Funding rounds are stepping stones in the process of turning an ingenious idea into a revolutionary global company ripe for an IPO.
The Series A, B, and C letters correspond with the development stage of companies that are raising capital, according to an Investopedia definition. They are necessary ingredients for a business when “bootstrapping” — surviving off of the generosity of friends, family and savings — is no longer enough.
The main differences between rounds are the maturity levels of the businesses, the type of investors involved, the purpose of raising capital and how it is allocated. The funding rounds begin with a seed capital phase and follow with A, B and then C funding.
What is the usual percentage of shares that go to seed, Series A, and Series B rounds?
This question originally appeared on Quora, the knowledge sharing network where compelling questions are answered by people with unique insights. Some questions on Quora stimulate responses and discussions that continue for years.
Answers by Raad Ahmed, Moisey Uretsky, David Wieland and Sean Owen.
Updated Dec. 5, 2016
The general rule of thumb is:
For seed rounds, expect anywhere from 10% to 25% as a normal range.
For Series A, expect 25% to 50% on average.
For Series B, expect roughly 33%.
As you advance to the next funding round, you should realistically expect further dilution. Founders start with 100% ownership. Seed rounds – the earliest stage of funding, usually from family and angel investors – typically dilute founders’ ownership by an average of 15%.
By the time you reach the Series A stage, you need to be prepared for further dilution. Series A investors are usually funders who provide venture capital for emerging companies. Since their funding typically exceeds $2 million, their percentage of ownership can be as high as 50%.
If you get to the Series B round, expect a dramatically different mindset from earlier funders. Whereas Series A and seed investors believe in your vision and have bought into the prospects of your company, those in Series B want to see that you’ve successfully progressed and satisfied important milestones. They typically see about 33% ownership, which will dilute all previous ownership percentages.
You also need to reserve a percentage for the option pool – usually, about 10% to 15%.
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Answered Nov. 2, 2016
If you are going with an institutional investor, VC, you can expect the first couple of rounds to be in the 20–30% range.
In the Seed Round most investors are more sensitive to the amount of ownership they acquire rather than the total dollars invested because there isn’t as much difference between $2M–to-$4MM but the ownership stake dramatically changes the results for the VC, which is why they usually target ownership more than dollars invested.
When you get to the Series A round, ownership is still around the 20–30% range, however valuation and dollars invested begin to change some of the investor dynamics because more funds are being deployed and it depends on which VC you are raising from, how large their fund is, and other such dynamics.
Series B is usually similar to series A in the general sense.
When a company is mature, and now looking to scale operations more so than find product market fit, or prove out a market, the ownership stake decreases to around 10%. This is when there is significantly less risk to the business, it is no longer a fly by night operation, there are more controls in place, the market is more understood and secure, and the company has established itself as a market leader.
From there the dilution can continue in the 10% range but at this point the amount of money you are looking to raise begins to determine how much dilution you take on. Each company treats this differently, but in general, once the business has minimized risk and you raise a 10% dilution round you can expect future rounds to dilute you less and less over time while raising significant amounts of capital because your valuation has dramatically increased.
Option Pool: It’s also important to remember that while all of this is happening you need to make sure that you have set aside sufficient stock for the option pool. This is typically in the 15–20% range when you raise your Seed round and then every round there after you usually craft a hiring plan that determines how many options you plan to allocate to which positions for 18 months and then if more options are needed the option pool is topped up.
Ultimately this leads to more dilution to the founders, but unlike an equity raise, these options are ending up in the hands of your employees which is good, increases retention, and also allows your employees to enjoy the benefits of a successful exit in the future.
Conclusion: Overall dilution decreases which each round you raise. The Seed round is the most painful because you are giving away 20–30% in the equity raise and an additional 10–20% for the option pool. There after the option pool is topped usually the original percentage that was set aside and works from your hiring plan and each further round on the equity side is about the same or decreases as the maturity and stability of your business increases.
Answered Oct 27, 2015
I typically go into conversations thinking that this round will end up buying 25-30% of a company.
As an investor: When I see founders selling less than 10%, I’m usually skeptical that they’re looking for an actual partner. On the flipside, I certainly don’t want founders giving up more than 50%, because that will be diluted over time and they need skin in the game to help them get through the tough times.
As an entrepreneur: it’s never an easy choice to give up any percentage. I always try to bootstrap as long as possible before taking outside capital. Yes, the risk is higher, but how could I conceivably put other people’s cash at risk if I am not willing to do the same for my own? Obviously, the more ownership I can keep in the founding team’s hands, the better. But when I bring on investors, they become my partners, and I want to make our partnership an incredible success for them.
Answered Jan 19, 2013
Sweeping generalizations: For institutional rounds, 40% is quite high and I’ve never seen >50% in a non-distressed situation. 20% is low — for the investors collectively in a round. It’s possible 2 funds invest for, say 15% each if one is more passive. Seed tends to be lower — 10% to 25%.
The question, “What is the usual percentage of shares that go to seed, Series A, and Series B rounds?” originally appeared on Quora, the knowledge sharing network where compelling questions are answered by people with unique insights.
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