What is an Investment Round?

An investment round is a fundraising event in which a company raises capital from one or more investors in exchange for equity, convertible securities, or another agreed investment instrument. In an investment round, the company provides investors with the opportunity to invest in the company for their money in one way or the other, depending on the nature of the transaction.

Investment rounds are normally used by growing companies and start-ups to finance their activities such as product development, recruitment, marketing, expansion, research, development, and working capital.

What are the Different Types of Investment Rounds?

• Pre-seed Round: This is early money raised for working on an idea, prototype, or venture.
• Seed Round: Money raised to prove the idea, get first customers, and hire team members.
• Series A: Money raised to expand the validated business model.
• Series B: Money raised for fast expansion.
• Series C and onwards: Later rounds raised for expansion, acquisition of businesses, or other purposes.

What Takes Place During an Investment Round?

• Preparation: The startup develops a pitch deck, a financial model, and sometimes a data room containing financial statements, metrics, and legal documents.
• Outreach: The founders approach the investors (VCs, angels, or both) in a planned manner typically spread over a number of weeks.
• Term sheet: The interested lead investor prepares a term sheet that contains the valuation and size of the round along with important rights.
• Due diligence: The investor confirms the claims of the startup (financial statements, contracts, references, and legal standing).
• Legal docs and closing: The lawyers prepare binding legal documents; money changes hands and securities (or SAFEs) are issued.
• Post-close: The cap table is updated, board seats/observer rights are allocated if needed, and the company starts spending money.

How Does an Investment Round Affect Existing Shareholders? 

A priced round will always lead to a decrease in the percentage ownership of existing shareholders, even if the actual monetary value of their share may increase. An example is a founder who owns 100% pre-seed can, in reality, own between 10-20% by the time the startup hits a Series C/D stage after multiple rounds of financing, employee pool options, and additional funding.

That is why the amount of the round size, valuation, and equity given up in a round is negotiated all at once, since getting more money doesn’t always mean success when the valuation of your business is very high.

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