Financing Rounds Guide
Estimated Reading Time: 20 minutes
Types of Financing Rounds
Understanding the different stages of startup funding and what investors expect at each stage.
Pre-Seed & Seed
Typical Range: $50K - $2M
Investors: Founders, friends, family, angels, micro VCs
Purpose: Prove product-market fit, build initial team
Valuation: $1M - $10M pre-money
Key Terms:
- Simple structures (SAFE, convertible notes)
- Minimal liquidation preferences
- Basic anti-dilution protection
- Board observer rights
Series A
Typical Range: $2M - $15M
Investors: VCs, strategic investors
Purpose: Scale proven business model
Valuation: $10M - $50M pre-money
Key Terms:
- Preferred stock with liquidation preference
- Anti-dilution protection (weighted average)
- Board seats for investors
- Protective provisions
Series B & Beyond
Typical Range: $10M - $100M+
Investors: Growth VCs, late-stage funds
Purpose: Market expansion, new products
Valuation: $50M - $1B+ pre-money
Key Terms:
- Senior preferred stock
- Participating liquidation preferences
- Ratchet anti-dilution (sometimes)
- Complex board composition
Bridge & Down Rounds
Typical Range: Varies widely
Investors: Existing investors, new investors
Purpose: Extension, turnaround funding
Valuation: Flat or lower than previous
Key Terms:
- Heavy anti-dilution protection
- Pay-to-play provisions
- Increased investor control
- Potential recapitalization
Understanding Valuation: Pre-Money vs Post-Money
Valuation is crucial for determining how much equity you give up in each round.
Key Definitions:
- Pre-Money Valuation: Company value before investment
- Post-Money Valuation: Company value after investment
- Investment Amount: How much investors put in
Formula
Post-Money = Pre-Money + Investment
Investor % = Investment ÷ Post-Money
Example Calculation
Pre-Money: $8M
Investment: $2M
Post-Money: $10M
Investor %: 20%
| Round | Pre-Money | Investment | Post-Money | Investor % | Founder % |
|---|---|---|---|---|---|
| Founding | $0 | $0 | $0 | 0% | 100% |
| Seed | $3M | $1M | $4M | 25% | 75% |
| Series A | $8M | $4M | $12M | 33.3% | 50% |
| Series B | $20M | $10M | $30M | 33.3% | 33.3% |
How to Model Financing Rounds in Model My Exit
Follow these steps to create accurate financing round models:
Set Up Base Case
- Enter current cap table with all stakeholders
- Include all issued shares and option pools
- Verify vesting schedules are accurate
- Document current valuation assumptions
Create Financing Scenario
- Navigate to "Scenarios" section
- Click "New Financing Round"
- Select round type (Seed, Series A, etc.)
- Enter investment terms
Input Key Terms
- Investment Amount: Total funding raised
- Pre-Money Valuation: Company value before investment
- Liquidation Preference: 1x, 2x, participating, etc.
- Anti-Dilution: Weighted average, ratchet, or none
- Option Pool: Increase before or after round
Review Results
- Check dilution impact on all stakeholders
- Verify investor ownership percentage
- Review liquidation waterfalls
- Export scenarios for investor presentations
Pro Tip
Create multiple scenarios with different valuations and terms to understand the range of possible outcomes. This helps in negotiations and decision-making.
Key Terms and Structures
Liquidation Preferences
1x Non-Participating: Get money back first, then participate in remaining proceeds pro-rata
1x Participating: Get money back first, then participate in all remaining proceeds
2x Non-Participating: Get 2x money back, then participate pro-rata
Anti-Dilution Protection
Weighted Average: Adjustment based on price and amount of down round
Full Ratchet: Conversion price drops to new round price
No Protection: No adjustment for down rounds
Option Pool
Pre-Money Pool: Dilutes founders and existing shareholders
Post-Money Pool: Dilutes investors too
Board Composition
Early Stage: 2 founders, 1 investor
Growth Stage: Equal representation
Late Stage: Investor majority possible
Understanding Dilution Impact
Dilution analysis helps you understand how each financing round affects existing shareholders.
| Stakeholder | Pre-Series A | Series A Investment | Post-Series A | Dilution |
|---|---|---|---|---|
| Founder 1 | 40.0% | - | 28.0% | -12.0% |
| Founder 2 | 30.0% | - | 21.0% | -9.0% |
| Employee Pool | 20.0% | +5.0% | 17.5% | +2.5% |
| Seed Investors | 10.0% | - | 7.0% | -3.0% |
| Series A Investors | 0.0% | $4M | 26.5% | +26.5% |
Key Insights
- All existing shareholders get diluted
- Option pool expansion adds to dilution
- Higher valuation = less dilution
- Series A investor gets 26.5% for $4M
Value Creation
Despite dilution, if the company's value increases, everyone's stake becomes more valuable:
Example: 28% of $12M > 40% of $4M
Financing Round Best Practices
Planning & Strategy
- Model multiple scenarios before fundraising
- Understand the full term sheet, not just valuation
- Plan 18-24 months of runway
- Consider strategic vs. financial investors
- Keep enough option pool for key hires
- Time your raise with business milestones
Stakeholder Management
- Communicate dilution impact to team
- Get existing investor input early
- Plan for anti-dilution triggers
- Document all agreements properly
Common Pitfalls
- Focusing only on valuation, ignoring terms
- Not modeling dilution through exit
- Underestimating legal and transaction costs
- Giving up too much control too early
- Not negotiating liquidation preferences
- Ignoring future round implications
Key Metrics to Track
- Ownership dilution per round
- Liquidation preference stack
- Option pool availability
- Board control percentage
Ready to Model Your Financing Round?
Use Model My Exit to create detailed financing scenarios and understand the impact on all stakeholders.
What You Can Model:
- Multiple Scenarios: Compare different valuations and terms
- Dilution Analysis: See impact on each stakeholder
- Liquidation Waterfalls: Understand exit proceeds distribution
- Option Pool Planning: Model different pool sizes and timing
- Anti-Dilution Impact: See effects of down rounds