Startup CXO

Chapter 4Fundraising

At some point, unless you're incredibly fortunate and are able to bootstrap or already are very wealthy, you'll need to get a cash infusion into your business and there are several different ways to do that, typically based on your stage of growth.

Seed equity is usually the first funding a company receives from outside investors. You could get seed funding on day one or at a later date if the founders bootstrap the startup. A generation ago, seed capital came almost entirely from friends and family and the amounts were relatively small—whatever they could scrape up. In recent years there are more and more professional seed investors, more sophistication, and higher expectations. The seed round can often have the valuation pushed to the next round, where the seed investors will end up having their shares valued at some discount to the next round.

Venture equity refers to money provided by venture capitalists and typically happens in the next few rounds. Venture capitalists take risks at this stage because companies are usually in a high growth phase and not that close to profitability—they could be losing tons of money. My perspective here is that at these stages getting a simple and straightforward preferred investment is worth giving up some valuation. For example, it is probably better to have a $15 million valuation on a simple preferred round with typical investor rights and protections than an $18 million valuation where the preferred comes with extra ...