Private Market Key Terms & Concepts for Investors
Investing in private markets, whether through pre-IPO deals, venture funds, or early-stage startups, can be incredibly rewarding, but it comes with its own unique language. Terms like SPVs, cap tables, and carried interest aren’t just jargon; they represent concepts that directly impact your investment decisions, potential returns, and risk management.
Whether you’re new to private investing or looking to deepen your knowledge, understanding these key terms is essential for making informed, confident decisions.
In this post, we break down the private market key terms and concepts every private market investor should know.
1. Investor Eligibility & Readiness
Accredited Investor – An individual who meets SEC-defined income ($200K+ annually, $300K+ if married) or net worth ($1M+ excluding primary residence) requirements. This designation unlocks access to private investments that are not available to the general public.
Qualified Client – A higher-tier investor qualification, requiring $2.2M+ net worth (excluding home) or $1.1M+ in assets under management. Only Qualified Clients can access funds that charge performance-based fees, giving them entry to more sophisticated investment strategies.
Investable Assets – The total financial resources available to deploy in investments, including cash, brokerage accounts, vested equity, and retirement accounts. Helps determine how much risk an investor can reasonably take.
(Checking + savings + brokerage + vested equity + retirement accounts)
Liquid Assets – The portion of investable assets that can be quickly accessed, after subtracting retirement accounts and a 3–6 month emergency fund. Crucial for ensuring investors can commit to illiquid opportunities without jeopardizing their financial security.
Savings Ability – A measure of how quickly an investor can replenish deployed capital from ongoing income. Strong savings ability indicates a higher capacity to take on long-term or illiquid investments. Strong savings ability is a household that can recoup the invested amount within six months, Neutral is 1+ year to recoup, and Negative would mean their current active income is less than current expenses.
2. Startup Funding Stages & Investment Types
Angel Investing – Early-stage funding provided to startups, often before the company has proven product-market fit. While high-risk, angel investments offer the potential for outsized returns if the company succeeds.
Seed Stage – The first formal round of funding for a startup, intended to support product development, hiring, and initial go-to-market efforts. Critical for turning ideas into viable businesses.
Venture Capital (VC) – Equity financing provided by venture capital firms to early-stage, high-growth companies. VCs provide capital in exchange for ownership and often take an active role in strategy, governance, and scaling.
Follow-On Investment – Additional capital invested in a startup during later funding rounds to maintain ownership percentage or capitalize on growth. Helps investors increase exposure to high-performing companies.
Late-Stage Investing – Investing in mature startups that are generating revenue and approaching IPO or acquisition. Typically lower risk than early-stage investments, but with less potential upside.
Pre-IPO Investing – Purchasing shares in a private company shortly before it goes public. Pre-IPO investing can provide access at lower valuations than IPO pricing but carries risks due to limited liquidity, transparency, and oversight.
Initial Public Offering (IPO) – The first sale of company shares on a public exchange, creating liquidity for early investors and marking a company’s transition to the public markets.
By investing in pre-IPO companies, qualified investors purchase shares of privately held stock before it becomes publicly traded (IPO) in the stock market. Since there are financial thresholds that buyers have to achieve to qualify for secondary market transactions, the hope is that an investor can buy into a promising company before the rest of the market has the same opportunity to buy, thus creating a potentially outsized return when the company does go public.
3. Structures & Fund Management
SPV (Special Purpose Vehicle) – A legal entity created to pool investor capital into a specific opportunity, often a single pre-IPO company. SPVs isolate risk and give investors targeted exposure while limiting broader liabilities.
Fund Administrator – A third-party firm responsible for managing investor records, distributions, legal compliance, and tax reporting (e.g., K-1s). Ensures transparency and operational efficiency for the fund.
Carried Interest (“Carry”) – The percentage of profits that fund managers receive as compensation for performance. Aligns manager incentives with investor returns.
Management Fee – The annual fee charged to operate and maintain a fund, typically around 2%, often prepaid for multiple years. Covers administrative and operational costs.
4. Ownership & Valuation
Cap Table (Capitalization Table) – A detailed record of a company’s ownership structure, including founders, investors, and stock option holders. Essential for understanding dilution and how funding rounds impact ownership.
Valuation – The assigned monetary worth of a company at a specific funding round. Determines how much equity an investor receives for their capital and sets expectations for future returns.
6. Risk & Return Principles
Diversification – The practice of spreading investments across multiple companies to reduce overall risk. In venture, most returns come from a small number of “home run” investments.
Power Law – The principle that a few successful investments generate the majority of a fund’s returns. Recognizing this helps investors set realistic expectations.
Due Diligence – The comprehensive evaluation of a company’s financials, team, product, and market traction before investing. Protects investors by identifying risks and opportunities.
7. Taxes & Reporting
K-1 Tax Form – Annual tax form issued to investors in partnerships or funds, detailing income, losses, and distributions. A timely review is critical for tax planning, as K-1s may be delayed.
Final Thoughts
Mastering these private market key terms is more than an academic exercise; it equips you to confidently navigate private markets, identify high-potential opportunities, and understand the structure and mechanics behind your investments. By familiarizing yourself with investor qualifications, funding stages, fund structures, liquidity events, and risk principles, you’ll be better positioned to make strategic investment choices.
DISCLOSURES
DiversiFi Capital LLC is a registered investment adviser located in CA and may only transact business or render personalized investment advice in those states and international jurisdictions where we are registered, notice filed, or where we qualify for an exemption or exclusion from registration requirements. Any communications with prospective clients residing in jurisdictions where DiversiFi Capital LLC is not registered or licensed shall be limited so as not to trigger registration or licensing requirements.
Past performance is not indicative of future returns, and investing always carries inherent risks, including the potential loss of principal capital. Any investment strategies are specific to individual clients and may not be representative of the experiences of all clients.
Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed.