The Differences Between Priced and Unpriced Startup Financing Rounds
An article we liked from Thought Leader Stefan Nagey of Capbase:
Priced and Unpriced Financing Rounds: What are the differences?
So, how do you get funding for your startup?
Amidst the avalanche of new terminology you may be hearing as the founder of a startup, you’ve almost certainly heard the terms priced round and unpriced round.
Below, I’ll break down what those terms mean and what types of fundraising term sheets and equity agreements are used for both types of rounds. In the timeline of startup funding, an unpriced round typically comes before a priced round, although some companies will fundraise with a priced round right out of the gate.
Unpriced Rounds: SAFEs vs. Convertible Notes
At the early, pre-revenue stage and sometimes later on, most tech entrepreneurs fund their businesses with an unpriced round composed of convertible equity in their startup. Almost every founder uses either Convertible Notes or their counterpart, SAFEs (Simple Agreement For Future Equity, sometimes Y-Combinator SAFE).
Rather than be paid back in kind, these equity instruments will be converted to stock at a certain discount to the valuation given at the time of the next priced round. Thus, they’re often called convertible debt financing as a whole.
In this initial priced round, you’ll raise capital by selling shares of preferred stock to investors at a specific valuation. You may also give a board seat to a large investor if they are providing an outsized portion of the funding. As an early stage company, you likely don’t need to worry about this yet.
You may have seen early unpriced rounds referred to as Seed Rounds—the designation Series Seed often, but not always, refers to a priced round. It’s important to note that unpriced rounds don’t come with a...
Read the rest of this article at capbase.com...
Thanks for this article excerpt to Stefan Nagey, Co-Founder at Capbase.
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