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Searching and reading about funding, I see a lot of people referring to different rounds of funding (related to a given stage the startup is at). Still, I can only find limited information on the common investment/equity tradeoffs negotiated at each stage.

Since it's crucial to understand this to do proper research, I want to verify my understanding:

  • Early stage funding / FFF (friends, fools & family): to help bootstrap the company and put a minimal product out there. The goal is to prove there is a market and it's a valid value proposition. 10 to 15% equity tradeoff, mostly 50k-100k investment
  • Seed funding: to expand marketing and product development efforts. 20 to 40% equity tradeoff, usually under 500k investment.
  • Series A: huge impact on sales efforts, main goal is to start the revenue streams. 50 - 70% equity tradeoff, < 2M investment;
  • Series B and C: to prepare for IPO or other exit strategies. Don't know usual equity tradeoff nor common investment range.

Am I totally off?

Insightful answers and pointing me to relevant info are very welcomed.

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I tried to keep it specific to "is this right or not, and if not what is wrong?", but I understand there are grounds to make this a subjective question since not one startup is like the other. Feel free to edit and clarify the question if you think it's needed. – tomeduarte Jul 19 '11 at 16:44

2 Answers

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Attempting to establish what the "usual" investment sizes and ownership percentages taken by investors are across all startups is wrong and will lead you into problems.

Market values for startups aren't tightly grouped around some average market value. Pre-money valuations are all over the map. Pre-money valuations will be influenced by comparisons to 'similar' startups in a 'similar' market/situation -- but that's not what you are comparing. Valuations will at least depend on:

  • The business opportunity.
  • The team.
  • The traction (buying customers)
  • The tech.
  • The location (matters a lot).
  • The business cycle (boom/bust for financing).

Seriously, don't continue this line of thinking. If you want a good intro to financing, then The Founder Institute just posted some great videos:

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I understand that and also that there is no "silver bullet" when it comes to valuation. I did get into this line of thinking trying to understand better how financing (in startups) work, after seeing mixed usage of the terms and sometimes contradicting values. That's why put "most startups" in the title, maybe not enough. Thank you for the links, I'll definitely see what I can learn from that. – tomeduarte Jul 20 '11 at 9:15
@tomeduarte: Thanks. Well, I don't quite know what confuses -- but maybe, if you're looking at the final valuation numbers, instead of looking at the assessment and negotiation process that lead to the numbers (and which it's harder to get info about), then numbers may seem contradictory. Mark Suster touches on something important briefly -- "Rounds" matched to risk factors, i.e. how much progress the startup has made in customer-, market- and tech-development. Risks and rounds are not tightly correlated, but it's a useful mental shortcut for 'ideal' rounds and 'ideal' VC archetypes. – Jesper Mortensen♦ Jul 20 '11 at 12:43
up vote 1 down vote

The fundamental tradeoff is straightforward. You need money to make money. By getting funding, you get the money right away that you need to make money, but you give away equity which essentially gives away the money you hope to make down the road.

The key question at each funding round is the valuation of the company. The higher the valuation, the less equity you give away to get the funding. The best position to be in is to have multiple investors fighting to invest in your company as you get the highest valuation and best deal.

Generally, startups want to have as few rounds of funding as possible. The more rounds you have, the more diluted your own stock becomes, and your long term value decreases. Some companies can hit the big time with very little funding, and others go through D and E rounds and more...

I don't know what your percentages mean, but the funding amounts you list for the first three stages are reasonable but such numbers vary greatly. Some companies get much higher Series A funding.

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The percentages are (what I think) the usual equity tradeoffs given at that stage. I'll clarify the question, thank you. I understand the more funding rounds, the more diluted founder shares get, yeah. How much higher in series A? 5M? 10M? – tomeduarte Jul 20 '11 at 7:48

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