What are some common types of funding rounds in venture capital and how do they affect the term sheet?

My 2 cents: ☑️ Valuation & Equity Stake: These are crucial because they set the precedent for future rounds. High valuation now means you're giving away less equity, but it also means you've set high expectations for growth. ☑️ Board Representation: Having an investor on your board can be a double-edged sword. They bring expertise but also can push the company in a direction you might not completely agree with. ☑️ Liquidation Preference: Often overlooked but super important. This decides who gets paid first if the company gets sold or goes under. ☑️ Crowdfunding Platforms: These are increasingly popular but might signal that the startup couldn't attract traditional VC investment, which could be a red flag for future investors.

Depending on your market, the seed round could be anywhere from $100k to $10M. At the lower valuations, you might want to do a convertible note. At the higher valuations, you probably want to do a priced round. The terms you negotiate for the Seed round will likely survive to later rounds, so spend some time to settle on terms that will suit you and your company now and in the future.

☑️ Valuation Method: How a company is valued can change significantly from seed to Series A. ☑️ Option Pool: The employee option pool is usually formalized in Series A. It's a way to attract and retain talent by offering them a piece of the future pie. ☑️ Vesting Schedule: How and when founders and employees can sell or transfer their shares. It's a tool to make sure everyone sticks around and contributes long-term. ☑️ Milestones: These can sometimes be attached to the funding, saying, "We'll give you X amount now, and Y amount later when you achieve Z." ☑️ Investor Influence: Series A investors usually have more clout and will expect board seats and stronger governance structures.

At this point, your cap table will have founders, investors, and a stock option pool. You may have common and preferred stock. The Series A round begins the expansion and growth of your company into your market. The investors you take on now will help you both to grow the company and secure the next round of funding. Great job!

☑️ Valuation: At this stage, valuation can involve more quantitative data, including EBITDA multiples, not just growth metrics or user engagement. ☑️ Exit Strategy: Series B investors are starting to think long-term about how they'll get their money back, whether through an IPO or acquisition. This also pressures the startup to perform. ☑️ Governance: More experienced investors usually demand a more structured governance framework, which could mean adding independent board members. ☑️ Debt Financing: Debt financing options such as convertible notes can sometimes complement a Series B round, especially for startups with strong revenues.

At the Series B, you are now a maturing startup. Your previous investors may invest a pro-rata share in this round. And hopefully they will connect you with later-stage VCs that might invest in this round. You may also consider corporate VCs. The VCs are likely beginning to think about an exit in the near term at this round. As a CEO, you will now be considering the future exit strategies for your company and your investors. Consider what your company needs to grow and succeed in the long term. Great job getting to Series B!

Depending on your company and your goals, you may not do a Series C. You may do an IPO. Or you may get acquired. The acquisition could be by an industry peer. Or it could be by a Private Equity fund.

☑️ IPO Readiness: Considered the "pre-IPO" round. Companies may use the funds to get all the elements to go public. ☑️ Diversification: Not just product diversification but sometimes even entering entirely new markets or sectors. For example, a health tech might consider expanding into the insurance tech sector. ☑️ Leverage in Term Sheet: Companies have much more wiggle room in terms and conditions at this stage, given their proven track record. They can often negotiate better terms like lower equity dilution or favourable debt terms. ☑️ Secondary Sales: Some Series C rounds may also include provisions for secondary sales, allowing early investors or employees to sell their shares, which can be a big morale booster.

☑️ Increasing Complexity: Expect increasingly complex due diligence as you go beyond Series C. ☑️ Turnaround Financing: Sometimes, these rounds are about giving a second life to a struggling startup. For example, a Series D could be a lifeline if a fintech startup faces regulatory scrutiny. ☑️ Strategic Investors: At this stage, don’t be surprised if you see corporate investors who want to acquire the startup or form a strategic partnership eventually. ☑️ Covenant-Laden Term Sheets: Expect term sheets to have more covenants — conditions the startup must adhere to or face penalties or dilution.

Watch your dilution. It doesn't matter if you're collecting a pre-seed round or a seed or bridge round to extend the runway and improve metrics. You must always keep an eye on not giving away too many shares. The standard is to give away between 15-25% of shares per round. It would be best if you aimed to still have more than a 50% stake in the company after the A round as a team and ESOP. A healthy cap table is key to raising further funding rounds. On the other hand, in the case of an exit, the cap table will determine the size of your reward. Don't let a situation arise where, with an exit, you only have a few percent stake as founder. Even if you build a unicorn, it will not be reflected in cash in your bank account.