So you’re new to venture, and want to build the confidence to speak VC jargon. Welcome to an exciting asset class that combines the potential for outsized returns with the opportunity to support innovative companies shaping the future. But first, you’ll need to decode the alphabet soup of VC jargon.
This guide will walk you through the essential terminology you’ll encounter as you evaluate opportunities, review documents, and engage with General Partners.
The Players
Limited Partner (LP): That’s you! LPs are the investors who commit capital to venture capital funds. You might be a high-net-worth individual, family office, endowment, pension fund, or institutional investor. As a limited partner, you have limited liability and typically don’t participate in day-to-day fund management.
General Partner (GP): The venture capitalists who manage the fund. GPs are responsible for sourcing deals, conducting diligence, making investment decisions, and supporting portfolio companies. They have unlimited liability and carry fiduciary duties to the LPs.
Fund Manager: Often used interchangeably with GP, this refers to the firm or team running the venture capital fund.
Fund Structure & Economics
Management Fee: The annual fee LPs pay to cover the fund’s operating expenses, typically 2% of committed capital during the investment period, then stepping down to 2% of net asset value or invested capital thereafter. This covers salaries, office space, legal fees, and other operational costs.
Carried Interest (Carry): The GP’s share of profits, traditionally 20% of returns above the hurdle rate. This is how GPs make most of their money and aligns their interests with yours—they only profit significantly when you do.
Hurdle Rate: The minimum return LPs must receive before GPs can take carried interest, often 8%. Think of it as a preferred return that ensures LPs get paid first.
2 and 20: The industry standard fee structure—2% management fee and 20% carried interest. Newer or smaller funds might offer different terms to attract LPs.
Commitment & Capital Calls
Committed Capital: The total amount you’ve pledged to invest in the fund, though you don’t write the full check upfront.
Capital Call (Draw Down): When the GP identifies an investment opportunity, they’ll issue a capital call requesting LPs contribute a portion of their commitment, usually with 10 – 14 days notice. You’ll receive these periodically over the fund’s investment period.
Dry Powder: Committed but uncalled capital, the ammunition sitting ready for future investments.
Deployment Period (Investment Period): Typically the first 3-5 years of the fund when the GP actively makes new investments. After this, the fund enters harvest mode.
Fund Performance Metrics
Internal Rate of Return (IRR): The annualized rate of return on your investment. A 25%+ net IRR is considered strong in venture capital. Note that early distributions can inflate IRR, so look at this metric alongside others.
Total Value to Paid-In Capital (TVPI): Also called the “multiple,” this shows total value (distributed + unrealized) divided by capital actually called. A 3x TVPI means every dollar invested has generated three dollars in value.
Distributed to Paid-In Capital (DPI): Actual cash returned to LPs divided by capital called. This is real money in your pocket, not paper gains. Sometimes called the “realization multiple.”
Residual Value to Paid-In Capital (RVPI): The unrealized value still held in portfolio companies divided by capital called. TVPI = DPI + RVPI.
Public Market Equivalent (PME): Compares the fund’s performance to what you would have earned investing in public markets instead, helping you assess whether the illiquidity premium was worth it.
Investment Terms
Pre-Money Valuation: A startup’s valuation before receiving new investment. If a company has a $10M pre-money valuation and raises $2M, the post-money valuation is $12M.
Post-Money Valuation: The company’s valuation immediately after the investment round closes.
Pro Rata Rights: The right to maintain your ownership percentage in future funding rounds by investing additional capital. GPs negotiate for these to protect against dilution in their best companies.
Ownership (Equity Stake): The percentage of the company the fund owns. Early-stage funds typically target 10-20% ownership per investment.
Dilution: When a company raises additional capital, existing shareholders’ ownership percentages decrease. This is normal and expected as companies grow.
Preference Stack: The order in which investors get paid in a liquidation event. Senior preferred stock gets paid before common stock.
Types of Investments
Seed Stage: The earliest institutional funding, typically $500K – $3M, when companies have a prototype or early product.
Series A: Usually $5M – $15M to scale a proven product with product-market fit.
Series B, C, D…: Later-stage rounds funding growth, expansion, and market dominance. These letters can continue indefinitely.
Bridge Round: Short-term financing between major rounds, often convertible notes.
Follow-On Investment: Additional capital deployed into existing portfolio companies in subsequent rounds.
Reserve Ratio: The percentage of fund capital held back for follow-on investments, typically 50% or more. A fund with a 2:1 reserve ratio invests $1 in initial checks and reserves $2 for follow-ons.
Portfolio Construction
Portfolio Company (PortCo): A company the fund has invested in.
Concentration: How much of the fund is invested in top holdings. High concentration can mean higher risk but also higher potential returns.
Vintage Year: The year a fund closes and makes its first investment. Vintage year significantly impacts returns due to market conditions.
Fund Size: Total committed capital. Larger funds must write larger checks and typically invest in later-stage companies with less risk but lower potential multiples.
Check Size: The amount invested in each company. A $100M fund might write $2 – 5M initial checks.
Exit Strategies
Exit: When the fund sells its position and returns capital to LPs, typically through acquisition or IPO.
Initial Public Offering (IPO): When a company goes public. Often the most lucrative exit path but increasingly rare as companies stay private longer.
Acquisition (M&A): When another company buys the portfolio company. This is the most common exit path in venture.
Secondary Sale: Selling shares to another investor before an IPO or acquisition, providing earlier liquidity.
Write-Off: When an investment fails completely and is valued at zero. This happens frequently in venture—expect 30-40% of a portfolio to fail.
Distribution: When the fund returns capital to LPs, either cash from exits or shares in companies that have gone public.
Lockup Period: After an IPO, the period when investors cannot sell their shares, typically 180 days.
Fund Lifecycle Terms
Fundraising: When GPs seek commitments from LPs for a new fund.
First Close: When the fund reaches minimum commitments and can begin investing.
Final Close: When the fund stops accepting new commitments.
Fund Term: The total lifespan of the fund, typically 10 years with possible 1-2 year extensions.
J-Curve: The typical pattern of venture returns, negative in early years as management fees are paid and organization expenses are front loaded, then positive as exits occur. Your fund will likely show paper losses before showing gains.
Mark-to-Market: Quarterly valuation of unrealized portfolio companies. Take these with skepticism in early years, they’re estimates based on limited data.
Due Diligence Terms
Track Record: The GP’s historical performance across prior funds. Look for consistent top-quartile performance.
Portfolio Construction: How the GP plans to deploy capital across number of investments, check sizes, and reserve strategy.
Investment Thesis: The GP’s strategy and focus area: industry, stage, geography, or other specialization.
Value Add: What the GP provides beyond capital: recruiting help, customer introductions, operational expertise, etc.
Key Person Clause: Provisions that pause or allow LPs to dissolve the fund if key GPs leave. This protects you if the team you backed falls apart.
No-Fault Divorce: A provision allowing a majority of LPs to remove the GP without proving cause.
Most Favored Nation (MFN): A clause ensuring if the GP offers another LP better terms, you automatically get those terms too.
Tax & Legal
Limited Partnership Agreement (LPA): The legal contract governing the fund. Read this carefully with your attorney.
Private Placement Memorandum (PPM): The offering document describing the fund’s strategy, risks, terms, and team.
Side Letter: A separate agreement between the GP and individual LPs offering special terms or rights.
Qualified Purchaser: An individual with $5M+ in investments or entity with $25M+ in investments. Many funds require this status.
Accredited Investor: An individual earning $200K+ annually ($300K jointly) or having $1M+ net worth excluding primary residence. The minimum bar for most VC investments.
K-1: The tax form you’ll receive annually showing your share of the fund’s income, gains, and losses. Expect these in March, unless there are delays.
UBTI (Unrelated Business Taxable Income): A tax consideration for tax-exempt entities like endowments investing through funds that use leverage.
Getting Started
As you evaluate venture opportunities, whether traditional funds, or syndicates, you’ll encounter these terms in pitch decks, LPAs, and quarterly reports. Don’t be intimidated by the jargon: GPs should be willing to explain anything you don’t understand. After all, you’re considering trusting them with your capital for a decade.
A few final pieces of advice: Start small with your first investment to learn the ropes. Diversify across multiple funds and syndicates, vintages, and stages. Build relationships with GPs before committing, the best funds often end up oversubscribed. And remember that venture capital is a long-term, illiquid commitment requiring patience.
The venture capital asset class is a different risk/reward profile, it can be immensely rewarding, both financially and in terms of participating in innovation, but it is higher risk compared with other asset classes. With this terminology guide in hand, you’re better equipped to evaluate opportunities.