Common Angel Investment Terms Every Founder Should Understand

3 February 2026

Raising money for your startup can feel like learning a whole new language. If you're dealing with angel investors, you’ll hear a ton of jargon thrown around—term sheets, valuations, cap tables, and more. But don't worry, I've got your back.

Understanding these key angel investment terms will not only help you communicate more confidently but also ensure you're making informed decisions about your startup’s future. Let’s break it all down in plain English.

1. Angel Investor

Let’s start with the basics. An angel investor is an individual who invests in early-stage startups in exchange for equity (ownership in the company). Unlike venture capitalists (VCs), who manage pooled funds, angels invest their own money.

Think of them as mentors with deep pockets—they’re often experienced entrepreneurs who provide not just cash but also guidance, connections, and industry expertise.

2. Pre-Money vs. Post-Money Valuation

Valuation is a big deal when raising funds, but terms like “pre-money” and “post-money” can get confusing.

- Pre-Money Valuation – This is how much your startup is worth before receiving investment.
- Post-Money Valuation – This is your startup’s value after the investment is added to the equation.

For example, if your startup has a pre-money valuation of $2 million and an angel investor puts in $500,000, your post-money valuation is now $2.5 million. Investors use these numbers to determine how much equity they will receive.

3. Equity & Ownership Percentage

When angels invest, they receive equity—a percentage of ownership in your company. The amount of equity they get depends on the valuation and the amount they invest.

For example, if an investor puts in $250,000 into a startup valued at $2M post-money, they would own 12.5% of the company ($250K ÷ $2M).

4. Convertible Notes & SAFEs (Simple Agreement for Future Equity)

Startups don’t always assign valuations right away. Instead, they use convertible notes or SAFEs (Simple Agreements for Future Equity) to raise funds without immediately determining a valuation.

- Convertible Notes – These are loans that later convert into equity when a future round of funding occurs, usually at a discount.
- SAFEs – Similar to convertible notes but without the debt component—investors give money now in exchange for the right to receive equity later.

Both are common in early-stage funding because they delay the need to set a valuation until the company is more developed.

5. Dilution & Anti-Dilution Protection

Every time you raise money and issue new shares, existing shareholders own a smaller percentage of the company—this is called dilution.

Say you own 40% of your startup, and then you raise new funding that results in more shares being issued. Your ownership percentage shrinks. While dilution is normal, some investors negotiate anti-dilution protection to maintain their ownership percentage if new shares are issued at a lower valuation later.

6. Cap Table (Capitalization Table)

A cap table is like your company’s financial scoreboard—it's a detailed chart of who owns what. It breaks down all shareholders, their ownership percentages, and the total number of shares outstanding.

Having a clean, organized cap table is critical when negotiating with investors. If it’s messy or unclear, it can scare off potential backers.

7. Vesting & Cliff

When you hear the term vesting, think of it as an employee (or founder) slowly earning equity over time instead of all at once.

A typical vesting schedule for founders or employees is 4 years with a 1-year cliff.

- 1-Year Cliff – If someone leaves before 12 months, they get nothing.
- 4-Year Vesting – After the first year, they earn equity gradually, often on a monthly basis.

Vesting ensures that people stick around and contribute to the company before cashing in on their shares.

8. Term Sheet

A term sheet is basically a deal summary. It outlines the terms of an investor’s funding, including valuation, equity percentage, voting rights, and other key details.

While term sheets aren’t legally binding, they set the stage for formal agreements. Always review them carefully before signing, preferably with a lawyer.

9. Liquidation Preference

This term determines who gets paid first if the company is sold or goes under.

For example, if an angel investor has a 1x liquidation preference, it means they get their initial investment back before any remaining money is split among shareholders. Some investors may push for 2x or 3x preferences, meaning they get double or triple their money back before founders see a dime—so always watch out for this!

10. Pro-Rata Rights

Pro-rata rights give investors the right to maintain their ownership percentage by investing in future funding rounds.

Let’s say an angel investor bought 10% of your company. If you raise another round, their pro-rata rights allow them to invest more money to keep that 10% stake instead of getting diluted.

Not all investors demand pro-rata rights, but those who do often want to continue supporting the company beyond the initial investment.

11. Drag-Along & Tag-Along Rights

These are two legal terms that protect different parties in an exit situation.

- Drag-Along Rights – If majority shareholders decide to sell the company, minority shareholders must sell their shares too, preventing small shareholders from blocking major deals.
- Tag-Along Rights – If major shareholders sell their stake, minority shareholders can join the sale under the same terms, ensuring they aren’t left behind.

Both terms help streamline exit strategies and protect both investors and founders.

12. Exit Strategy

Speaking of exits, every investor wants to know how they’ll get their money back. An exit strategy is a plan for how investors will cash out, typically through:

- Acquisition – Another company buys your startup.
- Initial Public Offering (IPO) – Your company goes public on the stock market.
- Secondary Sale – Investors sell their shares to another buyer before an IPO or acquisition.

Remember, angels aren’t just giving you “free money.” They’re expecting a return, and a solid exit strategy reassures them that they’ll eventually get their payday.

13. Due Diligence

Before cutting a check, investors will conduct due diligence—a deep dive into your business, finances, legal documents, and team to ensure everything checks out.

Good preparation speeds up this process. Make sure your financials, cap table, legal documents, and business plan are in order before approaching investors.

14. Bridge Financing

Sometimes, startups need a quick infusion of cash to bridge the gap between major funding rounds.

Bridge financing is often raised through convertible notes or SAFEs, giving companies extra runway until they secure a larger investment.

It’s like grabbing a snack before dinner—you just need something to hold you over until the main course arrives.

15. Burn Rate & Runway

Two critical numbers every investor will ask about:

- Burn Rate – How fast your company is spending money (usually measured monthly).
- Runway – How long your startup can survive based on current expenses and available cash.

For example, if you have $500K in the bank and a burn rate of $50K per month, you have a 10-month runway before running out of cash. Keeping these numbers under control is essential for attracting investors.

Final Thoughts

Angel investment comes with a lot of technical terms, but once you understand them, navigating the fundraising process becomes much easier. Knowing these key concepts will help you negotiate better deals, avoid common pitfalls, and secure the funding you need to grow your business.

At the end of the day, raising investment is as much about building relationships as it is about money. Speak the language, stay transparent, and find investors who truly believe in your vision.

Now, go crush that funding round!