Funding round

What it means

A funding round is a single period in which a company, typically a startup, raises capital from investors in exchange for new equity. Rounds are usually named after the company’s stage: pre-seed and seed at the start, Series A, B and beyond as it grows. With each stage the amount and investors’ expectations rise.

Each round has an agreed valuation, the company’s value before the investment, pre-money, and after it, post-money. From these follows the stake the investor receives for their money. A round starts with a term sheet setting out the main terms and ends with signing the investment agreement and amending the articles.

Early rounds often use a convertible loan or similar instrument that turns into equity only at the next round. Founders thus postpone the hard negotiation over valuation until the company has more results.

How it works in practice

Before a round we help clients get their numbers in order: the books, the financial plan, the cap table and an overview of contracts. The investor will check everything in due diligence, and flaws in the basics lower the valuation or drag out the talks.

Legally and in the books the investment is most often a capital increase with share premium or a contribution outside registered capital. The investor’s money is not revenue and is not taxed; it increases equity. The change must be entered in the commercial register.

Every round dilutes the existing shareholders. Founders should model in advance what stake they will keep after several rounds and watch investors’ protective clauses, which can shrink their stake further if a later valuation is low.

What to watch out for

The most common mistake is focusing only on the valuation and missing the other terms. Liquidation preferences, veto rights or anti-dilution clauses can matter more to founders than a difference in valuation.

The second risk is poor timing. Anyone who starts raising money with two months of cash left negotiates from weakness. A round often takes six months or more, so it should begin while the company still has enough runway.