How Startup Funding Works: Pre-Seed, Seed, Series A, B and C

Why startups raise money

Most startups spend money long before they make it: they hire engineers, build a product, find customers and grow fast. Banks rarely lend to companies with little revenue and no profits, so startups sell equity, part-ownership of the company, to investors who are betting it will become much more valuable.

Money is raised in steps called rounds. Each round is meant to fund the company until it reaches the next milestone that justifies raising more at a higher price.

The funding stages at a glance

Stage	What the company has	Typical investors	Money used for
Bootstrapping / friends and family	An idea, maybe a prototype	Founders' savings, friends, family	Building the first version
Pre-seed	A team and early product	Angel investors, accelerators, pre-seed funds	Proving people want it
Seed	A product with early users or revenue	Seed funds, angels, accelerators	Finding product-market fit
Series A	Product-market fit and a repeatable way to win customers	Venture capital firms	Building the team and scaling sales
Series B	Proven growth	Larger VC firms	Expanding into new markets and products
Series C and later	A large, fast-growing business	Growth funds, private equity, hedge funds, corporates	Scaling further, acquisitions, preparing to go public

Round sizes vary a lot by country, industry and the state of the market. As a rough picture for U.S. tech startups: pre-seed and seed rounds often range from a few hundred thousand dollars to a few million; Series A rounds often reach into the tens of millions; later rounds can be hundreds of millions. In India, Europe and elsewhere, typical amounts are often smaller.

Who the investors are

• Angel investors: wealthy individuals, often former founders, investing their own money early.
• Accelerators: programs such as Y Combinator or Techstars that invest a small amount for equity and provide mentoring and a demo day.
• Venture capital (VC) firms: professional funds that invest other people's money in high-growth startups. See our guide to what venture capital is.
• Corporate venture capital: investment arms of big companies.
• Growth and crossover funds: large investors that back late-stage startups, often before an IPO.

The investor who sets the price and terms and usually puts in the most money is the lead investor. Others "participate" on the same terms.

Valuation and dilution, with a worked example

Pre-money valuation is what the company is worth before the new money arrives. Post-money valuation is pre-money plus the new investment.

Example: a startup agrees a $8 million pre-money valuation and raises $2 million.

• Post-money valuation: $8m + $2m = $10 million
• New investors own: $2m ÷ $10m = 20%
• If the founders owned 100% before, they now own 80%

That shrinking percentage is dilution. It is normal: the founders own a smaller slice of a company that is now worth more and has cash to grow. After several rounds, it is common for founders to own well under half of the company. Rounds often also create or top up an employee option pool, which dilutes everyone a little more.

SAFEs and convertible notes

Very early rounds often skip setting a valuation at all:

• SAFE (Simple Agreement for Future Equity): a contract, introduced by Y Combinator, where an investor gives money now and receives shares later, at the next priced round.
• Convertible note: similar, but structured as a loan with an interest rate and maturity date that converts into shares.

Both usually include a valuation cap (the maximum valuation at which the money converts) and sometimes a discount to reward early investors for the extra risk.

What is in a term sheet

A term sheet is the short document laying out the deal before lawyers draft the full contracts. Beyond price and amount, the terms that matter most:

• Liquidation preference: who gets paid first if the company is sold. A "1x non-participating" preference, common in many markets, means investors get their money back first (or convert to shares if that pays more). Higher multiples tilt the outcome toward investors.
• Board seats: how many directors each side appoints, and therefore who controls key decisions.
• Pro rata rights: the right to invest in future rounds to keep the same ownership percentage.
• Anti-dilution protection: adjusts investors' price if a later round is priced lower.
• Vesting: founders and employees earn their shares over time, often four years with a one-year "cliff".

Other ways to fund a startup

• Bootstrapping: growing from revenue alone, with no outside investors. Slower, but founders keep control.
• Venture debt: loans designed for VC-backed startups, often alongside an equity round.
• Revenue-based financing: investors are repaid from a share of future revenue.
• Grants: government or foundation money that does not take equity.
• Crowdfunding: raising small amounts from many people, either for rewards or, where regulations allow, for equity.

Bridge rounds, extensions and down rounds

• Bridge round / extension: extra money raised between major rounds, often from existing investors, to reach the next milestone. Sometimes labeled "Series A-2" or "seed extension".
• Flat round: raising at the same valuation as last time.
• Down round: raising at a lower valuation than the previous round. Painful for earlier shareholders and often triggers anti-dilution terms, but sometimes the only way to keep going.

Funding conditions follow the wider economy. When interest rates are low, investors chase growth and valuations rise; when rates are high, rounds get smaller and investors demand stronger results.

How to read a funding headline

"Startup X raises $50 million Series B led by Fund Y at a $500 million valuation" tells you the amount, the stage, who set the terms and the (usually post-money) valuation. It does not tell you the terms, how much is in cash versus later tranches, or how much the company is burning each month. Treat the valuation as a negotiated price for a slice of preferred shares, not a market price; see what a unicorn is for why.