Fundraising
Fundraising is the process of selling part of your company to people who expect it to be worth much more later. The mechanics are a specialized vocabulary that investors use fluently and most first-time founders meet for the first time in the room, which is not where you want to learn it. The concepts here cover instruments, stages, terms, and the parts of a deal that decide what you actually own at the end.
36 concepts in Fundraising
- Pre-Seed, Seed, and Series AThe named stages of early venture financing, distinguished not by dollar amount but by what the company has proven and what the round is meant to buy.
- SAFEs and Convertible NotesTwo instruments that let an investor put money in now and receive equity later, at a price set when a future priced round happens, instead of negotiating a valuation today.
- Valuation Cap and DiscountThe two mechanisms that determine how favorably an early investor's SAFE or note converts into equity relative to the price new investors pay in the priced round that triggers conversion.
- DilutionThe reduction in each existing shareholder's percentage ownership that happens whenever a company issues new shares, whether from a new financing round or a new option pool.
- Cap TableThe authoritative record of who owns what in a company, every founder, investor, and option holder, with share counts, security type, and percentage ownership.
- Lead Investor and the Term SheetThe lead investor is the firm that sets the terms of a round and typically writes its largest check; the term sheet is the document in which they propose those terms before legal work begins.
- Investor UpdateA regular, concise written report a founder sends to their investors covering key metrics, progress, and specific asks, independent of whether a board meeting is happening.
- Bridge RoundA smaller, faster round, usually structured as a SAFE or convertible note, raised to extend a company's runway to the next milestone or the next full round, rather than to fund years of growth.
- Down RoundA financing round priced at a lower valuation than the company's previous round, which dilutes existing shareholders more heavily than a flat or up round would.
- Pro-Rata RightsA contractual right letting an existing investor invest additional money in a future round to maintain their current percentage ownership, rather than being diluted by new investors alone.
- Founder StoryThe account of why this team is the one to build this, told as the sequence of things you learned that most people do not know, not as a résumé.
- Pitch DeckThe short document a founder uses to take an investor from "who are you" to "let's book the next meeting", ordered by the questions investors ask, not by what the founder finds most interesting.
- Market TimingThe argument that something specific changed recently (in technology, regulation, cost, or behaviour) that makes this business possible or necessary now, when the same idea would have failed three years ago.
- TractionThe evidence that people actually want what you built, in whatever form your stage makes available, from signed design partners to revenue that renews without a conversation.
- Round SizingHow much you raise, chosen as the amount that buys enough time to reach the next milestone that changes what you can prove, and stated in the pitch alongside what it buys.
- Venture Fund MathA venture fund has to return the whole fund from a small number of very large outcomes, which is why an investor can believe your company will succeed and still decline to invest.
- Warm IntroductionAn introduction to an investor made by someone whose judgment that investor already trusts, which is why it converts at a rate cold outreach rarely matches.
- Fundraising ProcessTreating a raise as a time-boxed process (conversations started in parallel, tracked like a sales pipeline, aimed at a target close) rather than as a series of unrelated meetings.
- Partner MeetingThe internal meeting where a venture firm actually decides, and the point at which the partner who likes you has to argue the deal to their colleagues without you in the room.
- Investor ObjectionsThe two or three specific reasons a given investor will not do the deal, which exist whether or not anyone says them out loud, and which are usually the same two or three across a whole raise.
- Liquidation PreferenceA term giving preferred shareholders (investors) the right to be paid a specified multiple of their investment back before common shareholders (founders and employees) receive anything from a sale or liquidation.
- Board Observer SeatA right, usually negotiated by an investor, to attend and receive materials for board meetings without holding a vote or fiduciary duty as a director.
- Anti-Dilution ProtectionA term sheet provision that automatically adjusts an existing investor's conversion price, effectively giving them more shares, if the company later raises a round at a lower valuation than the one they invested at, protecting them from dilution caused specifically by a down round.
- Protective ProvisionsA list of specific company actions (raising more money, selling the company, changing the size of the option pool, taking on debt above a threshold) that require the separate approval of preferred shareholders (investors) as a class, beyond ordinary board or common-stockholder approval.
- Conversion RightsThe right, held by preferred shareholders, to convert their preferred stock into common stock (either voluntarily at any time, or automatically upon a qualifying event like an IPO) at a ratio set in the financing documents.
- Redemption RightsA provision letting preferred shareholders force the company to repurchase their shares, usually at their original purchase price plus a return, after a set number of years, typically five or more, if no liquidity event has happened by then.
- Right of First Refusal (ROFR)A right, typically held by the company and sometimes by existing investors, to purchase a shareholder's stock on the same terms before that shareholder can sell it to an outside third party.
- Information RightsA contractual right, typically granted to investors above a minimum ownership threshold, to receive the company's financial statements and other specified information on a regular basis, independent of whether that investor holds a board seat.
- Investor Rights Agreement (IRA)One of the core financing documents in a priced round that bundles an investor's ongoing rights (information rights, pro-rata rights, and registration rights for a future IPO) into a single agreement separate from the stock purchase itself.
- Warrant CoverageA right, commonly attached to venture debt and sometimes to bridge financings, letting the lender or investor purchase additional company stock at a fixed price within a set period, separate from and in addition to the debt or equity they are already receiving.
- Most Favored Nation (MFN) ClauseA provision, common in bridge financings and early SAFEs, giving an investor the right to automatically upgrade to better terms if the company later gives a subsequent investor in the same round more favorable terms.
- Deemed Liquidation EventA contractual definition, in the certificate of incorporation, of which corporate events beyond an actual dissolution trigger payout of the liquidation preference, typically a merger, an acquisition, or a sale of substantially all the company's assets.
- Legal Fee Caps in FinancingA negotiated ceiling on the amount the company will reimburse the investor's law firm for its work on a financing round, agreed in the term sheet before legal work begins, protecting the company from an open-ended legal bill that eats into the actual proceeds raised.
- Secondary SaleThe sale of already-issued shares from an existing shareholder (a founder, early employee, or early investor) to a new or existing investor, with the proceeds going to that shareholder rather than to the company as new capital.
- Tender Offer (Employee Liquidity Program)A structured, company-organized process letting a broad group of current and former employees sell a portion of their vested shares to an investor at a set price and window, rather than each employee separately negotiating an individual secondary sale.
- Side LetterA separate, often confidential agreement between the company and a single investor that grants that investor additional or different rights beyond what is in the main financing documents everyone else in the round signs.
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