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Venture funding and company building
How venture capital works and how to raise it — SAFEs, priced rounds, term sheets, cap tables, employee equity and exits.
- Sections
- 6
- Pages
- 133
- Reading time
- ~5 h
- Take first
- Startups
What you will be able to do
- Explain VC fund economics (2 and 20, power law, ownership targets) and predict how investors will behave as a result.
- Model post-money SAFE, convertible note and priced-round conversions, and build a cap table from founding through Series B.
- Read a term sheet and run liquidation waterfalls and anti-dilution adjustments with real numbers.
- Evaluate an employee equity offer, including strike price, 409A, vesting, exercise cost and tax treatment (ISO/NSO, 83(b), AMT, QSBS).
- Plan and run a fundraising process with a deck, investor pipeline and data room.
- Explain how acquisitions, secondaries and IPOs pay out to each class of shareholder.
- Decide when bootstrapping, revenue-based financing or venture debt fits better than equity.
Whether you found a company, join one early, or simply hold stock options, the mechanics of venture funding decide what your equity is worth. A 0.1% option grant is not a lottery ticket with a fixed jackpot — it is a claim on a company whose ownership, preferences and exit path were negotiated in rounds you may never see. This topic is the durable map of that system: how VC funds make money, why that shapes what they fund, how instruments convert, how term sheets allocate risk, how cap tables dilute, and how exits pay out.
Nothing here is legal or tax advice. The goal is fluency: you should know which questions to ask counsel, a CFO or a hiring manager, and you should be able to run the arithmetic yourself so nobody can hand-wave past you.
It pairs with Startup economics on whether the business can work, and with Product on what you build. Read this when equity, fundraising or investor behavior is on the table — evaluating an offer, sitting in a board update, or deciding whether venture money is the right tool.
Who this is for
You are a junior or mid-level engineer who might join a startup, negotiate equity, or found something later. You can read a spreadsheet. You do not need to have raised money. You need the habit of translating "we raised at a $40M post" into ownership, dilution and what a $200M exit would actually pay each class of shareholder.
If you already work at a venture-backed company, treat early lessons as the why behind board behavior, and later lessons as the how behind your grant and 409A.
How to study it
Work every number by hand at least once. After How venture capital works, sketch a $100M fund's fees and the gross return needed for a 3× LP outcome. After The power law, pick one company you know and ask whether a VC could ever return a fund on it. After SAFE conversion math and Cap tables, rebuild a toy cap table from founding through Series A on paper or in a sheet.
Do not binge every page. Pull a lesson when a decision is live: an offer letter → Employee equity and Equity taxes; a seed conversation → SAFEs and Running a fundraise; a rumor of acquisition → Liquidation preferences and M&A.
Pace: Start with how venture capital works if "VC" is still a blur. Company setup and instruments when you are incorporating or raising on SAFEs. Term sheets when a priced round is real. Cap tables and equity taxes when you hold paper. Raising and exits when you are in the process — or choosing not to be.
Unit roadmap
The numbered list is a shorter path. The sections below are every lesson: 133 in all, about 5 hours of reading.
How venture works
Why investors behave the way they do, and what each stage of capital is for.
- How venture capital works — LPs, GPs, fees, carry and the returns VCs need
- The power law — why a few investments return the fund
- Funding stages from pre-seed to IPO — round purpose, size, dilution and milestones
- Angels, accelerators and YC — early checks, syndicates and the YC deal
Company setup and early instruments
Legal shape and the convertible paper that funds most seeds.
- Incorporation and the Delaware C-corp — why startups incorporate this way
- Founder equity, vesting and agreements — splits, cliffs, acceleration, 83(b)
- SAFEs — post-money caps, discounts, MFN and pro-rata
- SAFE conversion math — stacking SAFEs into a priced round
- Convertible notes — debt that converts vs SAFEs
Priced rounds and term sheets
Preferred stock, valuation and the terms that survive the handshake.
- Priced rounds — pre/post money, price per share, option pool shuffle
- How startup valuation really works — ownership negotiation vs multiples
- Term sheets: an overview — anatomy and which terms matter
- Liquidation preferences and waterfalls — who gets paid first
- Anti-dilution protection — full ratchet vs weighted average
- Control terms — board, protective provisions, drag-along, ROFR
Cap tables and equity
Ownership over time, and what employees actually receive.
- Cap tables and dilution — founding through Series B with numbers
- Option pools — sizing, refreshes and founder cost
- Employee equity — options vs RSUs, 409A, vesting, offer math
- Equity taxes: ISOs, NSOs, 83(b), AMT and QSBS — US tax rules with scenarios
Raising
The process of selling the company to investors without wrecking the company.
- The pitch deck — structure and the slides that matter
- Running a fundraise — pipeline, sequencing, momentum, close
- Managing investors and boards — updates, meetings, asking for help
- Down rounds, bridges and venture debt — when the plan breaks
Exits and alternatives
How money comes out — and when venture is the wrong tool.
- Mergers and acquisitions — deal structures and shareholder proceeds
- Secondaries and tender offers — liquidity before exit
- IPOs and going public — S-1, lockups, why companies stay private
- Alternatives to venture capital — bootstrap, RBF, debt, grants
Course resources
Brad Feld and Jason Mendelson's Venture Deals is the standard field guide to term sheets. Holloway's guide is strong on process and vocabulary. Fred Wilson's AVC archives remain one of the clearest GP-written explanations of how funds think.
Venture Deals (Feld & Mendelson)Be Smarter Than Your Lawyer And Venture Capitalistventuredeals.com The Holloway Guide to Raising Venture CapitalA current and comprehensive resource for entrepreneurs, with technical detail, practical knowledge, real-world scenarios, and pitfalls to avoid.Holloway
Fred Wilson: AVCMusings of a VC in NYCAVC
Carta's classroom and data reports are the best free source for current medians on valuations and dilution — use them as orders of magnitude, not gospel for your deal.
Carta: State of Private Marketscarta.comYC's deal page and seed fundraising guide are canonical for early instruments and process.
The YC DealThe Y Combinator Standard Deal - $500kY Combinator
A Guide to Seed Fundraising (YC)Fundraising and Equity: The most comprehensive guide on why, when, and how to raise money for your startup.YC Startup Library
Carta's short explainer on fund structure is a clear visual companion to the first lesson:
The Stanford / YC "How to Raise Money" panel (Andreessen, Conway, Conrad) is still one of the best conversations on angels, VCs and closing:
How venture works
How venture capital works
LPs, GPs, fund structure, management fees, carry and the returns VCs need.
VC fund structure
LPs commit, GPs decide, the management company runs the firm, and a 10-year clock shapes every investment.
2 and 20
The classic VC fee split: about 2% a year to run the firm, 20% of profits as carry if the fund works.
TVPI, DPI and IRR
What LPs need from a fund, and why paper value (TVPI) is not cash they can spend (DPI).
Reserves and ownership targets
Why funds keep powder for follow-ons, aim for 10–20% at entry, and under-reserve at their peril.
Power-law returns
Most venture deals return little; a tiny tail returns so much it pays for the rest. The shape is the point.
Fund-returner math
At 10% ownership, one company often needs a $1B exit to return a $100M fund by itself. A $50M sale is rounding error.
The power law
Why a few investments return the whole fund, and how that shapes what VCs fund.
Black swan farming
Institutional venture optimizes for the right to win huge, not for a high hit rate of pretty-good companies.
Founder and VC misalignment
A $50M exit can change a founder's life and be a shrug for the fund. Know the game before you raise.
The funding staircase
Pre-seed through IPO is a sequence of checks that each buy down a different risk — not one round with a louder letter.
Round sizes and dilution
Typical check sizes by stage, Carta's 2025 medians, and the algebra that 20% sold is 20% of everyone's stake.
Round milestones
What proof each stage is buying — from "can this team build" through repeatable growth to public-market hygiene.
Funding stages from pre-seed to IPO
What each round is for, typical sizes, dilution and the milestones investors expect.
Founder dilution across rounds
How 100% becomes the teens — pools, 15–25% primary rounds, and why landing in single digits at IPO is normal.
Angel investors
People writing personal checks — typical sizes, what they add, and how to pick them.
Syndicates and rolling funds
How a lead packages many small checks into one line on the cap table, and how that differs from a solo angel.
Accelerators
A fixed-term program that trades a standard check and equity for network, focus and Demo Day.
Angels, accelerators and YC
A map of people-checks, syndicates, accelerators and the YC deal — choose them as colleagues, not ATMs.
The YC standard deal
Two SAFEs that add to $500k — a fixed 7% plus an uncapped MFN — and how the second piece moves with your next cap.
Company setup and early instruments
LLC vs S-corp vs C-corp
Why venture-backed companies form a Delaware C-corp, and when an LLC is still the right call.
Authorized shares and founder stock
How a charter's share count, par value and restricted stock purchases turn a new C-corp into a cap table.
PIIA and IP assignment
Investors buy a company that owns its product. A PIIA is how code, models and brand move from people into the entity.
Incorporation and the Delaware C-corp
Why VC-backed startups incorporate as Delaware C-corps, how founder stock is issued, and the setup that prevents diligence disasters later.
Formation tools and diligence cleanup
Atlas and Clerky for a vanilla Delaware setup, when to hire a lawyer, flips for non-US founders, and the eight messes Series A counsel always finds.
Splitting founder equity
Near-equal splits for co-founders who start together, and the few reasons an uneven split is actually justified.
Reverse vesting
Founders buy stock on day one, then earn the right to keep it — four years, a one-year cliff, and company repurchase of the rest.
Founder equity, vesting and agreements
How co-founders split equity, implement four-year reverse vesting with cliffs, handle acceleration and file the 83(b) before the clock runs out.
Founder acceleration
Single-trigger vs double-trigger vesting — who gets unvested shares when the company is sold or a founder is fired.
Co-founder agreements
Roles, IP, time commitment, departure and deadlock — the written rules that keep a 50/50 company from freezing.
SAFEs
The post-money SAFE as a right to future equity — valuation caps, discounts, MFN, pro-rata side letters and the ownership math founders must run before signing.
Post-money SAFEs
Ownership at the cap is investment divided by cap, and later SAFEs dilute founders rather than earlier SAFE holders.
SAFE caps and discounts
The valuation cap, the discount, "better of," uncapped SAFEs, and when each one actually binds.
MFN and SAFE side letters
Most-favored-nation clauses and pro-rata side letters — the extras that sit beside the standard SAFE form.
Choosing a SAFE cap
A cap is an ownership sale. Size the dollars against the cap, stay well under it, and stop when you hit your band.
SAFE conversion math
Stack post-money SAFEs, convert them in a priced round with an option pool, and work share counts and ownership before and after Series A.
Stacking post-money SAFEs
Later post-money SAFEs do not dilute earlier SAFE percentages; they dilute common, and the share math follows from that.
Cap vs discount at conversion
Each SAFE converts at the more favorable of its cap price and the discounted round price — lower price, more shares.
SAFEs into Series A
Two stacked SAFEs, a $5M Series A, and a 10% post-money pool — founders 56%, SAFEs 14%, new money 20%.
Convertible note terms
Principal, interest, maturity, discount, cap and the qualified-financing trigger that turns a loan into stock.
Convertible notes
Debt that converts — when notes still beat SAFEs, and the map of terms, math and maturity.
Note conversion math
Better of discount or cap, plus accrued interest, walked through a $500k note into a $2.00 Series A.
Note maturity
The due date a SAFE does not have, and the four conversations you get if no priced round arrives.
Priced rounds and term sheets
Preferred vs common stock
VCs buy preferred with seniority, anti-dilution and control. Founders and employees hold common — the residual.
Pre-money and post-money
Post-money = pre-money + new cash. Investor ownership = investment / post-money. Price per share falls out of that.
Priced rounds
Preferred stock at a negotiated price — pre- and post-money, share math, the pool shuffle and the closing binder.
Walking a priced Series A
$8M at $32M pre with a 10% post-money pool — share counts, price per share and the cap table after close.
Closing a priced round
Term sheet to charter, SPA and rights agreements — plus multiple closings, SAFE conversion and what to ask as an engineer.
How startup valuation really works
Early valuations as negotiated ownership, later ones as revenue multiples — and why the headline number can lie.
Ownership-backed valuation
At seed and Series A, price falls out of cash needed and the slice the lead must own — not a DCF of the code.
Revenue multiples
Later-stage posts are often ARR times a growth-and-efficiency multiple, with public comps as a noisy floor.
Valuation vs terms
A higher headline with participating prefs and a fat pool can leave common worse than a lower clean deal.
Term sheets: an overview
The anatomy of a VC term sheet — economic vs control terms, what is binding, and what to negotiate first.
Economics vs control
Almost every term-sheet fight is who gets the money or who decides — valuation is only one cell in the first column.
Binding term sheet terms
Most of a VC term sheet is an agreement to agree. No-shop, confidentiality, and sometimes expenses actually bind.
Market term sheet terms
A clean US seed or Series A baseline — 1× non-participating, weighted-average anti-dilution, sensible board, hiring-justified pool.
Negotiating term sheets
Fight valuation-plus-pool, preferences, and the board first — then run a thirty-minute checklist and a two-sheet comparison.
Non-participating preferred
The market standard — 1× preferred takes the better of money back or converting to common.
Participating preferred
Money back plus a share of the rest — costly for common, and why a cap is the usual compromise.
Preference multiples
2× and 3× preferences flatten common outcomes across a wide exit band — treat them as a distress term.
Seniority and stacked waterfalls
Later preferred can stand in front of earlier preferred. A $25M sale can still zero common.
Liquidation preferences and waterfalls
Who gets paid first in an exit — the map of 1× non-participating, participation, multiples and stacked seniority.
Full ratchet
The harsh anti-dilution formula that resets the old conversion price all the way to the new cheap price, even on a tiny round.
Weighted-average anti-dilution
The market formula CP2 = CP1 × (A+B)/(A+C), plus why the definition of A (narrow vs broad) changes the pain.
Anti-dilution protection
Extra conversion-price math for old preferred when a later round is cheaper — not ordinary new-money dilution.
Pay-to-play
Follow on in the next round or lose anti-dilution — and sometimes lose preferred status.
Board seats
Who sits on the board at each stage, why independents matter, and how an investor-majority board fires a CEO.
Protective provisions
The preferred veto list — what must stay on it, and what turns the company into a hostage.
Control terms
Board seats, vetoes, drag-along, pro-rata and ROFR — who can force a sale, block a raise, or fire a CEO.
Drag-along and tag-along
How a majority can force everyone to sell, and how a minority can join a sale they did not start.
Pro-rata rights
The right to buy enough of the next round to hold your percentage — and why super pro-rata is a scarce concession.
ROFR and co-sale
How the company and investors can match a founder share sale, and sell alongside it.
Cap tables and equity
Fully diluted ownership
Authorized vs issued vs fully diluted — and why "I own 1%" is meaningless until you name the denominator.
How dilution works
Your share count stays put; the denominator grows. Each round multiplies old ownership by (1 minus the new-money percent).
Cap tables and dilution
The ownership ledger from founding through Series B — start here for the map, then walk the numbers.
Walking a cap table
Northwind from incorporation through two stacked post-money SAFEs, with the ownership math at each step.
Series A on the cap table
Convert SAFEs, refresh the pool, sell preferred, then watch Series B and pro-rata move the same numbers again.
Sizing an option pool
Build a hiring plan, sum the grants, add a buffer — do not pick 15% because a term sheet said so.
The option pool shuffle
A post-money pool target is usually carved from the pre-money, so founders — not the new investor — pay for future hires.
Option pools
Reserved equity for hiring — size it from a plan, watch the pre-money shuffle, and refresh before the tank is empty.
Option pool refreshes
Later rounds top the pool up again. Track available, outstanding and grant burn so you are not surprised in diligence.
Options vs RSUs vs restricted stock
Three ways companies grant equity — a right to buy, a promise of shares at vest, or actual shares upfront.
Strike price and 409A
Option strikes track a 409A appraisal of common stock, which usually sits below the last preferred round price.
Vesting and acceleration
Four years, a one-year cliff, refresh grants, and the difference between single-trigger and double-trigger acceleration.
Exercising options
Paying strike to buy shares, early exercise plus 83(b), and the post-termination window that can force a cash decision in 90 days.
Employee equity
Options vs RSUs, strike prices and 409A, vesting and exercise windows, and how to evaluate a startup offer with ownership math.
Evaluating an equity offer
Turn "50,000 options" into ownership %, diluted %, exercise cost and dollars after the preference waterfall.
NSO taxation
Non-qualified options are taxed as ordinary income on the spread at exercise, then capital gain or loss when you sell.
ISOs and AMT
Incentive stock options skip regular tax at exercise, but the spread is an AMT adjustment — and a qualifying sale needs two holding periods.
83(b) elections
A 30-day election to tax restricted stock at grant instead of at vest — powerful at a tiny spread, irreversible if you forfeit.
QSBS
Section 1202 can exclude a large fraction of federal gain on eligible C-corp stock — with different rules for shares issued before and after July 4, 2025.
Equity taxes: ISOs, NSOs, 83(b), AMT and QSBS
How US tax rules hit option exercise and share sales — NSO ordinary income, ISO AMT, 83(b), QSBS after the 2025 changes.
Raising
Pitch deck slides
Ten to fourteen slides in a standard order — one job per slide, numbers that survive without you talking.
The pitch deck
A short slide narrative that sells the investment — get the meeting, frame the story, show why now and why you.
Seed vs Series A decks
Same skeleton, different burden of proof — insight and early evidence versus a repeatable growth machine.
Deck design
Legible, simple, obvious — one idea per slide, readable on a phone, numbers over adjectives.
When to raise
Raise when capital buys a milestone, with 6–9 months of runway left — not when you are merely anxious.
Target lists and intros
Rank 40–80 names before you take meetings, and make every intro warm and forwardable.
Batching a fundraise
A 2–4 week sprint of first meetings, dated partner slots and fast diligence — not a year of polite coffees.
Running a fundraise
Target lists, warm intros, a tight 2–4 week process, momentum, data rooms and closing — how a raise actually gets done.
Closing a round
First commitment, leads vs followers, reading soft nos, collecting wires, and keeping Plan B so the process is not existential.
Monthly investor updates
A short, predictable email — highlights, stable metrics, honest lowlights and specific asks — is the cultural version of information rights.
Running board meetings
Pre-reads 48 hours ahead, labeled decisions, recorded resolutions and a closed session — not a TED talk.
Managing investors and boards
Monthly updates, board meetings, hard conversations and how to use investors for hiring and intros without losing the company.
Board dynamics
Healthy boards argue about strategy. Unhealthy boards rubber-stamp — or turn every meeting into a referendum on the CEO.
Communicating bad news
Bad news early, complete and with a plan — never as a meeting ambush the day you need a vote.
Bridges and flat rounds
Insider capital and same-price extensions that buy time — and when they are just delayed insolvency.
Down rounds
A priced round cheaper than the last one — what happens to founders, employees and anti-dilution.
Down rounds, bridges and venture debt
A map of flats, bridges, clean downs, recaps, debt and structured "flats" — what to do when the last price will not hold.
Recapitalizations
A new financing that reshuffles rights — senior money in, old preferred cut down, and pay-to-play for those who follow.
Venture debt
A loan on top of equity — size, warrants, covenants, and why it is a poor rescue tool.
Structured rounds
Flat or up headlines that hide extra preference, warrants and guaranteed returns — often worse than a clean down round.
Exits and alternatives
Why companies buy startups
Talent, product, customers or defense — the buyer's motive predicts the deal structure and who gets paid.
The acquisition process
Inbound to LOI to diligence to close — and why you should not open talks unless you intend to sell.
Cash, stock, earnouts and escrow
How the purchase price is actually paid — and why headline value is not what hits your account.
The acquisition waterfall
Fees, debt, escrow and preferred get paid before common. A $40M headline can leave common $4.8M.
Mergers and acquisitions
How acquisitions work: motives, process, consideration, the waterfall and what happens to employee equity.
Equity in an acquisition
Unvested options may accelerate, convert to buyer stock, or vanish — and how to read a deal as an employee.
Secondaries and tender offers
Liquidity before exit for founders and employees: secondary sales, tender offers and their rules.
Founder secondaries
Selling a modest slice of vested founder stock in a later priced round — liquidity without selling the company.
Tender offers
A company-sponsored window where eligible holders can sell a capped slice of shares at a fixed price.
Transfer restrictions
ROFR, company consent, securities law and lockups — why a marketplace match is the start of paperwork, not a sale.
Secondary pricing and tax
Common often sells at a discount to last preferred, 409A is a separate number, and holding period decides the tax character.
The traditional IPO
Underwriters, the S-1, the roadshow, the offering price and the first-day pop — how a company actually lists.
IPO lockups
Insiders usually cannot sell for about 180 days. IPO day is not payday.
IPOs and going public
The map of listing — traditional IPOs, lockups, preferred conversion, direct listings and why companies stay private longer.
Preferred stock at IPO
A qualifying IPO usually converts preferred into common, so the preference stack disappears instead of eating a cash waterfall.
Direct listings and SPACs
Two other doors to a public ticker — market-set opening prices without a classic book, and SPAC mergers with extra dilution.
Bootstrapping
Growing from revenue and savings instead of institutional equity, and what you keep and give up.
Revenue-based financing
An advance you repay as a cut of monthly revenue until you hit a cap, with no equity sold.
Grants and non-dilutive funding
Public and research money that does not buy shares, and when the paperwork is worth it.
Customer funding
Paid pilots, services wedges, rewards crowdfunding and community rounds that put cash in before a priced raise.
Alternatives to venture capital
A map of bootstrap, RBF, grants, customer funding and debt — and how to pick the game you are playing.