Sim Simeonov (a much higher profile Boston-area former VC than me) just published a good post on raising a Series A venture round. I agree with the majority of his points, although he does postulate that it may make sense to ask for/raise a bit more money upfront even if it means the founders end up with a lower ownership percentage. I agree with his thesis that more capital is better if it boosts your next rounds valuation/de-risks the business intelligently. However, I’m not 100% sure it actually has to decrease the founders’ percent ownership all that much. I continue to believe that early stage VCs main valuation tool is how much they want to own (which usually falls within a pretty narrow band). See my post on the way VCs calculate startup valuations.
Sim puts forth some important math on how to calculate the real pre-money valuation of your Series A round, taking into account option pools, amount raised and percentage ownership taken by the VCs. As a startup founder looking to raise money, you should understand this. The algebra is simple, it’s nice to have a clean little formula to help you understand the implications of your term sheets. (I have worked at funds that did a more complicated pre/post money “effective” valuation taking into account the impact of some preferred stock features like participation – basically breaking the participation out and valuing it as a stand alone bond and then valuing the equity separately, but I wouldn’t bother/recommend that for most early stage investments.)
Sim also lays out the other real truth in getting a higher Series A valuation – you need multiple funds competing for deal. This is much, much harder said than done. And you also have to remember that VCs are pretty clubby – they like to syndicate/invest alongside each other, so if two firms realize they are both interested in the same company and they like investing with each other you probably DON’T actually have any real competition. This is because they are likely to team up and offer you a joint term sheet, or one is likely to wait until the other makes an offer and then try to join that investment as a co-investor.