5 exercises — burn rate and runway, ARR growth rates, TAM/SAM/SOM market sizing, cap table and dilution, and Series A valuation math.
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A startup CTO is preparing materials for an investor meeting. They say: "We need to show our burn rate, runway, and MRR clearly." A new engineer asks what these three things mean. How would you explain them?
The three investor-critical financial metrics every startup engineer should know:
Burn Rate How much money the company spends per month. • Gross burn = total monthly spending (salaries, servers, rent, marketing) • Net burn = gross burn minus revenue (what you're actually losing per month) • "We're burning $80K/month" = the company spends $80,000 per month
Runway How long until the money runs out: Cash in bank ÷ monthly burn • $800K cash, $80K burn = 10 months of runway • "We have 12 months of runway" = the company has 12 months before needing new funding • Raising a new round typically takes 3-6 months, so <12 months runway = fundraising urgency
MRR (Monthly Recurring Revenue) The predictable monthly income from subscriptions — the engine of SaaS business valuation. • Does NOT include one-time payments, professional services, setup fees • ARR (Annual Recurring Revenue) = MRR × 12 • "We're at $50K MRR" = monthly subscription revenue is $50,000
Why engineers care: Burn rate includes engineering salaries and infrastructure costs. When runway is low, engineering decisions change — technical debt is tolerated less; new hires are frozen; cloud costs are optimised aggressively.
Funding vocabulary primer: • cash flow — money coming in and going out of the business • default alive — if you cut costs to zero growth spending, the company survives on current revenue • default dead — the company will run out of money without raising more • fundraising round — a structured process of raising investment capital
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An investor asks in a pitch meeting: "What's your current ARR and what does your growth curve look like?" The CEO answers: "We're at $600K ARR and growing 15% month-over-month." What does this answer communicate, and is it impressive?
ARR, growth rates, and investor benchmarks:
ARR (Annual Recurring Revenue) = MRR × 12 $600K ARR = $50K MRR — very early stage for most venture-funded companies, but the stage matters: seed-stage $600K ARR is expected; Series A $600K ARR would be a concern.
Month-over-month (MoM) growth compounding: 15% MoM is extraordinary. To illustrate: • 15% MoM for 12 months = MRR multiplies by 1.15¹² ≈ 5.35× • $50K MRR × 5.35 = $267K MRR = ~$3.2M ARR after 12 months • 24 months: ~$17M ARR
T2D3 benchmark: "Triple, Triple, Double, Double, Double" — a rough ARR growth model for top SaaS companies (triple ARR for 2 years, then double for 3 years). Used as a benchmark for "fundable" SaaS growth.
Investor metrics vocabulary: • ARR — Annual Recurring Revenue (MRR × 12) • MoM / YoY — month-over-month / year-over-year growth • hypergrowth — >3× YoY growth; typically VC-funded companies targeting market leadership • growth curve — a visualisation of revenue growth over time (linear, exponential, S-curve) • traction — evidence of market adoption (revenue, users, retention, engagement)
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A VC partner reviews a seed deck and says: "The TAM looks big, but I want to understand the SAM and SOM. What's the realistic addressable market this team can actually capture in 3 years?" What do TAM, SAM, and SOM mean?
TAM / SAM / SOM — market sizing vocabulary investors expect:
TAM (Total Addressable Market) The total global revenue opportunity if you captured 100% of the market. Example: "The global HR software market is $24B TAM." • Investors want TAM to be large (>$1B) — small TAM = small exit potential • Large TAM that's real but remote is still weak; investors look at SAM
SAM (Serviceable Addressable Market) The portion of TAM you can actually reach with your current product and channels. Example: "Our product serves SMBs (small/medium businesses) in English-speaking markets — SAM is $3B." • Defined by: geography, language, industry, product capabilities • Should be large enough to build a significant business
SOM (Serviceable Obtainable Market) The realistic share of SAM you can capture in 3-5 years given your resources, team, and go-to-market strategy. Example: "We expect to capture 1-2% of SAM in 3 years — $30-60M ARR." • Should match financial projections • Unrealistically high SOM = credibility problem with investors
How investors evaluate market sizing slides: • Bottom-up estimate (preferred): "X customers × $Y ACV = addressable revenue" — shows you understand the customer • Top-down estimate (weaker): "1% of a $10B market" — circular; shows nothing about go-to-market
Vocabulary: • GTM (Go-to-Market) — strategy for how you acquire customers (sales, product-led, marketing) • ACV (Annual Contract Value) — annual revenue from one customer • market penetration — percentage of TAM/SAM captured • seed deck / pitch deck — investor presentation (typically 10-15 slides)
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After a Series A closing, a startup engineer hears: "The cap table is getting complex — we need to model the dilution from this round and the option pool expansion." What do cap table and dilution mean?
Cap table and dilution — ownership vocabulary for startup engineers:
Cap Table (Capitalization Table) A spreadsheet/document showing who owns what percentage of the company: • Founders • Angel investors • VC firms (from each round: seed, Series A, B...) • Employee stock option pool (ESOP) Example: Founder A: 35%, Founder B: 35%, Seed investor: 20%, Option pool: 10%
Dilution When new shares are created (for a new investor or for employee options), everyone's existing percentage goes down — even though they still own the same number of shares. Example: You own 35% before Series A. New shares are issued for the Series A investor. Your 35% may become 28% after the round — you were diluted by 7 percentage points. • Dilution is not inherently bad: you own less of a more valuable company • "Anti-dilution protection" is a clause that protects investors from dilution in down rounds
Option pool / ESOP vocabulary: • ESOP (Employee Stock Option Plan) — a pool of shares reserved for employees • vesting — the schedule under which you earn your equity (typical: 4-year vest, 1-year cliff) • cliff — the point at which vesting begins (usually 1 year: you get 25% of shares after 1 year, then monthly) • strike price — the price at which you can buy your options • liquidity event — when you can actually sell shares: acquisition, IPO, or secondary sale • 409A valuation — independent third-party valuation of the company, used to set strike price
Common terms in term sheets: • pre-money valuation — company value before new investment • post-money valuation — company value after new investment • pro rata rights — investor's right to maintain their ownership % in future rounds
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A startup CEO says in an all-hands: "We're raising our Series A — a $10M round at a $40M pre-money valuation. The lead investor is taking a 20% stake." Is the math correct, and what does it mean for the team?
Funding round math — how investors and founders calculate stakes:
The formula: • Post-money valuation = Pre-money valuation + new investment • Investor stake = new investment ÷ post-money valuation
What this means for the team: • The company is valued at $50M after the round closes • Existing shareholders keep 80% of a $50M company = $40M worth (matching the pre-money) • If the company exits for $100M: lead investor gets $20M; existing shareholders share $80M • The founders' original equity is diluted — they now own a smaller percentage of a more valuable company
Funding stages vocabulary: • Pre-seed / Friends & Family — first money in; usually $50K-$500K from angels or founders themselves • Seed — $500K-$3M; product validation, team building • Series A — $5-15M; proven product, initial growth, scaling team • Series B — $15-50M; accelerate growth, enter new markets • Series C+ — $50M+; mature company, pre-IPO expansion • Bridge round — small round to extend runway while preparing a larger raise • Lead investor — the largest investor in a round who sets the terms and often joins the board • term sheet — a non-binding agreement outlining the key terms of an investment • due diligence — investor's investigation of the company before committing (code review, financials, legal)