Funding Round Explained

Most of the startups you see these days are mostly funded by Investors and only a few of them are bootstrapped. Every day you hear news about startups raising money in millions in series A, B, C… funding rounds, so today we will talk about the stages in which funding occurs. What exactly is series A, series B, etc?

To understand this better we will assume a company says “XYZ”. Let’s assume it has 2 partners(Co-founder’s) initially and 1 investor which might be their friend, family member, or any relative. This initial investment by the investor in this case friend/family/relative will be known as seed funding.

Photo by Micheile Henderson on Unsplash

Seed funding is the capital invested in a startup in a very early stage in return for equity. let’s say he/she invests $50,000 for 20 % of the company which will value the company at $250, 000.

Assumption:

1. Co-founder 1 - 40 % of the company.
2. Co-founder 2 - 40 % of the company.
3. Initial Investor(Seed Funding) — 20 % of the company by investing $50,000.

While deciding the ownership in the company, the company issues shares like RBI issues money. The company issues 100,000 shares while incorporating the company.

Now,

1. Co-founder 1: 40,000 shares.
2. Co-founder 2: 40,000 shares.
3. Initial investor: 20,000 shares.

Now, by simple mathematics, each co-founder’s 40% share value will be $100,000.

Now, your seed funding round has been done. Suppose with this money your company was able to survive for a year, now you need more money for further business.

Now for raising money further, here comes the series A round continued by B, C, etc. This round is led by Angel investors and Venture capitalists.

Now let’s say the company raises $1.5 Million at a post-money valuation of $6 million, which gives 25% of the companies share to the investor by the basic formula.

{(Funding) / (Post money valuation) } * 100 = {Investor’s share}

{($ 1.5 Million) / ($ 6 Million)} * 100 = 25 %

Now the Angel Investor or VC will have 25 % of the companies shares and the initial 3 people will have only 75 % shares but initially, they were having 100% of the shares, so now a net dilution of 25% will take place in each of the initial shareholders shown as below.

Before Series A round of funding

After Series A round of funding

Now, the company will issue more shares for the new investors into the company. Now, how many shares will be issued? So it’s a basic Maths, now since 75% ownership means 100,000 shares that means for 25% ownership company will issue 33,000 more shares.

Updated company ownership after Series A round:

Now further funding round of funding will take place like this in series B, C, D……