Plain-language definitions for the finance and SaaS terms used across FounderCalc's calculators.
ARR (Annual Recurring Revenue)
The yearly value of a subscription business's recurring revenue, normalized across billing periods.
Annual Recurring Revenue (ARR) is the yearly value of a subscription business's
recurring revenue — the number you'd expect to collect over the next 12 months if no
customers churned and no new ones signed up. It's the standard way SaaS and
subscription businesses talk about scale, because it normalizes revenue across
different billing periods (monthly, annual, multi-year) into one comparable figure.
The formula
ARR = MRR × 12
If a company collects $50,000 in Monthly Recurring Revenue (MRR), its ARR is $600,000.
For customers on annual contracts, ARR is simply the contract value itself — no need
to divide and multiply by 12.
Why ARR matters more than one-time revenue
Investors, especially at seed through Series B, look at ARR growth rate as the primary
health signal for a subscription business — because recurring revenue is predictable
revenue. A company with $1M in ARR growing 100% year-over-year is a fundamentally
different (and usually more valuable) business than one with $1M in one-time sales,
even if both collected the same cash last year.
ARR vs. revenue on a P&L
ARR is not the same as revenue recognized on an income statement under standard
accounting rules (which spreads a $12,000 annual contract across 12 months of
recognized revenue). ARR is a forward-looking operating metric, not a GAAP figure —
it's how the business talks to itself and to investors about run-rate scale.
The total revenue (or profit) a business expects to earn from a customer over the entire relationship.
Customer Lifetime Value (LTV, sometimes CLV) is the total revenue — or, in a more
precise version, total gross profit — a business expects to earn from a single
customer over the entire time they stay a customer.
The simple formula
LTV = Average Revenue Per User / Monthly Churn Rate
A customer paying $100/month with a 5% monthly churn rate has an expected lifetime of
20 months (1 ÷ 5%), so their LTV is $2,000. The lower the churn rate, the longer
customers stick around and the higher their lifetime value.
Why LTV matters
LTV only means something in relation to what it costs to acquire that customer
(Customer Acquisition Cost, or CAC). A healthy subscription business typically targets
an LTV:CAC ratio of 3:1 or higher — meaning each customer is worth at least three times
what it cost to acquire them, leaving enough margin to cover overhead and still profit.
Revenue LTV vs. profit LTV
The formula above gives revenue LTV. A more accurate version multiplies by gross
margin to get profit LTV — the actual money left after delivering the product or
service, which is the number that should really be compared against CAC.
The average yearly value of a single customer contract — how sales and SaaS businesses size individual deals.
Annual Contract Value (ACV) is the average yearly value of a single customer
contract. It's the metric sales teams and SaaS businesses use to size an individual
deal, as opposed to ARR, which sums up all customers' recurring revenue across the
whole business.
The formula
ACV = Total Contract Value / Contract Length in Years
A 3-year contract worth $90,000 total has an ACV of $30,000 — the amount attributable
to a single year of the deal, regardless of how the contract is actually billed.
Why ACV matters
ACV determines a business's go-to-market motion. Low ACV (under ~$5,000/year) usually
means a self-serve or product-led sales motion, since the deal size can't support an
expensive sales process. High ACV (tens of thousands of dollars or more) can support a
dedicated sales team, longer sales cycles, and custom onboarding, because each closed
deal is worth the extra cost.
The direct costs of producing whatever a business sells — materials, direct labor, and production overhead.
Cost of Goods Sold (COGS) is the direct cost of producing whatever a business sells —
raw materials, direct labor, and manufacturing or production overhead. It does not
include indirect costs like marketing, sales salaries, rent, or general administration
— those are operating expenses (OpEx), tracked separately.
For a service or software business without physical inventory, COGS is usually
approximated as the direct cost of delivering the service — e.g. hosting costs and
support staff for a SaaS product, or materials and direct labor for a freelancer's
project.
Why COGS matters
COGS is the input to gross margin — revenue minus COGS, divided by revenue — which is
the single most-watched profitability metric for any product or service business. A
software company with 80%+ gross margin (low COGS relative to revenue) can reinvest
heavily in growth; a business with 20% gross margin has much less room to spend on
anything beyond production.
A SaaS health check: growth rate + profit margin should add up to 40% or more.
The Rule of 40 is a quick SaaS health check popularized by growth-equity investors: a
healthy subscription business's revenue growth rate and profit margin, added together,
should equal 40% or more.
A company growing 60% year-over-year with a -20% margin (still burning cash to fund
growth) scores 40 — healthy. A company growing 10% with a 10% margin scores only 20 —
a warning sign, since it's neither growing fast nor particularly profitable.
Why it works as a single number
Early-stage SaaS companies are expected to burn cash while they grow fast; mature ones
are expected to be profitable even if growth has slowed. The Rule of 40 captures both
situations in one number, so investors can compare a fast-growing, unprofitable
startup against a slower-growing, profitable one on the same scale — instead of
penalizing every company for not being both.
A description of the type of company or customer that gets the most value from a product — and is most likely to buy, renew, and expand.
Ideal Customer Profile (ICP) is a description of the type of company or customer that
gets the most value from a product — and is therefore most likely to buy, stay a
customer, and expand their spend over time. It's usually defined by firmographics
(company size, industry, revenue) and behavioral signals (existing tools they use, the
problem they're trying to solve).
Why ICP matters
A tightly-defined ICP focuses sales and marketing spend on the accounts most likely to
convert and succeed, instead of chasing every lead that shows interest. Deals that fall
outside a company's ICP tend to churn faster, need more support, and expand less —
even if they were easy to close in the first place.
ICP vs. TAM
ICP defines who to target; Total Addressable Market (TAM) estimates how big that
opportunity is. A narrow, well-fitting ICP inside a large market is usually a better
growth engine than a broad ICP that includes customers who churn quickly.
Earnings Before Interest, Taxes, Depreciation, and Amortization — operating profitability with financing and accounting choices stripped out.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It
measures a company's core operating profitability — what it earns from actually
running the business — with the effects of financing decisions (interest), tax
jurisdiction, and non-cash accounting choices (depreciation and amortization) stripped
out.
The formula
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Why investors and buyers use it
Because EBITDA excludes financing and accounting choices that vary company to company
(one business might lease its equipment, another might buy and depreciate it — EBITDA
makes them comparable), it's the standard basis for company valuation multiples in
private equity and M&A. "This company trades at 8× EBITDA" is a common shorthand for
what a business is worth relative to its core operating profit.
EBITDA is not cash flow
A common mistake is treating EBITDA as if it were cash in the bank. It ignores capital
expenditure, changes in working capital, and debt payments — a company can have strong
EBITDA and still run out of cash if it's spending heavily on equipment or growth.
A ledger of who owns what percentage of a company — every shareholder, option holder, and investor, and how new funding rounds dilute them.
A capitalization table (cap table) is a ledger of who owns what percentage of a
company — founders, employees with equity grants, and every investor, across every
funding round. It tracks share counts, share classes (common vs. preferred), and
ownership percentages, and updates every time new shares are issued.
Why it matters
Every time a company raises money, it issues new shares to investors — which dilutes
(reduces the ownership percentage of) everyone who already held shares, even though
the number of shares they personally hold doesn't change. A founder who owns 40%
before a round that issues new shares equal to 20% of the company will own roughly
32% afterward (40% × (1 − 20%)), not 20% less in absolute terms.
Common cap table terms
Fully diluted shares: total shares as if every option, warrant, and convertible
note were exercised or converted — used for calculating true ownership percentages.
Option pool: shares set aside for future employee equity grants, usually created
or topped up right before a funding round (which dilutes existing holders to fund it).
Liquidation preference: a term that determines who gets paid first, and how much,
if the company is sold — typically protects preferred (investor) shareholders.
The percentage of recurring revenue kept from existing customers over a year, including upgrades and downgrades — can exceed 100%.
Net Revenue Retention (NRR) measures the percentage of recurring revenue a business
keeps from its existing customer base over a period (usually a year) — accounting for
churn, downgrades, and upgrades or expansion revenue from the same customers.
Unlike Gross Revenue Retention (GRR), which caps out at 100% because it only measures
what's lost, NRR can exceed 100% if expansion revenue (upsells, seat growth, plan
upgrades) from existing customers outpaces churn and downgrades.
Why NRR above 100% is the SaaS gold standard
A company with 110%+ NRR grows its revenue from existing customers alone, even before
counting any new customer acquisition — which means growth compounds on top of a base
that's already expanding, not just holding steady. Best-in-class SaaS companies target
120%+ NRR; anything below 100% means the existing customer base is shrinking in
revenue terms even if logo churn looks manageable.