A+. Angels should understand how these raises affect cap table complexity and future institutional rounds.

Exit The event through which investors realize returns on their investment. Common exits: acquisition (M&A), IPO, or secondary market sale. Most angel exits occur via acquisition. Median time to exit is 5–10 years.

# F

Follow-On Investment Additional capital invested in a company by an existing investor in a subsequent round. Angels with pro-rata rights can participate; those without may be excluded or offered allocation at the lead investor's discretion.

Fully Diluted The total share count including all issued shares, outstanding options, warrants, and convertible instruments (notes, SAFEs). Ownership percentages should always be calculated on a fully diluted basis.

Fund of Funds (FOF) An investment vehicle that invests in other funds rather than directly into companies. Some angels invest in FOFs for diversification; returns are reduced by two layers of management fees and carry.

# G

General Partner (GP) The managing partner of a venture fund who makes investment decisions and manages the portfolio. GPs earn a management fee (typically 2% of AUM) and carry (typically 20% of profits). Contrasted with Limited Partners (LPs) who are passive capital providers.

# H

Hockey Stick A growth curve that remains relatively flat then accelerates sharply — resembling a hockey stick shape. Common in startup pitch decks. Angels should stress-test the assumptions behind hockey-stick projections before committing capital.

# I

Information Rights Contractual rights to receive regular financial updates — monthly or quarterly financials, annual audited statements, and cap table updates — from the company. Important for portfolio monitoring; often only granted above certain minimum investment thresholds.

Initial Public Offering (IPO) The process of a private company offering shares to the public on a stock exchange for the first time. A potential liquidity event for early investors, subject to lock-up periods that typically prevent selling for 180 days post-IPO.

Internal Rate of Return (IRR) The annualized rate of return on an investment, accounting for the time value of money. The standard metric for comparing investment performance over time. A 20%+ IRR is generally considered strong for angel investing.

# L

Lead Investor The investor who sets the terms, leads due diligence, and often takes a board seat in a funding round. Angels who lead rounds gain more negotiating leverage and visibility but take on more work and liability.

Letter of Intent (LOI) A non-binding document expressing intent to invest or acquire, outlining key proposed terms. Precedes formal term sheets and definitive agreements. Commonly used in M&A contexts.

Limited Partner (LP) A passive investor in a venture fund or SPV who contributes capital but has no management role. Angels often participate in syndicates as LPs. LPs bear no liability beyond their invested capital.

Liquidation Preference The right of preferred stockholders to receive proceeds before common stockholders in a liquidation or sale. A 1x non-participating preference returns invested capital first; participating preferred also shares in remaining proceeds after preference — sometimes called a "double dip."

Lock-Up Period The period following an IPO — typically 180 days — during which early investors and employees are contractually prohibited from selling their shares. Angels must account for this timeline when modeling exit returns.

# M

Management Fee An annual fee charged by fund managers — typically 2% of assets under management — to cover operating expenses. Reduces net returns to LPs. Not applicable in direct angel investments made outside of a fund structure.

Milestone-Based Financing Capital released to a company in tranches upon achievement of specific operational or financial milestones. Reduces risk for angels but requires ongoing monitoring and an active investor-company relationship.

MOIC (Multiple on Invested Capital) A simple return metric: total value returned divided by total capital invested. A 3x MOIC means $3 returned for every $1 invested. Does not account for time — always use alongside IRR for a complete picture of returns.

Most Favored Nation (MFN) A clause entitling an investor to adopt the terms of any subsequent investment if those terms are more favorable. Common in SAFE and convertible note agreements to protect the earliest investors in a round.

# N

Non-Disclosure Agreement (NDA) A confidentiality contract preventing parties from sharing proprietary information. Angels are sometimes asked to sign NDAs before receiving detailed pitch materials, though many institutional investors decline to sign them at early stages.

# O

Option Pool Shuffle The practice of requiring the employee option pool to be created before a funding round closes, effectively making founders — not new investors — bear the dilution cost of employee equity. A common negotiating point in term sheets.

# P

Pari Passu Latin for "equal footing." Indicates multiple investors have equal rights and claims within the same share class. No investor in the group has priority over others — contrasted with seniority structures.

Pay-to-Play A provision requiring existing investors to participate in future funding rounds or face conversion of preferred stock to common stock, forfeiting protective rights. Designed to ensure committed investors continue supporting the company.

Pitch Deck A presentation — typically 10–15 slides — used by founders to present their company to investors. Key sections: problem, solution, market size, business model, traction, team, financials, and the ask.

Portfolio Company A company in which an investor holds an ownership stake. Angels typically build a portfolio of 10–30+ companies to achieve diversification, as venture returns follow a power law and most gains come from a small number of outliers.

Post-Money Valuation The company's valuation after new investment is added. Post-money = pre-money valuation + amount raised. Used to calculate an investor's ownership: investment amount ÷ post-money valuation = ownership percentage.

Power Law The statistical principle that a small number of investments drive the vast majority of total returns. In angel investing, the top 1–2 companies in a portfolio often return more than all others combined — justifying broad portfolio diversification.

Pre-Money Valuation The agreed value of a company before new investment is added. Higher pre-money means a smaller ownership stake for investors at any given check size. The central negotiating point in a priced equity round.

Preferred Stock A class of equity carrying special rights over common stock, including liquidation preferences, anti-dilution protection, and voting rights. Professional angel and VC investors almost always receive preferred stock in exchange for their investment.

Pro-Rata Rights See Co-Investment Rights. The right of existing investors to invest in future rounds proportionally to maintain their current ownership stake. Among the most valuable rights an angel should negotiate for in early deals.

# R

Recapitalization (Recap) A restructuring of a company's equity and debt, often involving new share classes, debt-to-equity conversions, or cap table consolidation. Can significantly affect existing investor positions and ownership percentages.

Redemption Rights The right to force the company to repurchase an investor's shares after a defined period — often 5 years. Provides a theoretical exit mechanism but is rarely exercised in healthy, growing companies.

Regulation A+ (Reg A+) An SEC exemption allowing companies to raise up to $75M per year from both accredited and non-accredited investors, subject to more extensive disclosure and reporting requirements than Regulation D.

Regulation CF (Reg CF) SEC rules governing equity crowdfunding, allowing companies to raise up to $5M per 12-month period from any investor regardless of accreditation status. Angels should understand how Reg CF raises affect cap tables and future rounds.

Regulation D (Reg D) The primary SEC safe harbor exemption allowing private companies to raise capital from accredited investors without full SEC registration. The most common exemption used in angel and VC rounds (Rule 506(b) and Rule 506(c)).

Return on Investment (ROI) A basic profitability measure: (gain from investment − cost) ÷ cost of investment. Simple but does not account for time. Use MOIC and IRR for more complete performance analysis in early-stage investing.

Right of First Refusal (ROFR) A right giving the holder the option to purchase shares before the seller can offer them to a third party. Common for both the company (to control ownership) and major investors (to acquire shares from departing shareholders).

Runway The amount of time a company can operate before running out of cash, given its current net burn rate. Calculated as cash reserves ÷ monthly net burn. A critical metric — angels should monitor runway across all portfolio companies.

# S

SAFE (Simple Agreement for Future Equity) A Y Combinator-created instrument that converts to equity at a future priced round. Unlike a convertible note, it has no interest rate or maturity date. Key terms: valuation cap and discount rate. Now the most common early-stage investment instrument.

Secondary Market A market where existing private company shares are bought and sold between investors without the company issuing new shares. Platforms such as Forge Global and EquityZen facilitate secondary transactions for pre-IPO companies.

Securities and Exchange Commission (SEC) The U.S. federal agency regulating securities markets and investor protection. Angels must ensure all investments comply with SEC rules — primarily Regulation D. Violations can result in civil and criminal liability for both the company and investors.

Seed Round An early-stage funding round, typically $500K–$3M, used to build the product, hire initial team members, and validate the market. Angels most commonly invest at the pre-seed and seed stages.

Series A The first significant institutional funding round — typically $3–15M — after a startup has demonstrated product-market fit. Often led by a VC firm. Angels with pro-rata rights can follow on; others may be unable to participate.

Share Class A distinct category of company shares carrying different rights. Common classes include common stock, Series A Preferred, Series B Preferred, and so on. Different classes have different voting, liquidation, and economic rights.

Special Purpose Vehicle (SPV) A legal entity — typically an LLC — created to pool multiple investors' capital for a single investment. Simplifies cap table management by consolidating many angels into one line item. Syndicate leads commonly use SPVs to deploy capital.

Syndicate A group of angel investors co-investing together, usually organized by an experienced lead who sources deals and negotiates terms. Online platforms such as AngelList facilitate syndicates. The lead typically charges carry of 15–20% on returns.

# T

Tag-Along Rights (Co-Sale Rights) The right of minority shareholders to join in a sale of shares by a major shareholder on the same terms and price. Protects angels from being left behind when founders or large investors sell their stakes in a secondary transaction.

Term Sheet A non-binding document outlining the key terms of a proposed investment. Covers valuation, investment amount, share class, investor rights, and governance provisions. Sets the framework for the definitive legal agreements that follow.

Total Addressable Market (TAM) The total revenue opportunity for a product or service if it captured 100% of its target market. Angels use TAM to assess whether the market opportunity is large enough to generate venture-scale returns on a successful outcome.

Traction Evidence that a startup's product or service is gaining real market adoption. Measured by revenue, user growth, engagement, or retention metrics. Strong, defensible traction is the most persuasive element in any early-stage pitch.

# U

Unicorn A privately held startup valued at $1 billion or more. The term reflects the historical rarity of such outcomes. Angels who invest early in a company that reaches unicorn status can achieve 100x+ returns, illustrating the power law in venture.

# V

Valuation Cap (Cap) The maximum valuation at which a convertible note or SAFE converts into equity, regardless of the actual valuation at the next round. Protects early investors from excessive dilution. A lower cap is more favorable for the investor.

Venture Capital (VC) Professional investment funds that deploy institutional capital into high-growth startups, typically at Series A and beyond. VCs often co-invest alongside angels or lead rounds that angels follow into using pro-rata rights.

Vesting Schedule A timeline over which equity is earned by founders, employees, and sometimes advisors. Standard: 4-year vesting with a 1-year cliff. Ensures team members remain committed before fully owning their equity. Angels should verify founder vesting before investing.

Voting Rights The rights of shareholders to vote on major company decisions such as mergers, charter amendments, and board elections. Preferred stock often carries special voting rights. Some share classes carry no voting rights at all.

# W

Warrant A contractual right to purchase equity at a predetermined price within a defined period. Often attached to bridge loans as additional compensation to investors for their risk. Similar to options but issued directly by the company.

Waterfall The order in which proceeds from a liquidation or sale are distributed among all stakeholders. Typical order: secured debt → unsecured debt → preferred stockholders (by liquidation preference seniority) → common stockholders.

# 4

409A Valuation An independent third-party appraisal of a private company's common stock fair market value, required by IRS rules before issuing stock options to employees. Sets the exercise price for employee options. Distinct from — and typically lower than — the preferred stock valuation set in a VC round.

This glossary is provided for educational purposes. Consult qualified legal and financial advisors before making investment decisions.