Seed to IPO: What All Those Funding Round Names Actually Mean
Here's what each label actually refers to, roughly what to expect at each stage, and the terminology that sits underneath it all.
Startup financing has its own vocabulary, and most of it sounds more official than it is. There is no rulebook that says a company must raise a "Series B" after a "Series A," or that a seed round has to be a certain size. The names are conventions that grew out of the mechanics of issuing preferred stock, and they have drifted a long way from their original meanings. Where it starts: Pre-seed and friends-and-family The earliest money. Often a founder's own savings, plus cheques from people who are backing the person rather than the business — friends, family, former colleagues, angel investors. Typically anywhere from tens of thousands to a couple of million, depending on the market and the founders' track record. Almost always structured as a convertible instrument rather than a priced round, because negotiating a valuation for a company with no product and no revenue is largely theatre. "Pre-seed" only became a common label in the mid-2010s, when seed rounds got big enough that a gap opened up beneath them. It's a symptom of round inflation, not a genuinely new stage. Convertible notes and SAFEs Before the first priced round, most companies raise on instruments that postpone the valuation question. Convertible note. Technically a loan. It has a principal amount, an interest rate (often 2–8%, usually accruing rather than paid in cash), and a maturity date. Instead of being repaid, it converts into equity at the next priced round. Two terms do the work: Discount. The note converts at a discount to the price new investors pay — commonly 15–25%. If the Series A prices at $1.00 per share and the note has a 20% discount, the note holder converts at $0.80. This is their reward for taking earlier risk. Valuation cap. A ceiling on the valuation used for conversion, regardless of what the priced round actually values the company at. If a note has a $10M cap and the Series A prices at $40M, the note holder converts as though the company were worth $10M — a 4x better price. The cap is usually the term that matters most. Where a note has both, it typically converts at whichever is more favourable to the investor. SAFE (Simple Agreement for Future Equity). Introduced by Y Combinator in 2013 and now more common than notes at the earliest stages, particularly in the US. A SAFE is not debt: no interest, no maturity date, no repayment obligation. It's a contractual right to shares in a future financing. Same discount and cap mechanics, less paperwork, less risk of an awkward conversation when a maturity date arrives and the company hasn't raised. One wrinkle worth knowing: SAFEs come in pre-money and post-money versions. Y Combinator switched to post-money in 2018. The post-money version fixes the investor's ownership percentage more precisely, which is cleaner for the investor and more dilutive to founders when several SAFEs stack up. Founders who raise a long string of SAFEs at rising caps sometimes get an unpleasant surprise about their remaining ownership when everything converts at once. Seed The first round meant to fund real product development and early customers. Historically a few hundred thousand dollars; today, in the larger markets, seed rounds of $2–5M are routine and a well-connected team can raise considerably more. Seed rounds sit on the boundary between convertible and priced. Small seeds are usually SAFEs or notes. Larger ones — especially where a dedicated seed fund is leading and wants a board seat or information rights — are increasingly priced rounds issuing Seed Preferred stock. You'll also encounter: Seed extension / seed+ / pre-A. More money on roughly the same terms, usually because the company needs longer to hit Series A metrics. Common and not inherently a bad sign, though repeated extensions are. Party round. A seed filled by many small cheques with no clear lead. Easy to raise, but nobody feels responsible for helping when things get hard. Series A The first serious priced round, and the point where the financing becomes properly institutional. A lead investor sets the valuation, conducts real diligence, negotiates a term sheet, and usually takes a board seat. Traditionally the Series A is the "product-market fit" round: you've shown that customers want the thing, and the money is for building a repeatable sales or growth motion. In practice the bar has risen a lot — investors now often expect meaningful revenue where they once accepted user growth. Sizes vary enormously by geography and cycle. In US software, Series A rounds have commonly landed somewhere in the $8–20M range in recent years, against pre-money valuations in the tens of millions. In smaller markets, including Australia, the equivalent round is often materially smaller. This is where the standard venture terms first appear in full: Liquidation preference. The right to get money back before common holders in an exit. The market standard is 1x non-participating — the investor takes either their money back or their pro-rata…
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