A beginner's guide to priced equity rounds

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Today’s deep dive: Understanding priced equity rounds: A guide for new VCs and founders

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Understanding priced equity rounds: A guide for new VCs and founders

When raising capital, early-stage startups typically choose between two common fundraising structures:

1. Convertible Instruments (like SAFEs or convertible notes)

2. Priced Rounds

We covered convertible instruments in a previous post here. Convertibles are a popular choice for founders who want to raise money quickly without getting bogged down in lengthy negotiations over their company's valuation.

Now, let’s dive into priced rounds - the more structured (but more complex) alternative.

What is a Priced Round?

A priced round is an equity investment where a startup and investors agree on a valuation before the investment takes place. Investors then purchase shares of preferred stock in the company based on that valuation.

Unlike convertible instruments, where valuation is deferred, priced rounds establish a company's valuation at the time of investment. As a result, investors immediately receive ownership in the form of equity rather than a promise to convert later.

Why Do Investors Prefer Priced Rounds?

Preferred stock financings come with advantages for investors, including:

1) Higher liquidation priority – Preferred shareholders get paid out before common shareholders if the company is sold.
2) Greater control rights – Investors often negotiate governance terms such as board seats, voting rights, and anti-dilution protections.
3) Immediate equity ownership – Investors know exactly what percentage of the company they own right away.

For founders, priced rounds provide long-term stability since they formalize valuation and governance. Also due the formation of a board, founders will have built-in touch points with investors each quarter.

However, priced rounds involve more negotiation, legal work, and time to close.

How Do Priced Rounds Work?

The process of raising a priced round follows these key steps:

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