“The company raised $2 million at a $10 million valuation.”
That sounds impressive. It also leaves a few perfectly reasonable questions. Did someone just hand the founders $2 million? Where did the other $8 million come from? And why does the next announcement have a letter attached to it?
I find the subject easier to follow when we keep one company in view and watch two things: the money coming in, and the ownership being shared.
First, what is the investor buying?
Company X makes a simple tool that helps small shops keep track of orders. The founders can build an early version, but turning it into a dependable business will take people, time and money.
An investor offers funding in return for equity: ownership in the company. Shares are the units used to divide that ownership. The investor hopes those shares will eventually be worth more, while accepting that the investment could be lost.[1]
In the deals we will follow, Company X issues new shares and receives the cash. The founders do not personally pocket the investment. A separate sale of someone’s existing shares is called a secondary sale; that money goes to the seller.
A funding round is a fundraising event that may bring in money from several investors. The names broadly describe the company’s stage and ambition. They are not exams with fixed pass marks, fixed cheque sizes or a compulsory timetable.[2]
Let’s walk Company X through the rounds
Before any investor arrives, the founders might pay the bills themselves or use customer income. That is bootstrapping. A business can continue that way; raising outside equity is a choice, not a requirement.
01 Pre-seed$500,000
“Is this idea worth building?”
Company X has sketches, conversations with shop owners and plenty of unanswered questions. It raises $500,000 to build a basic working version and test it with ten shops.
The useful result is learning: do people have this problem, can the team solve it, and will anyone use the solution? Pre-seed often supports this earliest work, although companies draw the boundary with seed differently.[2]
02 Seed$2 million
“Will customers use it, pay and come back?”
The prototype works well enough to try. Company X now raises $2 million to improve the product, hire a small team and find paying customers. Seed money helps turn an early idea or product into evidence of a viable business.[3]
Suppose it eventually reaches 1,000 shops paying $25 a month: 1,000 × $25 = $25,000 in monthly revenue. That is sales income, before costs. The team still needs to learn whether customers stay and whether serving them can make economic sense.
This is the beginning of product-market fit: a product that a particular group of customers wants enough to keep using. One good month or a pile of downloads does not settle that question.
03 Series A$8 million
“Can we make this work repeatedly?”
Company X can now point to customers who renew and a promising way to reach more shops. It raises $8 million to make the product more reliable and build a repeatable sales process.
The next ambition is 5,000 paying shops. At the same $25 price, that would mean $125,000 in monthly revenue. The question is what it costs to get there and keep those customers. Series A commonly backs the move from early demand to a more repeatable business.[4]
04 Series B$20 million
“Can we do this at a much larger scale?”
Company X has a process worth expanding. It raises $20 million to enter more regions, strengthen customer support and handle many more orders without the system breaking.
Series B often funds expansion of a business that has already shown substantial promise.[2] For Company X, the challenge has shifted: a process that works for a small team must now work across a larger organisation.
05 Series C$40 million
“Where else can this business go?”
Company X raises $40 million to take its product into additional countries and develop tools for larger retailers. Later rounds can also fund acquisitions or new product lines.[4]
The company has more history for investors to inspect, but its next expansion can still fail. The letter C does not certify profitability, safety or a guaranteed future listing.
06 Series D and beyond$30 million
“What does the next chapter need?”
Company X raises $30 million to finish its expansion and improve the business while remaining private. Notice that this cheque is smaller than its Series C cheque.
Series D, E, F and later letters describe further rounds. They may support a new opportunity, more time to reach a goal or preparation for a public offering. There is no universal final letter. A later round can accompany strong growth or a difficult period; its terms and purpose tell us more than its name.[4]
These are common patterns, not universal milestones. Some businesses need years of development before meaningful sales. Others never raise a Series A at all.
Fictional amounts. These bars show fresh funding, not company value or money still in the bank. Series D is deliberately smaller than Series C.
Now the $2 million / $10 million puzzle
Return to Company X’s seed round. The investors and founders agree that the business is worth $8 million before the new investment. That is its pre-money valuation.
Investors put in $2 million. The resulting post-money valuation is $10 million. For this simple new-share deal, the arithmetic is:[5]
The new investors buy $2M ÷ $10M = 20% of Company X. The people who owned it before the round collectively retain 80%.
The missing $8 million was never a missing pile of cash. It was the value agreed for the existing business. A valuation is a price attached to ownership in a deal; it is neither the bank balance nor a promise that someone will buy the whole business for that amount.
Now we can put every round on the same page.
| Round | New cash | Value before | Value after | New investors’ share | Founders’ share after |
|---|---|---|---|---|---|
| Pre-seed | $0.5M | $4.5M | $5M | 10% | 90% |
| Seed | $2M | $8M | $10M | 20% | 72% |
| Series A | $8M | $32M | $40M | 20% | 57.6% |
| Series B | $20M | $80M | $100M | 20% | 46.08% |
| Series C | $40M | $160M | $200M | 20% | 36.86% |
| Series D | $30M | $270M | $300M | 10% | 33.18% |
Teaching assumptions: founders start with 100%; every round is a priced issue of new shares for cash; existing owners buy no further shares. No employee option pool, SAFEs, convertible notes, fees or secondary sales. Those features can change the calculations. All six round sizes and valuations are invented, including the early priced rounds.
Company X has raised $100.5 million in total across these rounds. Its final illustrative post-money valuation is $300 million. Its actual cash balance depends on what it has spent and earned along the way. Those are three different numbers.
What happens to the founders’ share?
When a company issues additional shares, an existing holder’s percentage can fall. This is dilution. Their original shares can stay exactly where they are; the total number of shares has grown.
For a small-number picture of Company X’s seed round, imagine its existing ownership is represented by 100 shares. It issues 25 new shares. The seed investors own 25 of 125 shares: 20%. The original holders collectively own 100 of 125: 80%.
After pre-seed, the founders own 90% of the company. After seed, they own 90% × 80% = 72%. After Series A, it is 72% × 80% = 57.6%. We multiply what remains at each step; we do not simply subtract 20 percentage points each time.
FoundersAll outside investors
Calculated from the six fictional deals below. Percentages are rounded for display; calculations retain full precision. No employee options or additional investments by existing holders.
A smaller percentage can represent a larger value on paper. After pre-seed, the founders’ 90% of a $5 million valuation equals $4.5 million. After Series A, 57.6% of $40 million equals $23.04 million. Neither amount is spendable cash, and both could fall.
Ownership percentage also does not tell the whole story about control or eventual payouts. Board seats, voting rights, employee shares and investor preferences matter. Investors often receive preferred shares with different rights from the founders’ common shares.[1][6]
Change the deal yourself
Try Company X’s seed deal
Move either slider. What changes when Company X asks for more money, or agrees a higher value before the investment?
Post-money valuation$10M
New investors own20%
Existing owners retain80%
New investors’ share = $2M ÷ $10M = 20%. “Existing owners” includes the founders and earlier investors; it does not mean the founders alone.
This is a separate experiment. It does not change the story’s tables. It assumes only new shares issued for cash, with no employee pool or convertible instruments.
How long does the money last?
Imagine that, just after seed, Company X has $2 million of usable cash. Its monthly cash outflow is $125,000 and its customer cash receipts are $25,000.
It is using up $100,000 a month: its net burn rate. At that unchanged pace, $2,000,000 ÷ $100,000 gives it 20 months of runway, or time before the cash runs out.
This assumes steady cash flows and no extra one-off bills or financing. If hiring doubles net burn to $200,000 a month, runway falls to ten months. The question behind a round is therefore quite practical: what can Company X accomplish before this money is used up?[3]
And what about SAFEs, angels and bridge rounds?
The jargon gets easier when we separate three questions: Who is investing? What agreement are they using? Why is the money needed now?
Who: friends, angels and funds
Friends and family may invest early. An angel investor generally invests their own money. A venture capital fund, or VC fund, invests pooled money on behalf of its investors, usually seeking substantial growth. Accelerators may combine early investment with a structured support programme. These describe sources of backing; they are not additional compulsory letters in the sequence.[7]
How: priced equity, a SAFE or a convertible note
Our main story uses priced equity rounds: agree a share price and issue shares now. Early funding often uses a different arrangement.
A SAFE means Simple Agreement for Future Equity. Company X receives money now in return for contractual rights to equity later under specified conditions. A standard SAFE is not a loan, has no interest or maturity date, and is not yet stock before conversion. Conversion and other outcomes depend on the agreement and what happens to the company.[8]
A valuation cap limits the valuation used to calculate conversion; a discount can give the early investor a lower conversion price. A cap is not a guarantee of the company’s value, and SAFE money can still dilute the founders. The exact arithmetic depends on the instrument, other financing and the later round.[8]
A convertible note starts as debt, usually accruing interest and carrying a maturity date, with terms for conversion into shares. It differs from a SAFE even though both can lead to future ownership.[1][8]
Why now: an extension or a bridge
If Company X adds money to an existing round, people may call it an extension, “seed-plus” or “Series A extension.” A bridge round provides funding between larger rounds or towards another milestone. Neither label tells us whether the price went up or down.[4][9]
Separately, an up round raises money at a higher share price than the preceding priced round; a down round uses a lower price; a flat round broadly keeps it unchanged, comparing on a consistent share basis. In a separate Company X scenario, moving from $10 to $7 a share would be a down round even if the new cheque were bigger.
Does every company eventually reach an IPO?
No. Company X could remain private, stop raising when customer cash supports it, be acquired, or close if it cannot keep operating. Debt and grants may also help fund a business; neither is a Series A or B. Loans bring repayment obligations, while grants have their own conditions.
An IPO, or initial public offering, is a company’s first public offering of shares. It can raise fresh capital and create opportunities for existing holders to sell, subject to restrictions. It is a different event from another private funding round, and it is not an automatic next step after Series D.[2]
Investors usually realise a return when they can sell their holdings, such as in an acquisition or a permitted share sale. A higher valuation on its own has not paid them back. Some investments never return any money.[7]
Even in our clean example, the seed investors’ original 20% becomes 9.216% after the four later rounds: 20% × 80% × 80% × 80% × 90%. If Company X were then sold for $300 million available to shareholders and everything were divided strictly by ownership, their share would be $27.648 million before taxes and fees. That is a simplified illustration; debt, sale costs and contractual payout preferences can change what people actually receive.
The next time I read a funding headline
I want to ask three questions: How much money is going into the business? What ownership and rights are being exchanged? What is the money meant to achieve?
Pre-seed gave Company X a chance to test its idea. Seed helped it find customers. The later rounds paid for larger ambitions. At every stage, the business still had to turn that money into something useful.
The letters tell me roughly where to look. The answers tell me what happened.
Sources and further reading
The sources below support the concepts. Company X and all its numbers are original fictional teaching examples. Source organisations are named only for attribution, not used as company case studies.
- U.S. SEC: Common Startup Securities — equity, share classes and convertible instruments.
- British Business Bank: A guide to equity funding stages — stage names, typical purposes and IPOs.
- Carta: Seed funding — early product development, validation and runway.
- Carta: Startup funding — later rounds and funding terminology.
- Carta: Pre-money vs. post-money valuations — the valuation and ownership calculations.
- U.S. SEC: Raising Later-Stage Capital — board involvement, dilution and investment terms.
- U.S. SEC: Early-Stage Investors — angels, venture funds and realising returns.
- Y Combinator: SAFE documents and explanations — the standard instrument and conversion terms.
- Carta: Priced rounds vs. SAFEs — priced financing and bridge funding.
An educational explanation of common venture-funding language, using simplified assumptions. Deal structures and terminology vary across markets.