Finance, Funding & Cap Tables
Master startup funding stages, equity structures, unit economics, and investor due diligence from pre-seed to Series C.
Raising capital is one of the most critical—and misunderstood—aspects of building a startup. Most founders obsess over valuations and funding amounts, but the real game is understanding dilution, unit economics, and building a sustainable business model that investors can't resist.
This comprehensive guide covers everything from pre-seed bootstrapping to Series C+ institutional rounds, with practical frameworks, cap table examples, and real-world metrics that drive investment decisions.
1. Startup Funding Stages: The Complete Journey
Every funding stage has different expectations, typical check sizes, and dilution ranges. Understanding where you are—and what investors expect—is critical.
Funding stages overview (CB Insights Global Venture Report 2024)
| Stage | Typical Raise | Valuation Range | Dilution | What Investors Want |
|---|---|---|---|---|
| Bootstrapping | Self-funded | N/A | 0% | Proof of concept, early traction |
| Pre-Seed | $100K - $500K | $1M - $3M | 10-20% | Working product, initial users, founding team |
| Seed | $500K - $2M | $3M - $10M | 15-25% | Product-market fit signals, growth metrics, clear GTM |
| Series A | $2M - $15M | $10M - $50M | 20-30% | Proven PMF, $1M+ ARR (SaaS), strong unit economics |
| Series B | $10M - $50M | $30M - $150M | 15-25% | Scaling proven model, $5M+ ARR, path to profitability |
| Series C+ | $30M - $100M+ | $100M - $500M+ | 10-20% | Market leadership, $20M+ ARR, international expansion |
India vs USA: Key Differences
India (2024 Market Conditions)
- • Pre-seed: ₹50L - ₹2Cr (angel investors, micro VCs)
- • Seed: ₹2Cr - ₹10Cr (early-stage VCs like Blume, Chiratae)
- • Series A: ₹10Cr - ₹50Cr (Sequoia India, Accel, Lightspeed)
- • Typical dilution 5-10% lower than US due to smaller check sizes
USA (Silicon Valley Benchmarks)
- • Higher valuations but also higher burn expectations
- • More competitive fundraising (1-2% of applicants get funded)
- • Stronger emphasis on YoY growth rates (3x+)
When to Raise Each Round
Pre-Seed: Prove the Idea
Raise when: You have a working MVP, 100-1,000 early users, or clear validation that your solution solves a real problem.
Use funds for: Product development, first hires (engineer + designer), early customer acquisition experiments.
Seed: Prove the Market
Raise when: You have strong product-market fit signals — users love your product, retention is strong (40%+ Month 1), and you're seeing organic growth.
Use funds for: Scaling GTM, hiring sales/marketing, product iteration based on feedback, building repeatable customer acquisition.
Series A: Prove the Model
Raise when: You've crossed $1M ARR (SaaS), have CAC payback under 12 months, LTV:CAC ratio above 3:1, and a clear path to $10M ARR.
Use funds for: Aggressive scaling, team expansion (10-30 people), new market entry, building moats (tech, brand, network effects).
Series B+: Prove the Scale
Raise when: You're a category leader with $5M+ ARR, strong unit economics, and ready to dominate the market or expand internationally.
Use funds for: Market domination, acquisitions, international expansion, building enterprise sales teams, scaling infrastructure.
2. Equity vs Debt vs Revenue-Based Financing
Not all capital is created equal. The type of financing you choose determines ownership, control, repayment obligations, and your relationship with funders.
Financing instruments comparison (NVCA Model Docs 2024)
| Type | How It Works | Pros | Cons | Best For |
|---|---|---|---|---|
| Equity (VC/Angel) | Sell company shares for capital | No repayment, expert advice, network access | Dilution, loss of control, exit pressure | High-growth startups aiming for $100M+ exit |
| Debt (Bank Loan) | Borrow money, repay with interest | No dilution, retain full ownership | Monthly payments, collateral required, personal guarantee | Established businesses with revenue & assets |
| Revenue-Based Financing | Repay % of monthly revenue until cap | No dilution, flexible payments (scales with revenue) | Higher effective interest (12-20%), not for early stage | SaaS with $50K+ MRR, predictable revenue |
| Convertible Note | Short-term debt → converts to equity later | Fast to close, delays valuation discussion | Discount & cap complicate future rounds | Pre-seed/seed when valuation is uncertain |
| SAFE | Future equity without debt or interest | Simple, founder-friendly, no repayment | Dilution ambiguity, less investor-friendly than notes | Y Combinator startups, fast fundraising |
Deep Dive: Convertible Notes vs SAFE
Convertible Note
How It Works
Short-term debt (12-24 months) that converts to equity in your next priced round. Includes interest rate (typically 5-8%).
Key Terms
- • Discount: 15-25% off next round valuation
- • Valuation Cap: Maximum conversion valuation
- • Interest Rate: 5-8% annually
- • Maturity Date: When note must convert or repay
Best For
India market (more common than SAFE), traditional investors who want debt protections.
SAFE (Simple Agreement for Future Equity)
How It Works
Not debt — just a promise of future equity. No interest, no maturity date. Converts in next priced round or liquidity event[2].
Key Terms
- • Discount: 10-20% off next round (optional)
- • Valuation Cap: Maximum conversion valuation
- • No Interest: Cleaner for founders
- • No Maturity: No repayment obligation
Best For
Early-stage startups, angel investors, fast fundraising when valuation is hard to determine.
India Legal Note
SAFE is NOT legally recognized in India under current SEBI/RBI regulations[3]. Indian startups should use Convertible Notes or Compulsorily Convertible Debentures (CCDs) for bridge financing.
3. Cap Tables: Understanding Equity & Dilution
Your cap table (capitalization table) is the single source of truth for who owns what percentage of your company. Mismanaging it early can cost you millions in lost equity or create legal nightmares.
Cap Table Example: Seed to Series A
Stage 1: Post-Incorporation (Founding Team)
Typical founding split (unequal based on role/contribution)
| Shareholder | Shares | Ownership % | Notes |
|---|---|---|---|
| Founder 1 (CEO) | 6,000,000 | 60% | 4-year vesting, 1-year cliff |
| Founder 2 (CTO) | 3,000,000 | 30% | 4-year vesting, 1-year cliff |
| Co-founder 3 (CPO) | 1,000,000 | 10% | 4-year vesting, 1-year cliff |
| Total Outstanding | 10,000,000 | 100% | Fully diluted |
Stage 2: Post-Seed Round ($1M at $4M post-money)
20% dilution for founders (typical seed round)
| Shareholder | Shares | Ownership % | Investment |
|---|---|---|---|
| Founder 1 | 6,000,000 | 48% | - |
| Founder 2 | 3,000,000 | 24% | - |
| Co-founder 3 | 1,000,000 | 8% | - |
| Seed Investors | 2,500,000 | 20% | $1,000,000 |
| Total Outstanding | 12,500,000 | 100% | - |
Stage 3: Post-Series A ($5M at $20M post-money)
Series A dilution + ESOP pool creation
| Shareholder | Shares | Ownership % | Notes |
|---|---|---|---|
| Founder 1 | 6,000,000 | 36% | Diluted from 48% |
| Founder 2 | 3,000,000 | 18% | Diluted from 24% |
| Co-founder 3 | 1,000,000 | 6% | Diluted from 8% |
| Employee Pool (ESOP) | 2,000,000 | 12% | 10-15% typical for Series A |
| Seed Investors | 2,500,000 | 15% | Diluted from 20% |
| Series A Investors | 4,166,667 | 25% | $5,000,000 invested |
| Total Outstanding | 16,666,667 | 100% | - |
Sequoia's 10-15-75 Rule
By Series A, aim for:
- • 10-15% set aside for employee stock options (ESOP)
- • 15-25% sold to Series A investors
- • 60-75% retained by founders + early investors
Source: Sequoia Capital - Cap Table and Hiring[5]
Anti-Dilution Protections: What Investors Negotiate
Sophisticated investors often include anti-dilution clauses to protect themselves if you raise a "down round" (lower valuation than previous round)[7].
Two Types of Anti-Dilution:
1. Full Ratchet (Investor-Friendly)
If you raise at a lower price, investor's conversion price adjusts to the new lower price — giving them more shares. Very punitive for founders.
2. Weighted Average (Standard)
Conversion price adjusts based on a weighted average formula considering the amount raised. More balanced for both parties. This is standard in most term sheets.
Vesting Schedules: Protecting the Team
All founders and employees must have vesting schedules. Standard is 4-year vesting with a 1-year cliff:
- •Cliff: If you leave before 1 year, you get 0% of equity
- •Year 1: After 1 year, you vest 25% (cliff amount)
- •Years 2-4: Remaining 75% vests monthly (2.08% per month)
Why Vesting Matters
Without vesting, a co-founder who leaves after 3 months still owns 30% of your company forever. Investors will NEVER fund a company with unvested founder equity. It's a deal-breaker.
4. Unit Economics: The Math That Matters
VCs don't just bet on vision—they bet on math. Your unit economics tell the story of whether your business is fundamentally profitable per customer[6].
The Critical Metrics Every Investor Evaluates
SaaS unit economics benchmarks (First Round Review 2024)
| Metric | What It Measures | Good Benchmark | How to Calculate |
|---|---|---|---|
| CAC (Customer Acquisition Cost) | Cost to acquire one paying customer | <$500 for SMB SaaS, <$5K for enterprise | Total Sales & Marketing Spend ÷ New Customers Acquired |
| LTV (Lifetime Value) | Total revenue from one customer | 3-5x CAC minimum | ARPU × Gross Margin % ÷ Churn Rate |
| LTV:CAC Ratio | Return on customer acquisition | >3:1 (great), >5:1 (excellent) | LTV ÷ CAC |
| CAC Payback Period | Months to recover acquisition cost | <12 months (good), <6 months (great) | CAC ÷ (ARPU × Gross Margin %) |
| Gross Margin | Profit after COGS | >70% (SaaS), >40% (marketplace) | (Revenue - COGS) ÷ Revenue × 100 |
| Net Revenue Retention (NRR) | Revenue growth from existing customers | >100% (must-have), >120% (best-in-class) | (Revenue from cohort + Expansion - Churn) ÷ Starting Revenue |
| Monthly Burn Rate | Cash spent per month | Depends on runway target | Starting Cash Balance - Ending Cash Balance |
| Runway | Months of cash left | >12 months minimum | Current Cash ÷ Monthly Burn Rate |
Worked Example: SaaS Startup Unit Economics
Inputs (Monthly Averages)
Calculated Metrics
Verdict: Excellent Unit Economics ✓
LTV:CAC above 10:1 and payback under 4 months signals a highly capital-efficient growth engine. Ready for aggressive scaling.
When to Prioritize Growth Over Profitability
If your LTV:CAC is above 3:1 and payback is under 12 months, you should be spending more on sales & marketing, not less. This is a sign that every dollar you invest returns 3x+ over the customer lifetime.
VCs call this "throwing fuel on the fire" — investing aggressively while unit economics are positive.
5. Burn Rate & Runway: Managing Your Cash
Running out of cash is the #1 killer of startups. Understanding your burn rate and extending your runway is critical to survival—especially in tough fundraising markets.
Calculating Burn Rate & Runway
Gross Burn Rate
Total monthly operating expenses (salaries, rent, marketing, software, etc.)
Net Burn Rate
Gross burn minus monthly revenue (actual cash depletion rate)
Runway
Months until you run out of cash at current burn rate
Example: Startup Cash Management
Scenario: Post-Seed SaaS Startup
Strategy Recommendation
- • Start fundraising at 12-month runway mark (Month 5)
- • Fundraising takes 3-6 months on average
- • Never let runway drop below 6 months (panic territory)
- • If revenue hits $50K MRR, burn becomes $30K → runway extends to 33 months
The 6-Month Rule
If your runway drops below 6 months without a term sheet signed, you're in danger zone.Options: (1) Cut burn by 30-50%, (2) Raise emergency bridge round, (3) Explore acquisition. Don't wait until Month 3 to panic.
6. Investor Due Diligence: What to Prepare
Once a VC gives you a term sheet, expect 2-4 weeks of rigorous due diligence. Be prepared with a clean data room to avoid delays or renegotiations.
Due Diligence Checklist (Series A+)
- Cap table (fully reconciled with all option grants, convertible notes, SAFEs)
- Financial statements (P&L, balance sheet, cash flow) for last 12-24 months
- Customer list with MRR/ARR breakdown (anonymized if sensitive)
- Product roadmap and technical architecture documentation
- All contracts: customer agreements, vendor contracts, office leases
- Employment agreements for all team members (offer letters, equity grants)
- IP documentation: patents, trademarks, invention assignments
- Incorporation documents: certificate of incorporation, bylaws, board resolutions
- Compliance records: taxes filed, labor law compliance, data privacy (GDPR/CCPA)
- Insurance policies: D&O insurance, E&O insurance, cyber insurance
- Previous round documents: term sheets, SAFEs, board consents
- Litigation history or ongoing legal disputes (if any)
Pro Tip: Build Your Data Room Early
Use Google Drive, Notion, or dedicated software (Carta, DocSend) to organize your data room before you start fundraising. VCs will ask for this within 48 hours of a verbal term sheet.
A disorganized data room signals operational sloppiness and can kill deals.
Download Templates & Calculators
References & Sources
- [1] NVCA Model Legal Documents - National Venture Capital Association • Accessed October 2024
- [2] SAFE (Simple Agreement for Future Equity) - Y Combinator • Accessed October 2024
- [3] SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 • Accessed September 2024
- [4] Global Venture Funding Report 2024 - CB Insights • Accessed August 2024
- [5] Cap Table and Hiring - Sequoia Capital • Accessed October 2024
- [6] Unit Economics: A Guide to Understanding Startup Metrics - First Round Review • Accessed September 2024
- [7] Equity Dilution: How It Works - Carta • Accessed October 2024
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