Equity-based financing involves raising money from VCs and other investors in exchange for an ownership stake in your business, while debt-based financing typically involves borrowing money from lenders such as banks or other financial institutions.
A down round is a financing round whereby venture capitalists, angel investors, or another kind of private investor invests in a company at a lower valuation than the previous round. Down rounds can occur when there is an economic downturn, decreased performance or increased risk at the company, a change in the competitive landscape, or a lack of investor confidence.
A term sheet is a document outlining the key terms and conditions of an investment agreement between your startup and a prospective investor. It serves as a framework for negotiations and outlines details such as the amount of investment, the level of equity offered, the valuation of the company, and other relevant terms and conditions. The agreement between the two parties will eventually be more detailed and formalized in a contract, but the term sheet serves as an initial blueprint for the deal.
The amount of equity a startup should exchange for a VC funding round depends on a number of factors, including company valuation, the amount being raised, and the funding stage. In general, seed funding rounds involve higher equity stakes in exchange for investments, as early investors take on more risk. For later rounds, the level of equity exchanged for investments typically decreases as the company has established itself and is seen as less of a risk. Early-stage startups should usually expect to exchange at least 10-20% equity for a significant equity investment round.
In today’s economic environment, most startups should maintain enough cash to cover at least 18 months of burn rate.
