What it means
Start-ups often begin with funds from founders, friends or small seed investments. A Series A round comes when the company has a product, some customers and a plan for scaling, and wants a larger sum from professional investors.
The money typically pays for hiring, product development and marketing. Investors in the round receive preferred stock, which normally ranks ahead of the founders' common shares if the company is sold or wound up.
Common terms include a liquidation preference, which gives investors the right to be repaid first, anti-dilution protection, a board seat and approval rights over major decisions. These terms matter as much as the headline valuation.
The key numbers are the pre-money valuation, what the company is worth before the new money, and the post-money valuation, which is the pre-money figure plus the amount raised. The investors' ownership share equals their investment divided by the post-money valuation.
Founders' shares are diluted, meaning each existing share represents a smaller slice of the company. For finance teams, the round has accounting consequences.
The company must record the shares correctly, set up an option pool for employees, and often has to move from basic bookkeeping to proper financial reporting. Investors will expect monthly numbers, a budget and a clear picture of how long the cash will last, known as the runway.
Later rounds are named Series B, Series C and so on, each usually raised at a higher valuation if the company grows. A Series A is no guarantee of success, and many companies fail to raise another round, so founders should plan cash carefully.
Before signing a term sheet, founders should model several exit scenarios. A low sale price can leave common shareholders with far less than their percentage suggests, because preferred investors are paid first, so ownership figures alone do not show who receives what.
Running the numbers at a modest exit, a good exit and a poor exit gives a much clearer picture.
In practice
Real-world examples.
Example
A software start-up with growing monthly subscriptions raises $6,000,000 from a venture fund. The money lets it double its engineering team over eighteen months. The CFO builds a budget that shows cash lasting until the planned next round.
Example
A health technology founder compares two term sheets. One offers a higher valuation but a liquidation preference that takes more of the proceeds in a sale. She models both outcomes and picks the one that leaves her more at a modest exit price.
Example
An employee at a young company is offered options in lieu of a higher salary. She asks how much the Series A has diluted existing holders. The finance director shows her the new share count and the option pool.
Formula
Calculation
Post-money valuation = pre-money valuation + investment
Investor ownership = investment / post-money valuation
Share price = pre-money valuation / existing fully diluted shares
Suppose a start-up has a pre-money valuation of $20,000,000 and 10,000,000 fully diluted shares. Share price = 20,000,000 / 10,000,000 = $2.00. Investors put in $5,000,000, so post-money valuation = 20,000,000 + 5,000,000 = $25,000,000. New shares issued = 5,000,000 / 2.00 = 2,500,000, giving 12,500,000 shares in total. Investor ownership = 2,500,000 / 12,500,000 = 20%, which matches 5,000,000 / 25,000,000.Case study
Seen in the real world.
Skyline Robotics is an illustrative, fictional start-up that raised a Series A to build its first factory line. The founders owned 100% of 8,000,000 shares before the round.
An investor offered $4,000,000 at a pre-money valuation of $16,000,000, which set the price at $2.00 a share. The round created 2,000,000 new shares, so the investor owned 2,000,000 / 10,000,000 = 20% and the founders held 80%.
The CFO checked the arithmetic against the term sheet and confirmed that the founders' 8,000,000 shares were 80% of the 10,000,000 shares outstanding after the round. The illustrative lesson is that every term in a funding round changes who owns what, and the arithmetic should be checked before signing.
Watch out
Common mistakes.
- Focusing only on the headline valuation, when liquidation preferences, board rights and other terms can matter as much.
- Confusing pre-money and post-money valuation, which leads to a wrong calculation of the ownership given away.
- Raising too little and running out of cash before reaching the milestones needed for the next round.
Questions
People also ask.
What does the letter A mean?
It names the first main round of preferred stock the company sells to institutional investors, with later rounds labelled B, C and so on.
How much of the company do founders give up?
It depends on the amount raised and the valuation, and the share given up equals the investment divided by the post-money valuation.
Is Series A the same as seed funding?
No, seed funding usually comes first, at an earlier stage and often in smaller amounts, while Series A is a larger round once the company has shown early traction.
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