What are the startup funding stages and how does the ownership change after each round?
Just like any other company, a startup regularly needs money to run daily operations and plan for expansion. All the companies usually raise capital by doing one (or more) of the following: retaining profits, selling the assets, issuing equity/shares, borrowing from banks, issuing debt instruments etc.
The startup funding rounds refer to the fund-raising cycles where the startups try to issue new shares to get fresh investments in the business. This money that the company receives is then used to achieve faster growth and run the daily business operations.
Depending on the business model and the capital requirements, there could be many funding stages for startups. Usually, the startup companies prefer to stay unlisted in their growth years and raise money by issuing fresh shares. On this page, we try to explain in detail about the different startup funding stages and their impact on the ownership of the business.
Valuation after a funding round
Since startups are unlisted companies, it is very difficult to calculate the valuation of the company as there is no stock price for reference. So, the price at which the shares are issued in a funding stage is used as a reference price.
Therefore, before we can explain the different startup funding rounds, it is important to understand how the Market Capitalization of an unlisted company is calculated after a funding stage.
Example: Suppose that an unlisted company has 80,000 shares and it has not raised any funding so far. At this stage, the valuation of the company cannot be calculated because there is no Last Trade Price available for the shares of the company.
Let us assume that the company receives INR 50,00,00,000 (INR 50 crore) by issuing 10,000 new shares to an investor. Now that we have a reference price, the valuation of the company can be calculated using basic mathematics:
Value of 10,000 shares = INR 50,00,00,000
Value of 1 share = INR 50,000
Market cap = Value of 90,000 shares (80,000 existing + 10,000 new)
Market cap = 90,000 * INR 50,000 = 450,00,00,000 (INR 450 crore)
Similarly, when the company raises funds in the next funding round by issuing more shares, the new valuation can be calculated. It can be imagined that as the company grows in size, the future investors will have to pay a higher amount to purchase new shares.
Startup funding rounds
On a broad level, there are 3 funding stages in the life of a startup: Early stage, Growth stage, Late stage. In the image below, we try to explain the names of the different startup funding rounds and the journey of the company from inception to a possible Initial Public Offering (IPO).
Pre-Seed stage
The Pre-Seed Funding refers to the very initial capital that is used to do some administrative activities before the business operations are started. Some of these activities are: doing market research, building strategy, finding suppliers and distributors, incorporating a company / LLP / Proprietorship, building a product prototype etc.
This is not a formal financing round and the amount collected at this step is very small. So, the money that is raised in this stage is usually contributed by the promoters and their family members, friends etc. (also called Bootstrapping)
However, some participants in the startup ecosystem define all initial funding stages as pre-seed stage if the amount raised is few hundred thousand US Dollars (USD). When the amount being raised is around USD 1 Million, then the startup funding round might be called a Seed Round.
Seed Funding
The Seed Round Funding refers to the capital-raising process where the promoters try to raise funds from the investors. As the name suggests, this is the first formal fund-raising round and the money is primarily used to start the business operations.
The investors who provide the seed investment are also known as Angel Investors. These could be friends and relatives of the promoter or could be a Private Equity investor. In fact, there are some professional investors that only invest at the Seed Stage or in the initial funding rounds mentioned below.
Since the Pre-Seed and Seed are early financing rounds in the life of a Startup, some investors prefer to use a Simple Agreement for Future Equity (SAFE) contract at these stages. The focus of SAFE is to quickly inject funds in the business, and to discuss about the valuations in the future funding rounds.
Series A and Series B
The Series A and B rounds of financing are the early stages of raising capital, where new investors or existing investors infuse more money into the business. During these rounds, the startups usually have ongoing operations and the raised capital is used for expansion and growth.
As the company grows in size, the amount raised in these rounds is usually larger than the money collected in the seed stage. Depending on the amount raised, many startups are able to achieve a Minicorn status in these initial funding rounds.
It can be imagined that most of the startups fail at a very early stage and the investors in the Seed round and the initial stages are at a big risk of losing their investments. But, since these are early years of the business, the growth rate and the Return on Investment (ROI) can be very high.
Series C, Series D etc.…
The Series C, Series D, Series E etc. rounds of financing usually occur in the growth stage of the company. The rounds that happen close to the IPO are also called as late-stage funding rounds. By this time, the business of the startup is usually well established and many companies become Unicorns at this stage.
If the startup has grown at a good pace, then the amount invested at this stage is usually very large. So, at this point large Private Equity (PE) investors, Venture Capital Funds come into the picture and many buyouts happen. Since these are the final fund-raising rounds, the investors who enter at this stage, usually exit at IPO (or later).
Theoretically, there is no limit to the number of startup funding stages and the company could do as many funding rounds as it likes. But after a certain point, getting access to large sums of money from private sources can get difficult. For example, if a company becomes a Hectocorn, then very few investors will be able to provide a meaningful amount as the size of the company will be huge.
Initial Public Offer (IPO)
The Initial Public Offer refers to the process where the shares of a company are offered to the general public for the first time. For startups, many existing investors use the IPO as an exit opportunity by selling their shares to the public. A startup could also issue new shares to raise additional capital and the company is called a publicly traded company after the shares get listed on the Stock Exchange.
Series A1, A2, A3, B1, B2, B3, B4, C1, C2 etc.
Some startup funding rounds can have multiple sub-rounds which happen very close to each other and at similar valuations. In such a case, the funding round will have a number associated to A, B, C etc. like Series A2 round, Series B3 round etc.
Example: Suppose that a startup conducts a Series A1 funding round in January, where the company is valued at INR 100 crore and an investor pays INR 10 crore. Let us suppose that in February another investor gives INR 1 crore at the same valuation of INR 100 crore. In such a case, this additional 1 crore can be labeled as Series A2 funding round.
Now, suppose that 10 months later, the company is valued at INR 150 crore and new investors want to invest capital. Then, the company could call it a Series B1 round at the new valuations.
However, this is just used for better communication and there is no hardcore rule for naming the stages of Venture Capital. Some startups might just use Series A, B, C, D, E etc. for every time they raise capital. While others might choose to use A1, A2, A3, A4 etc. for all the funding rounds at different valuations.
Example of Startup funding
Now, let us look at an example to understand the startup funding stages and their impact on the valuation of the company. In addition, we will also discuss about how the issuance of new shares will impact the ownership of the existing and future investors.
1. Seed investment
Let us assume that a new startup is incorporated by 2 founders. Suppose that Founder 1 invests INR 45,00,000 (INR 45 lakh), Founder 2 invests INR 25,00,000 (INR 25 Lakh) and an Angel Investor gives INR 30,00,000 (INR 30 Lakh).
Let us suppose that the company issued shares at the Face Value of INR 10 in the Seed Funding stage. The ownership details and the valuation of the startup can be seen in the below table.
| S.No | Investor | Number of shares | Percentage of shares (%) | Latest share price (INR) | Value of shares (INR) |
| 1 | Promoter 1 | 4,50,000 | 45 | 10 | 45,00,000 |
| 2 | Promoter 2 | 2,50,000 | 25 | 10 | 25,00,000 |
| 3 | Angel Investor | 3,00,000 | 30 | 10 | 30,00,000 |
| 10,00,000 | 100 | 10 | 1,00,00,000 |
2. Series A funding round
Now, let us assume that 2 years later, the startup conducts Series A funding round where Venture Capital is received by issuing new shares at INR 50. Suppose that Venture Capitalist A buys 1,00,000 shares and Venture Capitalist B buys 2,50,000 shares.
The company has managed to raise: INR 50 * (1,00,000 + 2,50,000 shares) = INR 1,75,00,000 (INR 1.75 crore).
The number of shares held with Promoter 1, Promoter 2 and Angel Investor has not changed. But based on the price used in this funding stage, the value of these shares has increased. Because new shares have been issued, the ownership structure will change as well.
The new percentage ownership and the updated valuation of the startup can be seen in the below table.
| S.No | Investor | Number of shares | Percentage of shares (%) | Latest share price (INR) | Value of shares (INR) |
| 1 | Promoter 1 | 4,50,000 | 33.33 | 50 | 2,25,00,000 |
| 2 | Promoter 2 | 2,50,000 | 18.52 | 50 | 1,25,00,000 |
| 3 | Angel Investor | 3,00,000 | 22.22 | 50 | 1,50,00,000 |
| 4 | Venture Capitalist A | 1,00,000 | 7.41 | 50 | 50,00,000 |
| 5 | Venture Capitalist B | 2,50,000 | 18.52 | 50 | 1,25,00,000 |
| 13,50,000 | 100 | 50 | 6,75,00,000 |
3. Series B funding round
Now, let us assume that 1 year later, the startup goes through a Series B funding stage where new shares are issued by the company at INR 200. Suppose that Venture Capitalist C buys 2,00,000 shares and Venture Capitalist B who participated in Series A round, decides to buy 50,000 more shares.
In this round, the company has managed to raise: INR 200 * (2,00,000 + 50,000 shares) = INR 5,00,00,000 (INR 5 crore).
The number of shares held with Promoter 1, Promoter 2, Angel Investor and Venture Capitalist A has not changed. But the value of these shares and ownership structure will change because new shares have been issued.
Whereas, Venture Capitalist B will now own 2,50,000 + 50,000 = 3,00,000 shares. The updated valuation of the startup and the new ownership can be seen in the below table.
| S.No | Investor | Number of shares | Percentage of shares (%) | Latest share price (INR) | Value of shares (INR) |
| 1 | Promoter 1 | 4,50,000 | 28.125 | 200 | 9,00,00,000 |
| 2 | Promoter 2 | 2,50,000 | 15.625 | 200 | 5,00,00,000 |
| 3 | Angel Investor | 3,00,000 | 18.75 | 200 | 6,00,00,000 |
| 4 | Venture Capitalist A | 1,00,000 | 6.25 | 200 | 2,00,00,000 |
| 5 | Venture Capitalist B | 3,00,000 | 18.75 | 200 | 6,00,00,000 |
| 6 | Venture Capitalist C | 2,00,000 | 12.50 | 200 | 4,00,00,000 |
| 16,00,000 | 100 | 200 | 32,00,00,000 |
4. Initial Public Offering (IPO)
Now, let us assume that 2 years later, the company decides to go for an IPO at a fixed price of INR 300. Suppose that the company issues 4,00,000 new shares in the public offer and 2,00,000 shares are given as an Offer for Sale (OFS) by the existing investors (Venture Capitalist A sells all 1,00,000 shares held by them and the Angel Investor sells 1,00,000 shares).
Through the IPO, the company has managed to raise: INR 300 * 4,00,000 = INR 12,00,00,000 (INR 12 crore). The Venture Capitalist A and the Angel Investor have sold shares and they will receive money from the sale of 2,00,000 shares. The amount received from this exit of the investors will not go to the company.
The updated valuation of the startup and the new ownership at listing time can be seen in the below table. For calculation purpose, we will assume that the stock lists on the Stock Exchange at INR 300. As the stock price moves, the Market Cap of the company will also change in the future.
| S.No | Investor | Number of shares | Percentage of shares (%) | Listing price (INR) | Value of shares (INR) |
| 1 | Promoter 1 | 4,50,000 | 22.50 | 300 | 13,50,00,000 |
| 2 | Promoter 2 | 2,50,000 | 12.50 | 300 | 7,50,00,000 |
| 3 | Angel Investor | 2,00,000 | 10.00 | 300 | 6,00,00,000 |
| 4 | Venture Capitalist A | 0 | 0 | 300 | 0 |
| 5 | Venture Capitalist B | 3,00,000 | 15.00 | 300 | 9,00,00,000 |
| 6 | Venture Capitalist C | 2,00,000 | 10.00 | 300 | 6,00,00,000 |
| 7 | Public | 6,00,000 | 30.00 | 300 | 18,00,00,000 |
| 20,00,000 | 100 | 300 | 60,00,00,000 |
Other startup funding options
A startup could also raise capital by traditional sources like bank loans and debt instruments. But the interest rate that these companies will have to pay is usually very high because most of the startups are not profitable initially.
Also, many tech startups do not have any big assets, machinery, investments etc. that could be sold or used as collateral to raise funds. So, if the Cost of Capital of the different funding options is considered for the startup companies, the issuance of equity is the best method for raising funds.
In addition, many startups try to find and attract investors who can bring operational expertise to the company. These new investors act as mentors and can provide guidance to the startup and help in faster expansion of the business. To understand in detail about all the sources of finance for a startup company, refer: What are the sources of funding for startups?
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