15 common misconceptions about terminology in the startup sector

As a lawyer who advises many start-ups and young entrepreneurs, I often come across errors in the use of technical terms. Here are 15 typical examples that are often misunderstood or misused:

Company vs. company

The term “company” is often used as a synonym for “enterprise”. In fact, however, the company is only the official name under which a company is entered in the commercial register and operates. The company itself is the economic and organizational unit that carries out business activities. The company is, so to speak, the figurehead of the company, while the enterprise comprises the organization behind it with all its resources and activities. Every company needs a company, but not every company necessarily has to correspond to an enterprise. For example, an entrepreneur can have several companies under which he operates on the market. Conversely, a company cannot exist without an associated company. It is also interesting to note that many self-employed people or partners in a GbR often talk about their “company”, although strictly speaking they cannot have a company at all. This is because a company requires registration in the commercial register, which is only the case for merchants or certain types of company such as a GmbH or AG. Freelancers or GbRs can have a company name, but not a company in the legal sense.

Managing director vs. board of directors

In a GmbH there are managing directors, in an AG there is a management board. Although both are legal representatives of the company, they have different rights and duties. For example, the management board is independent of instructions, while managing directors may be bound by instructions from the shareholders’ meeting. The liability rules also differ: Management boards are only personally liable in cases of intent or gross negligence, whereas managing directors can also be held liable for simple negligence. On the other hand, the appointment and dismissal of managing directors is simpler than for board members. While managing directors can be dismissed at any time and without giving reasons, this is only possible for board members for good cause. There is a further difference in terms of remuneration: Management Board members are entitled to “appropriate” remuneration, whereas the remuneration of managing directors is freely negotiable. Pensions are also often more generously regulated for board members. Unlike managing directors, board members can be shareholders in the company, but must observe special rules such as reporting obligations and trading bans.

Prokura vs. power of attorney

A power of attorney gives a person comprehensive power of representation for all of the company’s ordinary transactions. A power of attorney, on the other hand, is usually limited to certain business areas or branches. In addition, a prokura must be entered in the commercial register, whereas a power of attorney does not. The authorized signatory can therefore represent the company externally almost like a managing director, whereas an authorized agent may only act within their defined area. However, the power of attorney can also contain certain restrictions, e.g. a ban on real estate transactions. The power of attorney can also be revoked at any time. It expires automatically when the authorized signatory leaves the company. However, the power of attorney can also be granted for a limited period of time and does not necessarily have to be linked to an employment relationship. A special form of power of attorney is the joint power of attorney, in which two or more persons are only authorized to represent the company jointly. This is intended to provide additional control and security, but also restricts flexibility.

Share capital vs. equity capital

The share capital is the amount that the shareholders must pay in when a GmbH is founded. It is part of the equity capital, which also includes other items such as retained earnings. The share capital serves as a liability fund for creditors, while the total equity shows the economic strength of the company. The amount of share capital is prescribed by law and is at least EUR 25,000. However, it can also be set higher. Equity capital, on the other hand, is constantly changing due to profits, losses and withdrawals. It is an important indicator of a company’s creditworthiness and credit standing. The higher the equity ratio, the better the financing structure usually is. However, it should be noted that the equity shown in the balance sheet does not always correspond to the capital actually available. Hidden reserves or intangible assets are often not fully reflected. Conversely, a company can get into difficulties despite having a high level of equity if it does not have sufficient liquid funds. It is therefore important for start-ups to ensure sufficient liquidity in addition to share capital, e.g. through investors or bank loans.

Turnover vs. profit

Turnover is the sum of all income from sales and services. However, it says nothing about whether the company is profitable. You have to deduct expenses and taxes to determine the profit. Although high turnover is impressive, it is worthless in the long term without sufficient profits. Many start-ups make the mistake of focusing too much on sales growth and losing sight of costs. However, a company can only grow sustainably if the profit margins are right. It should be noted that there are different profit concepts: From gross profit to operating profit to net profit. The decisive factor is ultimately what remains at the bottom line. Cash flow is also important, i.e. the inflow of liquid funds. After all, profits on paper are of little use if the money is not actually available, e.g. because customers pay late. Start-ups should therefore not only keep an eye on sales and profit development, but also on liquidity planning. This is the only way to ensure solvency and avoid insolvency.

Participation vs. partnership

The terms participation and partnership are often used interchangeably, but there are important differences. A shareholding means that you hold shares in a company and are therefore a co-partner. Depending on the size of the shareholding, you have certain voting and control rights. A partnership, on the other hand, is a contractual cooperation between two or more parties without a joint company being formed. These can be strategic alliances, joint ventures or distribution partnerships, for example. Here, the partners remain legally and economically independent, but work closely together in certain areas. Partnerships are more flexible than shareholdings, but also less binding. They are particularly suitable for projects that are limited in terms of time or content, while participations are designed for long-term cooperation. However, there are also mixed forms such as silent partnerships or profit-participating loans. Here, the investor receives a share of the profits but does not have a stake in the company itself. Both equity investments and partnerships can be interesting for start-ups, depending on the objectives and financing requirements. A clear contractual regulation of rights and obligations is important.

Founder vs. shareholder

The terms founder and shareholder are often equated, but there are also differences here. Founders are the people who bring a company to life and build it up. They develop the business idea, create the business plan and drive its implementation. Shareholders, on the other hand, are the owners of the company who hold shares and thus provide capital. In the start-up phase, founders are often also shareholders, but this does not always have to be the case. On the one hand, founders can sell all or part of their shares, e.g. to investors. On the other hand, new shareholders who were not involved in the start-up can be taken on. Conversely, founders can also withdraw from the operating business but continue to hold shares. One example is the so-called “shadow founders”, who are significantly involved in the development of the company but do not appear publicly. Succession arrangements or takeovers can also lead to a decoupling of founders and shareholders. It can be very important for the public image of a start-up that the founders remain on board, even if they no longer hold the majority of shares. This is because they represent the identity and values of the company.

Pitch deck vs. business plan

The pitch deck and the business plan are both important documents for start-ups, but fulfill different purposes. The pitch deck is a short presentation, usually in the form of slides, which summarizes the key points of the business model. It serves to quickly convince potential investors or partners and arouse their interest. It is therefore very visual and focuses on the unique selling points and market potential. The business plan, on the other hand, is a comprehensive document that describes all aspects of the company in detail: From the business idea to the market and competitive analysis to the financial plan and risk factors. It serves as a roadmap for implementation and is important for raising capital and managing the company. While the pitch deck has a more promotional character, the business plan is a sober analysis of the business model. Ideally, both documents complement each other: The pitch deck arouses interest, the business plan provides the details. However, it does not always make sense to disclose the complete business plan, e.g. to competitors. In this case, a light version or an executive summary may be sufficient. The target group is also different: the pitch deck is aimed at a broader audience, while the business plan is aimed more at experts such as investors or banks.

Vesting vs. Cliff

Vesting and cliff are terms that play an important role in the participation of employees and founders in start-ups. Vesting means that the shares are not transferred in full immediately, but over a certain period of time. This is intended to ensure that those involved remain committed to the company in the long term. A typical vesting period is four years, with the shares being transferred in equal steps each year. The cliff is a blocking period at the beginning of the vesting period during which no shares are transferred. The actual transfer only begins once the cliff has been exceeded. A typical cliff is twelve months. This is intended to prevent participants from leaving the company early and still taking shares with them. Vesting and cliff thus ensure a fair distribution of shares and an alignment of interests between the company and those involved. However, the regulations can be very complex in individual cases, e.g. when it comes to the valuation of shares or tax treatment. The question of what happens in the event of premature departure or termination must also be clarified. There are various models here, such as the repurchase of shares or the forfeiture of shares that have not yet been transferred (reverse vesting). In any case, the vesting conditions should be set out in writing and understood and accepted by all parties involved.

Scaling vs. growth

Scaling and growth are often used interchangeably but refer to different concepts. Growth means that a company increases its sales and profits by deploying more resources and expanding its activities. This can be done, for example, by hiring additional employees, opening up new markets or expanding the product portfolio. Scaling, on the other hand, means that a company increases its turnover disproportionately to the resources deployed. In other words, it achieves growth without

the costs grow at the same rate. Scaling requires a scalable business model in which the variable costs are low and the marginal costs fall as the output volume increases. Examples include software-as-a-service or platform models. While growth is therefore more quantitatively oriented, scaling aims to improve the quality of the business model. Growth can also be achieved through scaling, but not all growth is automatically scalable. The levers in the business model that enable a disproportionate increase in turnover and profit are decisive. These include, for example, network effects, automation or self-service components. Start-ups should therefore pay attention to scalability from the outset and align their business model accordingly. This is the only way to achieve high valuations and a successful exit.

Venture capital vs. private equity

Venture capital and private equity are both forms of equity financing, but differ in their focus and target group. Venture capital refers to the financing of young, innovative companies with high growth potential, but also high risk. Investors provide equity capital and receive shares in the company in return. They support the start-up not only financially, but also with know-how and networks. The aim is a successful exit, e.g. through an IPO or a takeover. Private equity, on the other hand, refers to investments in established, often medium-sized companies. The focus here is less on growth and more on increasing value, e.g. through restructuring or expansion. Investors usually have a longer investment horizon and aim to achieve a return by selling their shares. In contrast to venture capital, financing is often provided through debt capital, e.g. in the form of leveraged buyouts. Venture capital is the more suitable form of financing for start-ups, as they generally do not yet have any collateral or stable cash flows. However, competition for venture capital is fierce and the requirements for the business model and growth potential are high.

Burn rate vs. runway

The burn rate and runway are important key figures for start-ups to assess their liquidity and viability. The burn rate describes the speed at which a startup uses up its financial resources. It results from the difference between monthly income and expenditure. A high burn rate means that the company is losing money quickly and will soon need new capital. The runway, on the other hand, refers to the period for which the available funds are still sufficient to cover the burn rate. It results from the ratio of available capital to the burn rate. A long runway means that the startup still has a good financial reach and can concentrate on its business. Both key figures are closely linked: The higher the burn rate, the shorter the runway. Startups should therefore keep a close eye on their burn rate and optimize it by controlling costs and increasing sales. At the same time, it is important to extend the runway through forward-looking financing rounds. Because if the money runs out, there is a risk of insolvency or emergency financing on poor terms. A healthy burn rate and a sufficient runway are also important signals for investors that the startup has its finances under control.

Bootstrapping vs. fundraising

Bootstrapping and fundraising are two contrasting approaches to financing start-ups. In bootstrapping, the founders largely do without external investors and finance themselves from their own funds or current income. This can be through savings, side jobs or initial sales. The advantage is that the founders retain full control over their company and do not have to give up any shares. The disadvantage is that growth is usually slower and large investments are difficult. Fundraising, on the other hand, refers to the active search for external investors, whether through venture capital, business angels or crowdfunding. Large sums of money can be raised quickly to accelerate growth or open up new markets. However, shares must be given up and co-determination rights granted. Expectations regarding returns and exit times are also often high. Which approach is the right one depends on the business model, market dynamics and the founders’ goals. Some start-ups rely on a mixture of bootstrapping and fundraising by initially launching self-financed and later bringing targeted investors on board. In any case, careful financial planning and control is essential.

MVP vs. PoC

MVP and PoC are both concepts from the lean startup methodology for testing business ideas quickly and cost-effectively. MVP stands for “Minimum Viable Product” and refers to the first, still incomplete version of a product that is just sufficient to demonstrate the key functions and obtain customer feedback. The aim is to find out with minimal effort whether the product has a market and which features are really needed. This helps to avoid costly undesirable developments and improve the product iteratively. PoC, on the other hand, stands for “Proof of Concept” and refers to an even earlier step in the development process. The aim here is to prove the fundamental feasibility of an idea or technology without already having a concrete product. This can be done using prototypes, simulations or theoretical considerations. A PoC is the preliminary stage to an MVP, so to speak, and serves to minimize the technical and economic risk before major investments are made. Both concepts are important for start-ups to validate their ideas and use their resources efficiently. However, they also require a certain amount of discipline and focus in order to avoid getting bogged down in detail or getting bogged down.

Pivot vs. Persevere

Pivot and persevere are two options for start-ups when they realize that their original business model is not working or the hoped-for success is not materializing. Pivot means that the startup fundamentally changes its strategy and realigns itself. This may mean targeting a new market, solving a different problem or developing a completely new product. The pivot often requires a radical change to the business model and internal processes, but can also open up new opportunities. Persevere, on the other hand, means that the startup sticks to its original strategy and tries to achieve success after all by making adjustments and optimizations. This can make sense if the basic problem has been recognized and the solution is fundamentally correct, but has not yet been implemented perfectly. However, there is also a risk of holding on to a lost cause for too long and wasting valuable time and resources. The decision between pivot and persevere is often one of the most difficult for start-ups and requires an honest analysis of the situation and the chances of success. Key figures such as customer satisfaction, retention rate or conversion rate, as well as feedback from mentors and investors, can help. Ultimately, every startup has to find its own path and the right balance between perseverance and adaptability.

Of course, there are many other terms that are often misused or misunderstood in the startup context. However, the 15 examples presented here are intended to provide a good overview of the most important concepts and pitfalls. As a startup, you should familiarize yourself with the correct terminology at an early stage in order to present yourself professionally and avoid misunderstandings. At the same time, it is also important not to get lost in terminology, but to keep the focus on the essentials: The development of a convincing product, the acquisition of customers and the establishment of a viable business model. After all, it is not theory but practice that ultimately determines the success of a start-up.

Author: Marian Härtel

Marian Härtel ist Rechtsanwalt und Fachanwalt für IT-Recht mit einer über 25-jährigen Erfahrung als Unternehmer und Berater in den Bereichen Games, E-Sport, Blockchain, SaaS und Künstliche Intelligenz. Seine Beratungsschwerpunkte umfassen neben dem IT-Recht insbesondere das Urheberrecht, Medienrecht sowie Wettbewerbsrecht. Er betreut schwerpunktmäßig Start-ups, Agenturen und Influencer, die er in strategischen Fragen, komplexen Vertragsangelegenheiten sowie bei Investitionsprojekten begleitet. Dabei zeichnet sich seine Beratung durch einen interdisziplinären Ansatz aus, der juristische Expertise und langjährige unternehmerische Erfahrung miteinander verbindet. Ziel seiner Tätigkeit ist stets, Mandanten praxisorientierte Lösungen anzubieten und rechtlich fundierte Unterstützung bei der Umsetzung innovativer Geschäftsmodelle zu gewährleisten.