What is a funding round structure?

A funding round structure is the complete design of a round: its size, its investors, its valuation and the movement of every share. In many rounds this design is settled before anyone drafts a term sheet, the short document with the main terms of an investment.

Peter Möllmann explained this on my DEALMACHER podcast. He is a partner at the law firm PXR and negotiates some of the largest growth rounds in Germany, Austria and Switzerland. Examples are a $500 million Series C at Stark, $410 million at Vay and €240 million at Amboss. Series A, B and C are the numbered funding rounds that follow a startup's first round, the seed round. He also represents venture funds such as Battery Ventures, Creandum and Union Square Ventures.

The part of the work he enjoys most is the modelling that happens before any document exists. By the time the term sheet arrives, valuation and allocation are usually settled. In a spreadsheet, two or three weeks earlier. The full conversation is summarized in Design the Round Before You Negotiate the Term Sheet.

What belongs in the model of a funding round?

Every moving part of the round belongs in one cap table, the table that shows who owns which share of the company. Build it before the term sheet exists:

• Round size: how much you actually want to raise.
• Lead investors: how much each interested lead wants to invest. The lead is the investor who sets the terms and usually writes the largest check.
• Pro rata: which existing investors will use their right to invest again to keep their percentage.
• Early angels: whether early private investors get bought out.
• Secondary: whether you sell some existing shares, and how many. In a secondary the money goes to the seller, while new shares from a primary bring money into the company.

Then model scenarios: this investor as lead instead of that one, 30 million instead of 40, a larger secondary against a smaller primary. You are looking for the version of the round you want to live with.

Why is the valuation usually settled before the term sheet?

Because the investor needs internal approval before issuing a term sheet. The partner at a fund needs an informal okay from the investment committee, the group inside the fund that approves deals. That okay rests on a number and a structure you agreed on beforehand.

So the valuation is rarely the fight inside the term sheet. It explains why the term sheet looks the way it does when it arrives. The same holds for a secondary: once it is in the agreed cap table, nobody negotiates it in the term sheet.

Can a founder sell shares in a funding round?

Yes, and an oversubscribed round makes it easiest. Oversubscribed means investors want to invest more than you want to raise. If two leads both want to write 20 million and you only want 30, a secondary can absorb the extra demand. You clean up the cap table, buy out the angel investors from the very first round and sell a small part of your own shares.

Without excess demand, the conversation runs on your argument instead of the arithmetic. Möllmann has never seen a deal fall apart because a founder asked for a secondary. The reaction is often personal rather than economic:

• Fund history: a partner who has not yet returned money to the fund's own investors (LPs, limited partners) tends to be more sensitive.
• Origin: American investors, often relaxed on other terms, tend to be more reserved on secondaries.

Möllmann's calibration:

• Series A: a six-figure secondary is workable. Seven figures triggers real discussion and depends on how oversubscribed you are.
• Series B onward: seven figures is common.
• A round that barely closes: no secondary.

The reason to do it is risk. A founder eight years into a venture-backed company often holds one illiquid asset: shares that cannot easily be sold. If everything stays in the company, decisions can at some point be made for personal security instead of for the company.

How does the choice of lead investor shape the round?

The lead brings a brand, an expectation and a person who may sit on your board for years. Wilken Engelbracht discussed the brand question on DEALMACHER. He spent two periods in venture capital and was CFO of the football club VfL Bochum. He co-founded the €300 million fund Cusp Capital and is now managing director at the football club FC St. Pauli.

• For the brand: a well-known fund on the cap table reads as proof to the next investor, hire and customer.
• Against the brand: the signal can flip. A top fund that backs your seed round and then passes on your Series A tells the market it had the inside view and walked away.
• Beyond the brand: the name creates expectations you have to meet, and in early stages you choose a partner as much as a fund.

The brand is a weighty factor and one of several. Read more in Brand Wins Deals – And the Bill Comes Later.

Why does ownership in a growth round lead to hard negotiations?

Because in a growth round, ownership and risk stop moving together. The growth investor pays the highest price, carries the highest risk and ends up with three or four percent. The seed investor holds ten percent with much less risk.

Board seats, drag-along rights, exit rights and downside protection all follow from this gap. Drag-along rights let a majority of shareholders require the others to join a sale. If you know the gap while you allocate the round, you can see which investor will push for what and design around it.

Growth investors also form a different group from early-stage investors. Many have never written a check under $10 million. The best time to start these relationships is during your Series A, in the months after closing it. See The Network Reset.

What is left to negotiate in the term sheet?

Governance and legal structure: board composition, reserved matters, vesting and exit rights. Reserved matters are decisions that need investor approval. Vesting means founder or employee shares are earned over time. These are real negotiations. They deserve a full markup: one edited version of the document with all your changes at once.