Startup

• Scale. Almost by definition, startup companies start small. At launch, they may serve a small geographic area or a specific customer segment, sometimes referred to as a "beachhead market." However, from a management and economic standpoint, startups are designed to scale up beyond their initial markets and serve many, many customers. For startups, economic viability is often predicated on very large scale.

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Various characteristics used to define startups include:

• Size-defined, below a size threshold (employee, revenue): This definition could categorize a startup based on its size. I.e. above a certain threshold of size on a particular attribute, the startup would no longer be considered a startup.
• A cultural perspective: This definition would point towards the company being called a startup due to its philosophies and cultural qualities.
• Innovation perspective: This definition requires the company to have some kind of innovation on technology, distribution or business model in order for it to qualify being a startup as opposed to a 'lifestyle' or family owned business.

Startup companies may share a number of characteristics with small and medium-sized businesses. Especially at the earliest stages, startup companies may have small teams and limited revenues. Startups may be unprofitable in the beginning (and some remain unprofitable even at large scale). And they may operate in a relatively small geographic area or narrow segment of a particular market.

Startup companies can come in various forms and sizes. Some of the critical tasks are to build a co-founder team to secure key skills, know-how, financial resources, and other elements to conduct research on the target market.

Often but not always, a startup will begin by building a minimum viable product (MVP), a prototype, to validate, assess and develop the new ideas or business concepts. In addition, startups founders do research to deepen their understanding of the ideas, technologies or business concepts and their commercial potential.

A Shareholders' agreement (SHA) is often agreed early on to confirm the commitment, ownership and contributions of the founders and investors and to deal with the intellectual properties and assets that may be generated by the startup. Vesting schedules for equity are also setup for Founders, Co-founders and early employees.

A company may cease to be a startup as it passes various milestones, such as becoming publicly traded on the stock market in an initial public offering, or ceasing to exist as an independent entity via a merger or acquisition.

Startups frequently fail and cease to operate altogether, an outcome that is very likely for startups, given that they are developing disruptive innovations which may not function as expected and for which there may not be market demand, even when the product or service is finally developed. Many startups fail due to team issues or s ly running out of funding.

Another critical moment of possible business failure is the leap from startup to big business.

Given that startups operate in high-risk sectors, it can also be hard to attract investors to support the product/service development or attract buyers. The size and maturity of the startup ecosystem where the startup is launched and where it grows have an effect on the volume and success of the startups.

The startup ecosystem consists of the individuals (entrepreneurs, venture capitalists, angel investors, mentors); institutions and organizations (top research universities and institutes, business schools and entrepreneurship programs operated by universities and colleges, non-profit entrepreneurship support organizations, government entrepreneurship programs and services, chamber of commerce) business incubators and business accelerators and top-performing entrepreneurial firms and startups. A region with all of these elements is considered to be a "strong" entrepreneurship ecosystem. Some of the most famous entrepreneurial ecosystems are Silicon Valley in California, where major computer, Internet firms and top universities such as Stanford University create a successful startup environment, Boston (where Massachusetts Institute of Technology is located) and Berlin, home of WISTA (a top research area), numerous creative industries, leading entrepreneurs and startup firms.

Investors are generally attracted to those new companies distinguished by their strong co-founding team, a balanced "risk/reward" profile (in which high risk due to the untested, disruptive innovations is balanced out by high potential returns) and "scalability" (the likelihood that a startup can expand its operations by serving more markets or more customers).

Attractive startups generally have lower costs (by "bootstrapping" - self-funding of startups by the founders), higher risk, and higher potential return on investment.

Successful startups are sometimes more scalable than an established business, in the sense that the startup has the potential to grow rapidly with a limited investment of capital, labor or land. Timing has often been the single most important factor for biggest startup successes, while at the same time, timing is, identified to be one of the hardest things to master by many serial entrepreneurs and investors.

Startups have several options for funding. Venture capital firms and angel investors may help startup companies begin operations, exchanging seed money for an equity stake in the firm. Venture capitalists and angel investors provide financing to a range of startups (a portfolio), with the expectation that a very small number of the startups will become viable and make money. In practice though, many startups are initially funded by the founders themselves using "bootstrapping", in which loans or monetary gifts from friends and family are combined with savings and credit card debt to finance the venture.

Factoring and venture debt is another option, though it is not unique to startups. Other funding opportunities include various forms of crowdfunding, for example equity crowdfunding, in which the startup seeks funding from a large number of individuals, typically by pitching their idea on the Internet and ICOs (Initial Coin Offerings).

Many startups are formed as a C corps (Inc's) in the US and 'Ltd' in the UK. Some startups are formed as LLCs. Characteristically, founders can be working on a project anywhere from days to years before incorporating as legal entities, in stark contrast to the commercial behavior of more established operations.

Co-founders are people involved in the initial launch of startup companies. Anyone can be a co-founder, and an existing company can also be a co-founder, but frequently co-founders are entrepreneurs, engineers, hackers, web developers, web designers and others involved in the ground level of a new, often high-tech, venture. There is no formal legal definition of what makes someone a co-founder, however, in the US the SEC considers co-founders to be 'promotors'. The divorce rate among startup co-founders is very high, a factor often disregarded until it is too late.

Stereotypically, startup founders have a more casual or offbeat attitude in their dress, office space, and marketing, as compared to traditional corporations. For example, startup founders may wear hoodies, sneakers and other casual clothes to business meetings. Their offices may have recreational features, such as pool tables, ping pong tables and pinball machines, which are used to create a "fun" work environment, stimulate team development and team spirit, and encourage creativity. However, this view is changing as traditional corporations take on 'startup' like characteristics, the definition of 'startup' expands to include more exceptions than the rule. Typical examples of companies that were considered startups at some point include Facebook, Snapchat and Google which are now considered by some to now not be startups as they have crossed a weakly defined threshold of size.

However, startups tend to share several characteristics which serve to distinguish them from small businesses:

• Innovation. Startup companies are typically built around a new idea, method, or product. While the products and services a startup may offer are enabled by technology, not all startups are rooted in unique, defensible intellectual property. They may offer a new type of business or service model (ex. app-based ride-hailing services vs. the traditional taxi industry) or a unique design or interaction model which sets them apart from established competitors.
• Risk. Startup companies often operate at the edge of a technical field or market for their product or service. Given their small size, limited resources, and often unproven demand for their commercial offerings, startup companies experience high rates of business failure. However, with high risk can come high reward.
• Scale. Almost by definition, startup companies start small. At launch, they may serve a small geographic area or a specific customer segment, sometimes referred to as a "beachhead market." However, from a management and economic standpoint, startups are designed to scale up beyond their initial markets and serve many, many customers. For startups, economic viability is often predicated on very large scale.
• Speed. Small team sizes and relatively flat organizational structures let startup teams make decisions and move quickly to seize upon a market opportunity. Limited available resources (see runway) and competitive pressure makes speed a necessity.

Collectively, these characteristics serve to create dynamic organizations and more flexible management styles than what might be found in the typical small business.

Startups, like most types of companies, have a capital structure built around the creation and issuance of stock which can appreciate in value over time. Equity is the difference between the value of the assets/interest and the cost of the liabilities of something owned. In finance, it represents the total value of a company if its assets (which include tangible things like office furniture and computing equipment as well as intangible things like its intellectual property and its anticipated future revenues). Shares in a company's equity grant shareholders a claim to their proportional share of proceeds from a liquidation event, among other rights and privileges.

Startup companies are privately-held, meaning that there is not an open market for their shares. Accordingly, startup equity is an illiquid asset, which makes valuing its worth a challenge and selling startup equity for cash difficult before a company chooses to engage in an initial public offering (IPO) or is valuable enough for third-party investors to establish a secondary market for their shares. However, being privately held allows companies to operate with less oversight from securities regulators, and reduces the burden of corporate financial reporting imposed on publicly-traded companies.

Equity in a startup can be owned by an individual (such as a founder or an employee), by a company (like a venture capital fund), or by some other legal entity such as a trust. A startup's capital stock is originated at time of incorporation, and new stock may be created and issued over the course of a company's development as it takes on outside investors and grows its team. Creation of new shares dilutes the ownership stakes of existing shareholders. So long as the valuation of a company continues to rise, dilution does not directly affect the financial value of a shareholder's equity stake in a company.

Ownership of startup shares is tracked in a company's capitalization table (or "cap table"), which shows the full list of shareholders and the pool(s) of unallocated shares and what percentage of the company's stock each stockholder's shares represent. A well-structured capitalization table will typically distinguish between whether a shareholder is in possession of preferred stock—which may carry special rights and privileges outlined in a company's shareholder agreement—or ordinary common stock.

Stock may be sold to investors, awarded to key advisors (see Advisory shares), or may be granted to employees or contractors as part of their overall compensation package. Options to purchase stock, rather than direct issuance of stock, is the most common way for employees to receive equity in a company.

Allocations of equity may be issued in full, such as when an investor purchases shares, or distributed over time according to an agreed-upon schedule of stock vesting. Vesting schedules are a way to align interests between a startup and the person or entity to which stock is being vested. Issuing stock or stock options over time (typically 3-5 years, but there are exceptions) and/or only after a certain period of time has elapsed (called the "vesting cliff") ensures that employees and advisors maintain long-term engagement with the startup.

• Convertible note
• Founder preferred stock
• Warrant
• Restricted Stock Unit (RSUs)
• Restricted stock award
• Options pool
• Options pool shuffle
• Outstanding shares
• Liquidation overhang
• Liquidation preference
• Exercise options
• Exercise window
• Acceleration

• Vesting
• Vesting period
• Vesting schedule
• Vesting cliff

• Single Trigger Acceleration

• Double Trigger Acceleration
• Phantom Stock
• Stock Appreciation Rights
• Incentive stock option (ISOs)
• Nonstatutory stock options
• Non-Qualified Stock Option (NSOs)
• Early exercise
• Cashless exercise

Like all communities, the startup ecosystem consists of people which fulfill one or more roles.

Founders are the people who start organizations. One or more people may be counted as founders (or "co-founders") of an organization. It should be noted that, in the context of the startup community, organization types could include companies, entrepreneurial support organizations like incubators or technology community hubs, or investment companies like accelerators and venture capital firms.

As the name of the title may suggest, founders are responsible for establishing the foundational elements of an organization. In exchange for the high level of risk and workload they take on, founders are typically granted significant equity stakes in their companies, which may be issued as either founders shares or common stock. This serves to align incentives between co-founders, and later between the founding team and investors in the company.

Founders undertake disproportionate responsibility for defining the scope of their organizations; setting a vision and defining the mission of their organizations; designing, developing, and delivering the earliest versions of their organizations' product or service offerings; and other standard business leadership activities like recruiting a team, securing a source of funds (which could include their own personal assets or lines of credit, business revenue, or external funding from investors), generating "buzz" for their organizations, and fulfilling other administrative responsibilities.

Founders typically take top-level roles in their organizations. A co-founder with business experience and/or a compelling vision for the organization may serve as Chief Executive Officer (CEO); the co-founder with the strongest technical abilities, who might also shoulder most of the responsibility for developing core technology, may serve as Chief Technical Officer (CTO) for example. Though job titles may vary from organization to organization, especially at the earliest stages of formation and development, founding members typically go on to lead the parts of their organization that align with their experience and early contributions.

Founders may serve informal mentorship or formal advisory roles to other founders. Successful founders may make angel investments in other founders' companies, may join venture capital firms, or serve in advisory or mentorship roles to organizations serving the entrepreneurial community. It is rare for founders to start more than one organization simultaneously, but many go on to found other organizations later in their careers.

Startup employees are people who join organizations established by founders. Like employees of other organizations, they're responsible for managing or directly carrying out the functions of an organization. However, depending on the stage of a startup's lifecycle at which an employee joins, they may be exposed to more risk (but also more financial upside and professional opportunities) than employees performing similar roles at more established organizations.

Regulations vary between jurisdictions, but startup employees are typically granted the same rights as employees at other types of firms. In addition to salary and benefits (which can vary widely), employees may also receive a grant of equity or options to purchase equity shares in the startup, which is subject to the covenants and conditions outlined in a company's employee stock ownership plan (ESOP).

Startup employees who join a company early in its lifecycle are typically issued more equity or options than employees performing comparable duties who join the organization later in its lifecycle. Though management style and hiring strategy can vary between companies, it's typically the case that—relative to their counterparts at more established enterprises—startup employees have more responsibilities and more opportunities to rise through the ranks of an organization as it scales up its operations.

Startup advisors are people who provide advice to founders and executives about specific business needs. In exchange for their time, expertise, and other contributions to a startup, advisors may receive advisory shares in the company.

Advisors usually have experience, domain expertise, or a valuable personal or professional network that can help early-stage organizations set up new processes or grow their business or operations.

The relationship between companies and their advisors is often formalized in a startup advisory agreement. Advisors may work with founders and executives on an as-needed basis, or as part of a formal advisory board.

Unlike startup advisors, mentors typically have an informal, non-compensated role in supporting a company's founders and executives. They may contribute their time, expertise, and may help the company by making introductions to potential job candidates, investors, or service providers, but they typically do not receive equity (advisory shares) or cash compensation for their contributions. Relationships between founders and mentors is typically friendly, collegial, and informal.

Startup investment organizations like accelerators and support organizations like incubators and technology hubs may establish a structured mentorship program. This may involve pairing a founder (or co-founding team) with established service providers and people with prior founding or leadership experience who provide informal guidance and support throughout the duration of the accelerator or incubator program. Founders may opt to bring mentors on as formal advisors after the program concludes, but typically the relationship between founders and mentors remains informal or ends entirely.

Investors are people who commit capital in exchange for an equity share (or the promise of a future equity share) in a company, the rights or options to purchase equity in a company, an income stream from dividends paid out by a company, return of the principal plus interest of a loan made to a company, or some combination thereof.

Especially for earlier-stage companies, the investors they encounter typically fall into one of two categories: representatives of institutional investment funds (who invest other people's money) or individual "angel" investors (who invest their own money). People representing institutional investment funds may occasionally make startup investments using their personal capital if they have personal conviction in the founder(s) and their team, but the firm they work for passed on investing.

Besides providing capital, startup investors may fulfill similar roles to advisors and mentors. They may help make introductions to candidates for executive leadership positions, connect companies with customer leads, and generally act in the interest of their portfolio companies whenever and however they can.

In addition to mentorship and advisory functions, institutional investors may also perform governance and oversight functions as members or observers of a company's board of directors.

Startup investing is the action of making an investment in an early-stage company (the startup company). Beyond founders' own contributions (which may be negligible), some startups raise additional investment at some or several stages of their growth. Not all startups trying to raise investments are successful in their fundraising.

The solicitation of funds became easier for startups as result of the JOBS Act.

After the Great Depression, which was blamed in part on a rise in speculative investments in unregulated small companies, startup investing was primarily a word of mouth activity reserved for the friends and family of a startup's co-founders, business angels and Venture Capital funds. In the United States, this has been the case ever since the implementation of the Securities Act of 1933. Many nations implemented similar legislation to prohibit general solicitation and general advertising of unregistered securities, including shares offered by startup companies. In 2005, a new Accelerator investment model was introduced by Y Combinator that combined fixed terms investment model with fixed period intense bootcamp style training program, to streamline the seed/early stage investment process with training to be more systematic.

Following Y Combinator, many accelerators with similar models have emerged around the world.

Title II of the Jumpstart Our Business Startups Act (JOBS Act), first implemented on September 23, 2013, granted startups and startup co-founders or promoters in US the right to generally solicit and publicly advertise using any method of communication on the condition that only accredited investors are allowed to purchase the securities.

When investing in a startup, there are different types of stages in which the investor can participate. The first round is normally called seed round (sometimes their is a round before this called the 'preseed'). The seed round generally is when the startup is still in the very early phase of execution when their product is still in the prototype phase (though it can also be after traction). At this level, angel investors will be the ones participating. The next round is called Series A.

At this point the company may already have traction and may be making revenue. In Series A rounds venture capital firms will be participating alongside angels or super angel investors (however, sometimes only venture capital firms will participate). The next rounds are Series B, C, and D. These three rounds precede any potential IPO. Venture capital firms and private equity firms may be participating. Sometimes, the A or B rounds can be extended in what is called an A prime or B prime.

Platforms like Angel List have altered the landscape of fund raising to include 'syndicates' which are SPVs (special purpose vehicles) which allow unconventional fund raising rounds.

The first known investment-based crowdfunding platform for startups was launched in Feb. 2010 by Grow VC, followed by the first US based company ProFounder launching model for startups to raise investments directly on the site, but ProFounder later decided to shut down its business due regulatory reasons preventing them from continuing, having launched their model for US markets prior to JOBS Act. With the impact of the JOBS Act for crowd investing in US, equity crowdfunding platforms like SeedInvest and CircleUp emerged in 2011 and platforms such as investiere, Companisto and Seedrs in Europe and OurCrowd in Israel. The idea of these platforms is to streamline the process and resolve the two main points that were taking place in the market. The first problem was for startups to be able to access capital and to decrease the amount of time that it takes to close a round of financing. The second problem was intended to increase the amount of deal flow for the investor and to also centralize the process.

• Pre-Seed
• Seed
• Series A
• Series B
• Series C
• Series D
• Series E
• IPO

• Bootstrapping
• Venture capital
• Angel investor
• Startup incubator
• Crowdfunding
• Term sheet
• Secondary offering

• Founder/Advisor Standard Template (FAST)