I’ve fundraised a lot. Tactically, fundraising is a skill like any other. You get better the more you do it. But practicing gets you nowhere if you don’t have a strong foundation in understanding a fundraising round’s core components.
As a founder, you will understand less than investors when it comes to fundraising. For investors, negotiating with founders is their full-time job. For founders, fundraising is just a small part of building a business. Understanding the basics of venture financing can help founders raise on better terms.
We’ll cover:
- How financing works: SAFEs versus equity rounds.
- How much to raise.
- How to arrive at your valuation.
How financing works: SAFEs versus equity rounds
As a founder, you will understand less than investors when it comes to fundraising.
Venture financing takes place in rounds. The first stage is the pre-seed or seed round, then a Series A, then a Series B, then a Series C and so on. You can continue to raise funding until the company is profitable, gets acquired or goes public.
We will focus here on seed-stage funding — your very first funding round.
SAFEs
Post-money SAFEs are the most common way to raise funding. These documents are used by Y Combinator, angel investors and most early-stage funds. You should raise on post-money SAFEs using standard documents created by YC. Standard documents have consistent terms that have been drafted to be fair to both investors and founders.
By using the standard post-money SAFE, your negotiation can focus on the two terms that matter:
- Principal: The amount you want to raise per investor.
- Valuation cap: The value of your business.
EQUITY ROUNDS
A startup with a brilliant business idea is aiming to get its operations up and running. From humble beginnings, the company proves the worthiness of its model and products, steadily growing thanks to the generosity of friends, family and the founders’ own financial resources. Over time, its customer base begins to grow, and the business begins to expand its operations and its aims. Before long, the company has risen through the ranks of its competitors to become highly valued, opening the possibilities for future expansion to include new offices, employees and even an initial public offering (IPO).
If the early stages of the hypothetical business detailed above seem too good to be true, it’s because they generally are. While there are a very small number of fortunate companies that grow according to the model described above (and with little or no “outside” help), the large majority of successful startups have engaged in many efforts to raise capital through rounds of external funding. These funding rounds provide outside investors the opportunity to invest cash in a growing company in exchange for equity, or partial ownership of that company. When you hear discussions of Series A, Series B and Series C funding rounds, these terms are referring to this process of growing a business through outside investment.
