M&A and Fundraising Glossary for AI Startups

55 of 55 terms

NDANon-Disclosure AgreementDeal process

A contract in which each side promises to keep what it learns confidential and to use it only to assess the deal. It is normally the first document signed, because nothing useful about a company can be shared before it exists.

See alsoTeaser,Data room

TeaserDeal process

A one- or two-page anonymous summary of a company for sale: sector, size, rough financials, why it is attractive — but not the name. It is sent to possible buyers to find out who is interested before any identity is revealed.

See alsoNDA,CIM

CIMConfidential Information MemorandumDeal process

The full written case for buying a company — what it does, how it makes money, its customers, its financials and its risks. It goes to buyers who have signed an NDA, and it is the document most first offers are based on.

See alsoNDA,Teaser,IOI

IOIIndication of InterestDeal process

An early, non-binding note from a buyer saying roughly what they would pay and on what terms, usually as a range. It is a way to sort serious buyers from curious ones before anyone spends money on diligence.

See alsoLOI,CIM

LOILetter of IntentDeal process

A written outline of the deal a buyer intends to do: price, structure, timetable and conditions. Most of it is non-binding, but a few clauses usually are — exclusivity and confidentiality in particular — so it is signed with legal advice, not as a formality.

See alsoIOI,Exclusivity,SPA

ExclusivityDeal process

A promise by the seller to stop talking to other buyers for an agreed period, so the one buyer can spend money on diligence without being outbid mid-way. Also called a no-shop. It is the point where a seller loses competitive leverage, which is why its length is negotiated carefully.

See alsoLOI,Due diligence

Due diligenceDeal process

The buyer checking that the company is what it was said to be — financial, legal, technical, commercial. Findings do not only kill deals; more often they change the price, the structure, or what the seller has to promise in the contract.

See alsoData room,Disclosure schedule

Data roomDeal process

The controlled place where a seller puts the documents a buyer needs — contracts, accounts, cap table, IP assignments. Access is granted per person and usually tracked, so the seller can see what has been read and by whom.

See alsoDue diligence,NDA

SPASale and Purchase AgreementDeal process

The binding contract that actually transfers the business. It sets the final price and its adjustments, what each side promises is true, who carries which risk afterwards, and what must happen before completion.

See alsoLOI,Closing,Disclosure schedule

Disclosure scheduleDeal process

The seller’s list of exceptions to the promises made in the contract. If the contract says "there is no litigation", this is where an existing case is named. Disclosing something properly generally removes it as a basis for a later claim.

See alsoSPA,Due diligence

ClosingDeal process

The moment ownership actually changes hands and the money moves. It often happens some weeks after signing, once the conditions in the contract — approvals, consents, financing — have been met.

See alsoSPA,Escrow

Enterprise valueValuation

What the business itself is worth, independent of how it is financed: the value of the operations before counting cash in the bank or debt owed. Most multiples are quoted against it because it lets two companies be compared without their balance sheets getting in the way.

See alsoEquity value,EBITDA multiple

Equity valueValuation

What the owners actually receive: enterprise value, plus the cash in the business, minus the debt it owes. This is the number a founder should look at, because a headline price can shrink considerably by the time debt is settled.

See alsoEnterprise value,Working capital adjustment

Revenue multipleValuation

A valuation expressed as a multiple of annual revenue. Common for software companies that are growing rather than maximising profit, because their profit figure understates what the business is worth.

See alsoARR,EBITDA multiple

EBITDA multipleValuation

A valuation expressed as a multiple of annual EBITDA. The usual measure for profitable businesses, since it prices what the company earns rather than what it sells.

See alsoEBITDA,Revenue multiple

Comparable companiesValuation

Valuing a company by looking at what similar public companies trade at. Quick and widely understood; its weakness is that a private company of a different size, growth rate and customer base is rarely as comparable as the label suggests.

See alsoPrecedent transactions,Revenue multiple

Precedent transactionsValuation

Valuing a company by what buyers actually paid for similar companies. Closer to reality than public trading multiples because those prices include the premium a buyer paid for control — but the data is thinner and often older.

See alsoComparable companies

DCFDiscounted Cash FlowValuation

Valuing a company by forecasting the cash it will produce and reducing each future year to what it is worth today. Rigorous in form, but the answer moves a long way on small changes to the assumptions, so it is usually a sanity check rather than the number.

See alsoEnterprise value

TTMTrailing Twelve MonthsValuation

The last twelve months of actual results, whatever the financial year happens to be. Buyers price on TTM rather than on a calendar year because it is the most recent full year of evidence.

See alsoRun rate

Run rateValuation

A recent short period projected out to a full year — most often the latest month multiplied by twelve. Useful for a fast-growing company, and easy to flatter with one good month, so buyers usually check it against TTM.

See alsoTTM,ARR

ARRAnnual Recurring RevenueMetrics

The annualised value of subscription revenue that repeats — contracted and expected to continue. One-off fees, services and usage that is not committed do not belong in it, though they frequently get counted anyway.

See alsoMRR,Net revenue retention

MRRMonthly Recurring RevenueMetrics

The same idea as ARR measured by month. Useful for a young company where a year-long view hides how quickly things are changing.

See alsoARR

EBITDAEarnings Before Interest, Taxes, Depreciation and AmortisationMetrics

A measure of operating profit that strips out financing, tax and accounting charges for past spending, so two businesses can be compared on how well the operations themselves earn.

See alsoEBITDA multiple,Gross margin

Gross marginMetrics

What is left of revenue after the direct cost of delivering the product. For AI companies this is where inference and model-serving costs land, which is why their margins can look unlike traditional software.

See alsoEBITDA

Net revenue retentionNRRMetrics

What last year’s customers are worth this year, counting upgrades, downgrades and cancellations but no new customers. Above one hundred per cent means the existing base grows on its own — the single number buyers most often ask for first.

See alsoChurn,ARR

ChurnMetrics

The rate at which customers or their revenue leave. Worth asking which is being quoted: losing many small accounts and losing one large one produce very different pictures from the same headline figure.

See alsoNet revenue retention

Rule of 40Metrics

A rough test for software companies: growth rate plus profit margin should reach forty. It is a shorthand for the trade-off between growing and earning, not a law, and it means little for a company early enough that both numbers are volatile.

See alsoGross margin,Burn rate

Burn rateMetrics

How much cash the company consumes each month. Net burn — spending minus income — is the figure that matters, because it is what actually shortens the runway.

See alsoRunway

RunwayMetrics

How long the company can operate before the money runs out: cash divided by net burn, usually expressed in months. It sets the deadline for a raise or a sale, and it is the first thing a buyer works out for themselves.

See alsoBurn rate,Bridge round

CACCustomer Acquisition CostMetrics

What it costs, on average, to win one customer — sales and marketing spend divided by customers gained. Read next to how much that customer is worth over time, and how long it takes to earn the cost back.

See alsoLTV

LTVLifetime ValueMetrics

The total gross profit a customer is expected to produce before they leave. Highly sensitive to the churn assumption behind it, so a confident LTV built on thin retention data is worth little.

See alsoCAC,Churn

Share purchaseDeal structure

The buyer acquires the company itself by buying its shares, so contracts, employees and liabilities move with it. Usually simpler for the seller and the outcome most founders expect.

See alsoAsset purchase,SPA

Asset purchaseDeal structure

The buyer acquires chosen assets — code, customers, brand, sometimes staff — rather than the company. It lets a buyer leave unwanted liabilities behind, which is exactly why sellers usually prefer a share purchase.

See alsoShare purchase

EarnoutDeal structure

Part of the price paid later, only if the business hits agreed targets. It bridges a disagreement about what the company is worth, and it is the most frequent source of post-deal argument — which is why how the target is measured matters as much as its size.

See alsoSeller note,Rollover equity

Seller noteDeal structure

Part of the price left as a loan from the seller to the buyer, repaid over time with interest. The seller is effectively financing part of their own exit and ranks behind the banks if things go wrong.

See alsoEarnout

Rollover equityDeal structure

The seller keeps a stake in the business under its new owner instead of cashing out fully. Common where the buyer wants the founder to stay invested in what happens next.

See alsoEarnout

EscrowDeal structure

Part of the price held by a neutral third party for an agreed period, available to the buyer if the seller’s promises turn out to be wrong. Released to the seller if nothing surfaces.

See alsoClosing,Disclosure schedule

Working capital adjustmentDeal structure

A correction to the price at completion so the business is handed over with a normal level of day-to-day operating cash. It routinely moves the final number, and it surprises sellers who assumed the headline price was the price.

See alsoEquity value,Closing

Cap tableDeal structure

The register of who owns what: shares, options, convertibles and the terms attached to each. A messy or contradictory cap table is one of the most common reasons a deal slows down.

See alsoDilution,Liquidation preference

Liquidation preferenceDeal structure

The right of certain investors to be paid before ordinary shareholders when the company is sold. In a modest exit it can absorb most of the proceeds, so founders should model their own outcome after preferences, not before.

See alsoCap table

VestingDeal structure

Shares or options earned over time rather than granted at once, usually with a cliff before any of it is earned. Buyers look at it closely, because it determines who is tied to the company after the deal.

See alsoCap table

Term sheetFundraising

A short summary of the terms an investor proposes — valuation, amount, control rights. Mostly non-binding, but it sets the shape of everything that follows, so what is conceded here is rarely won back later.

See alsoLOI,Pre-money and post-money

SAFESimple Agreement for Future EquityFundraising

An investment that converts into shares at a later priced round rather than buying shares now. It avoids agreeing a valuation early; the caps and discounts on several stacked SAFEs decide how much a founder is actually giving away.

See alsoConvertible note,Dilution

Convertible noteFundraising

A loan that is expected to convert into shares at a future round instead of being repaid. Unlike a SAFE it is debt, so it carries interest and a maturity date — and if the round does not arrive, that date still does.

See alsoSAFE

Pre-money and post-moneyFundraising

Pre-money is what the company is agreed to be worth before new investment; post-money is that plus the money invested. Which one a quoted valuation refers to changes how much of the company the founder keeps, so it is always worth asking.

See alsoDilution,Term sheet

DilutionFundraising

The reduction in an existing shareholder’s percentage when new shares are issued. Not automatically bad — a smaller share of a larger company can be worth more — but it compounds quietly across rounds and option pools.

See alsoCap table,Pre-money and post-money

Bridge roundFundraising

A short raise meant to carry the company to a larger round or to an exit. Usually raised from existing investors and on faster terms, because it exists to buy time.

See alsoRunway,Convertible note

Lead investorFundraising

The investor who sets the terms, does the deepest diligence and usually takes the largest share of a round. Other investors often wait for a lead before committing, which is why a round without one can stall.

See alsoTerm sheet,Pro-rata

Pro-rataFundraising

An existing investor’s right to put more money into future rounds to keep their percentage. Valuable to investors and worth counting for founders, since it reduces the room available to new ones.

See alsoDilution,Lead investor

MandateSell-side mandate

The engagement under which an adviser is appointed to sell a company: what they will do, for how long, and how they are paid. Everything else on this list — retainer, success fee, tail — is a term inside it.

See alsoSuccess fee,Retainer,Exclusive mandate

Exclusive mandateSell-side mandate

A mandate under which only one adviser may run the sale for its term. Advisers ask for it because the work is front-loaded and easy to lose to a rival who did none of it.

See alsoMandate,Tail period

RetainerSell-side mandate

A fee paid during the engagement regardless of whether the company sells, typically monthly. It funds the work up front and is often credited against the success fee at completion.

See alsoSuccess fee,Mandate

Success feeSell-side mandate

The adviser’s payment on a completed sale, normally a percentage of the price. What counts as "the price" is worth pinning down: whether deferred amounts, earnouts and assumed debt are included changes the fee materially.

See alsoRetainer,Earnout,Mandate

Tail periodSell-side mandate

A window after the mandate ends during which the adviser is still owed a fee if the company is sold to a buyer they introduced. It stops a seller from waiting out the contract to avoid paying for the introduction.

See alsoCovered parties,Success fee

Covered partiesSell-side mandate

The agreed list of buyers an adviser introduced, which the tail period applies to. Keeping it explicit and approved as the process runs is what prevents an argument about who found whom after the deal is done.

See alsoTail period,Mandate