A priced round is a financing in which a new lead investor offers to buy company shares at a negotiated price. That price implies a valuation, and other investors can join on the same terms. It is also called a preferred stock financing or priced equity round. section 6.1 section 20.1.2
The practical change is that fundraising becomes more formal. Rather than postponing valuation through convertible notes, the company creates and sells a new preferred-share class at a fixed price per share. Founders and employees generally hold common stock; the new preferred shares carry rights that common stock does not. section 10.3 section 6.1
A priced round usually has a recognizable sequence:
- Find a lead investor willing to set the share price and proposed terms; the lead is often the largest investor. section 6.1
- Review the term sheet, which records the proposed price and key terms for prospective investors. section 6.1 section 11.1.1
- Complete due diligence and definitive legal documents before closing. section 11.1.1
- Update the cap table after issuing new shares; existing common holders own a smaller percentage of the company. section 10.3 section 10.2
Price matters, but it is not the whole deal. A term sheet can also define the security being purchased, the pre-money valuation, liquidation preference, protective provisions, conversion, anti-dilution provisions, and future participation rights. These terms determine how preferred holders are treated alongside common holders and in later events. section 11.1.1
A seed financing decision
A startup with a defined problem and target market but no product revenue may raise a seed round. It creates seed preferred shares and sells them for cash. The founders accept dilution because the alternative is retaining a larger share of a company without the capital needed to continue. A lead VC can set the price, conduct due diligence, and typically receive a board seat; angels or strategic investors may participate behind the lead. section 5.2 section 10.2 section 10.3
A competing set of term sheets is favorable because multiple new investors may compete on price and terms. Still, valuation is subjective: investors weigh the market, company stage, prior valuations, team, and other evidence when deciding what they will offer. A higher valuation is useful only when the full terms remain acceptable. section 20.1.2 section 11.1.1
Table 5.1 The who, what, and when of the various stages of venture capital financing rounds
|
Round
|
Pre-seed
|
Seed
|
Series A
|
Series B
|
Series C
|
|---|---|---|---|---|---|
|
Form
|
Cash or debt
|
Equity
|
Preferred “A” equity
|
Preferred “B” equity
|
Preferred “C” equity
|
|
Who
|
Founders Friends and family
|
Venture capitalists Angels
|
Venture capitalists Corporate
|
Venture capitalists Private equity Corporate
|
Private equity Corporate
|
|
What
|
Early working capital to get to first financing
|
First formal financing round after formation from investors focused on early-stage investing
|
First significant financing round in which one or more VCs become involved in a company previously financed by founders, seed VCs, and/or angels
|
Scaling round when the company has proven it is able to grow fast
|
Management and investors are contemplating an exit and need to prepare and raise the value of the company in preparation.
|
|
When
|
Immediately upon formation
|
When they agree with and buy into your “story” of opportunity
|
Once proof of product-market fit is shown (typically three paying customers)
|
When sales and marketing are what is needed to grow
|
When the company is contemplating an exit
|
|
Size
|
$100,000 to $750,000
|
$1 million to $2 million
|
$2 million to $10 million
|
$10 million to $25 million
|
$25 million and up
|
Compare pre-seed through Series C to see where a priced seed financing fits: seed is the first formal equity financing after formation, followed by Series A and later preferred rounds. section 5.2
