Flow of funding from startup to IPO

Seed funding is the first official round of funding for a startup, helping it transition from an idea to a viable business. It typically involves angel investors, early-stage venture capital firms, accelerators, or even crowdfunding.

🔹 Purpose: Product development, hiring initial team, market validation

🔹 Investment Size: ₹4 Cr - ₹16 Cr (varies by industry and region).

🔹 Equity Given: 10-20% (can be in SAFE notes or convertible debt).

Seed funding is riskier than later rounds since the startup is still proving itself.

Valuations are lower compared to Series A+ rounds, making investor returns potentially higher.

Funding sources shift from individuals (angels) to institutions (VCs, hedge funds) as the company matures.

Angel investors are high-net-worth individuals who provide capital to startups in exchange for equity or convertible debt. They typically invest in the pre-seed and seed stages when startups are too risky for venture capital firms.

• Capital Injection – Provide early funding (8L - 4 Cr) to help startups build an MVP, hire a team, and validate the market.
• High Risk Tolerance – Invest in ideas with high growth potential but significant uncertainty.
• Mentorship & Guidance – Offer industry expertise, strategic advice, and valuable business connections.
• Networking & Credibility – Their backing can attract other investors, including VCs, in later rounds.
• Flexible Investment Terms – Unlike VCs, they often use SAFE notes or convertible debt rather than demanding strict equity deals.

Venture capital (VC) is a type of private equity financing where institutional investors (venture capital firms) provide capital to high-potential startups in exchange for equity (ownership stake). It is typically used to scale operations, expand markets, and drive rapid growth.

• Fundraising by VC Firms 💰 – VC firms raise money from Limited Partners (LPs) such as pension funds, endowments, and wealthy individuals.
• Startup Investments 🚀 – VCs invest in promising startups through Series A, B, and later funding rounds.
• Active Involvement 🤝 – VCs take board seats, provide strategic guidance, and help recruit talent.
• Scaling & Growth 📈 – With VC funding, startups expand operations, enter new markets, and refine their product.
• Exit Strategy 💵 – VCs aim to exit in 5-10 years via:
  • Initial Public Offering (IPO)
  • Merger & Acquisition (M&A)
  • Secondary Sale (selling shares to another investor)

A term sheet is a non-binding agreement outlining the key terms and conditions of an investment deal between a startup and investors. It serves as the blueprint for final investment agreements (like Shareholder Agreements & Subscription Agreements).

🔹 1. Valuation Terms

• Pre-Money Valuation – Startup value before investment
• Post-Money Valuation – Value after investment

🔹 2. Investment & Ownership

• Equity Stake – % ownership given to investors
• Dilution Protection – Safeguards against excessive dilution

🔹 3. Control & Governance

• Board Composition – Investors’ influence on decisions
• Voting Rights – Who controls key company matters
• Founder Vesting – Ensures founders earn equity over time

🔹 4. Liquidation Preferences (Investor Payout Priority)

• 1x, 2x Preference – Defines who gets paid first in exits

🔹 5. Exit & Fundraising Clauses

• Drag-Along Rights – Investors can force a sale
• Right of First Refusal (ROFR) – Investors get first rights to buy founder shares

Equity dilution occurs when a startup issues new shares during funding rounds, reducing the ownership percentage of existing shareholders (founders, early investors, employees).

🔹 For Founders:

• Lower Ownership % – Each round reduces their stake.
• Less Control – Investors may gain more decision-making power.
• Exit Impact – A smaller stake means lower returns in an IPO or acquisition.

🔹 For Early Investors:

• Reduced Stake – Their % ownership decreases as new investors come in.
• Potential Upside – If valuation grows, their stake is worth more despite dilution.
• Anti-Dilution Clauses – Some investors negotiate protections to maintain their stake.

Investment banks are key players in a startup’s Initial Public Offering (IPO), helping transition from private to public markets. Their main roles include:

1️⃣ Underwriting 💰 – Buy shares from the company and sell them to public investors.
2️⃣ Valuation & Pricing 📊 – Set the IPO price based on market demand.
3️⃣ Regulatory Compliance 🏛️ – Handle SEC/SEBI filings and approvals.
4️⃣ Marketing & Roadshows 🎤 – Promote the IPO to institutional investors.
5️⃣ Share Allocation & Stabilization 📉📈 – Distribute shares and manage stock price post-listing.
6️⃣ Post-IPO Advisory 🤝 – Assist in investor relations and future fundraises.

1️⃣ Financial Readiness 📊 – Ensure audited financials, revenue growth, and compliance.
2️⃣ Strong Leadership 👥 – Hire an experienced CFO, board, and investor relations team.
3️⃣ Scalability & Operations ⚙️ – Streamline processes for post-IPO growth.
4️⃣ Select Investment Bank 🏦 – Choose the right underwriter for pricing & market support.
5️⃣ Regulatory Filings 📄 – Prepare S-1 (USA) / DRHP (India) for approval.
6️⃣ Investor Roadshow 🎤 – Pitch to institutional investors to build demand.
7️⃣ Post-IPO Strategy 🚀 – Focus on stock stability & long-term growth.

1️⃣ Valuation & Demand 📊

• Bull Market 🟢 – High investor confidence → Higher IPO valuation & strong demand.
• Bear Market 🔴 – Low risk appetite → Lower valuations & weak demand.

2️⃣ Stock Performance Post-IPO 📈📉

• Positive sentiment = Stock surges on listing day (high subscriptions & trading volume).
• Negative sentiment = Underperformance or IPO withdrawal (low subscriptions).

3️⃣ Investor Participation 👥

• Strong sentiment attracts institutional & retail investors.
• Weak sentiment may lead to IPO undersubscription or price cuts.

4️⃣ Sector Trends Matter 🔥

• If the industry is booming (e.g., AI, EVs), IPOs perform better.
• Unfavorable trends (e.g., economic downturn) hurt IPO prospects.

A lock-up period is a pre-determined time (usually 90-180 days) after an IPO when insiders (founders, executives, early investors) cannot sell their shares. This prevents an immediate stock sell-off.

1️⃣ Initial Stability 📈

• Lock-ups reduce selling pressure, helping stabilize the stock after IPO.

2️⃣ Potential Sell-Off After Expiry 📉

• Once the lock-up ends, insiders may sell shares, causing a price drop due to oversupply.
• If investors believe insiders are selling due to company weakness, it can trigger a further decline.

3️⃣ Stock Performance Varies 🔄

• If the company is performing well, share prices stay strong post lock-up.
• If sentiment is weak, prices may drop significantly as large investors exit.