What are the most common startup funding round structures?

Pre-seed funding indeed lays the groundwork for a startup's growth, akin to nurturing a seed before it sprouts into a full-grown plant. It's the initial infusion of capital that provides the resources needed to validate the idea, develop a minimum viable product (MVP), and start gaining traction in the market. Just like a seed needs water, sunlight, and nutrients to grow, startups require financial support, mentorship, and guidance during this crucial stage. Pre-seed funding sets the stage for subsequent funding rounds, such as seed rounds and beyond, by demonstrating the startup's potential and attracting further investment.

The pre-seed round is a critical phase for startups, providing essential funding to develop ideas and build initial prototypes. This early investment helps entrepreneurs validate their concepts, attract talent, and prepare for future funding rounds. It’s an exciting time that lays the foundation for growth and innovation.

Vale ressaltar que muitas ideias podem ser validadas sem precisar de recursos financeiros. E que o melhor dinheiro que vc pode captar é o dinheiro do seu cliente e n?o de um investidor ou do banco. Prefira ter um cliente anjo do que um investidor anjo.

'Bootstrapping' and 'Nights and weekends' This stage is often referred to as the pre-seed stage and most often includes founder / co-founder capital and friends and family capital. This stage usually involves 'nights and weekends' work and includes periods where one or more of the co-founders are still working their day job. Things to remember in this phase: 1) Be honest with anyone you are taking money from 2) Understand your own commitment level 3) Avoid hiring any staff on payroll 4) Recruit co-founders who can help with financial and work product burden 5) Focus on validating your idea - what problem are you solving? How will you build a solution? What are early ideas about the operating and business model to pull this off?

"Angels" and "Seeds" Some people lump Angel investors in with the bootstrapping or friends and family phase. I think of Angels as your bridge from Pre-Seed to doing a real Seed round, so I think they can sort of be in either slot or slide between the first two stages. Angels are invaluable to your journey to build a company and capital raise. Angels won't give you money unless they know something about the problem your are solving, so they help validate your early ideas. Angels can give you the critical first 'bump' in capital to hire a few FTEs and begin to get a real MVP developed. They can also usually help you network to VCs and other institutional sources of Seed Funding in larger check sizes. They can save you headaches.

Series A investors want to see a product and a product-market-fit. Their diligence process is going to evaluate if you have had reasonable hygiene in corporate formation, financial accounting, IP protection, and other important administrative matters. I always stress to founders that you hurt yourself a lot if your company is a mess at this stage. Have your financials and taxes in order. Understand how to calculate and present the most basic GAAP and non-GAAP financials for your industry. Have your corporate records and CAP Table in pristine condition. At this stage you will be raising a "priced round" by selling "preferred shares". You and your team hold common shares. You probably have SAFE and/or convertible notes converting.

Series B means that you have successfully deployed Series A capital and hit the desired performance criteria required to raise additional capital. After Series A, you will have a Board of Directors. This means the Series B process is Board-driven, as opposed to founder driven. This is good news, as it means the company is starting to be 'real' and function as a proper corporate entity set to get into full growth mode. Series B funding is often a second sale of Preferred Equity. Valuation will be based on your growth and financial performance, together with the 'hype cycle' of whatever industry you are in, together with macro and competitive factors amongst interested investors. Boards may bring a financial institution for this raise.

Series C and beyond are the rounds where your company is seen as 'Pre-IPO'. This just means that you are growing enough and tapping the private capital markets enough that your overall growth and financial performance begin to be judged against public companies. At this stage your valuation becomes more correlated to the public markets, at large, and your specific public company compares. Ideally, your company is in a CF+ state by Series C. This allows the Board and leadership to have ultimately flexibility with timing, terms, and amounts for any securities transactions. This would include - in some cases - using the possibility of an IPO as leverage in negotiations. Series C is a good time to offer secondary liquidity to employees.

One thing to note is how the founder equity shrinks during the investment process, though the value of their equity rises. Three co-founders might each have 33% of the company at the start, but could end up with less than 5% each if they sell their equity in funding rounds. This 5% will be worth significantly more than what they started, but the loss of equity can also lead to loss of control of the company.