Getting started as an angel investor is exciting—but it can also be overwhelming. From SAFEs and cap tables to pro rata rights and carry, there’s a lot of new terminology to learn. Understanding these core terms not only builds your confidence, but also helps you make smarter, faster investment decisions. Whether you’re backing your first startup or just beginning to explore the world of early-stage investing, these 14 terms will give you a solid foundation—complete with real-world examples to make each one stick.
1. SAFE (Simple Agreement for Future Equity)
A SAFE is a convertible security that gives investors the right to receive equity at a future date—usually when a priced round happens—without setting a valuation today.
Example: Your group invests $100K in a startup via a SAFE. A year later, the company raised a Series A round. Your SAFE converts into preferred shares at a discount or with a valuation cap, depending on the terms.
2. Liquidation Preference
Definition: Liquidation preference determines the order and amount investors receive in the event of an exit (like an acquisition), before any proceeds go to common shareholders. It’s usually expressed as a multiple (e.g., 1x) of the original investment.
Example: Your fund invests $250K with a 1x liquidation preference. If the company is acquired for $5M, you receive your $250K back before common shareholders see any return. If the exit is for less than expected, this clause protects your downside.
3. Pro Rata Rights
Pro rata rights give an investor the option (but not the obligation) to maintain their ownership percentage in future funding rounds by investing more.
Example: Your fund owns 5% of a company. The company raises a new round, and you're offered the chance to invest more to maintain that 5% stake.
4. Anti-Dilution Protection
Definition: Anti-dilution provisions protect investors from their ownership percentage being diluted by future rounds priced lower than the one they invested in (a “down round”). The most common types are weighted average and full ratchet.
Example: You invest in a Series A round at a $10M valuation, but the Series B round happens at a $5M valuation. Anti-dilution terms may adjust your share price downward so you end up owning more shares, offsetting the lower valuation.
5. Cap Table (Capitalization Table)
A cap table is a detailed breakdown of who owns what in a company—founders, employees, investors—typically showing percentages, types of shares, and dilution over time.
Example: When reviewing a startup’s cap table, you notice your fund owns 3.25% on a fully diluted basis after a new round of funding.
6. Carry (Carried Interest)
Carry is the share of profits—typically 20%—that fund managers earn from successful exits, after returning original capital to investors.
Example: Your fund exits an investment with $500K in gains. If you have a 20% carry agreement, the managers earn $100K and distribute the rest to investors.
7. Tax Credits
Tax credits are government incentives that reduce a company’s tax liability, often tied to specific activities like research and development (R&D), hiring, or clean energy investments.
Example: A cleantech company in your portfolio receives $250,000 in R&D tax credits annually, allowing it to hire more engineers without raising another round. That’s a win for both company growth and investor dilution.
8. Liquidity Event
A liquidity event is when an investor has the opportunity to convert their investment into cash—typically through an acquisition, IPO, or secondary sale.
Example: Your Series B shares are sold in an acquisition, resulting in a liquidity event for your investors.
9. SPV (Special Purpose Vehicle)
An SPV is a legal entity created to pool capital from multiple investors into a single investment, making it easier to manage group investments.
Example: You set up an SPV for 15 investors to collectively invest $300K into a startup’s seed round.
10. Pre-Money vs. Post-Money Valuation
- Pre-money is the company’s valuation before new capital is added.
- Post-money includes the new capital being raised.
Example: A startup has a pre-money valuation of $8M and is raising $2M. The post-money valuation is $10M.
11. Participation Rights (a.k.a. Double Dip)
Definition: In some deals, preferred shareholders not only get their liquidation preference back, but also “participate” in the remaining exit proceeds alongside common shareholders—sometimes without a cap (fully participating) or up to a multiple (capped participation).
Example: Your preferred shares come with a 1x liquidation preference plus participation. In a $10M exit, you first get your $1M back, then also share pro rata in the remaining $9M with other shareholders.
12. Conversion
Conversion refers to when a convertible security (like a SAFE or convertible note) turns into equity, typically during a priced round.
Example: Your $50K SAFE converts into 25,000 Series A preferred shares at a $2.00 per share price.
13. Royalties
Royalties are payments made to a rights holder (like an inventor, author, or startup with proprietary tech) in exchange for the ongoing use of their intellectual property (IP). These payments are usually structured as a percentage of revenue or profits.
Example: A medical device startup licenses its patented technology to a large distributor and earns a 5% royalty on all sales. That income may be reinvested or used to fund operations—lowering future capital needs.
14. Time-Based Vesting (and Cliffs)
Definition: Vesting schedules dictate how startup employees earn their equity over time, with a “cliff” as the minimum period they must work before earning any. This affects both cap tables and retention risk.
Example: A founder has a 4-year vesting schedule with a 1-year cliff. If they leave the company after 10 months, they walk away with nothing. This protects investors from prematurely allocated equity and supports long-term commitment.
Why These Terms Matter
Learning the language of angel investing is one of the best ways to set yourself up for long-term success. These terms may seem technical at first, but once you start using them, they become second nature. Keep this list handy as you review deals, talk with founders, and participate in investor meetings—it’ll help you ask better questions, spot red flags, and communicate like a pro. Most importantly, it’ll give you the confidence to dive in and make investments with clarity and conviction.
