7 Things Every Entrepreneur Must Know About Venture Capital Before Raising Money

Raising venture capital can be a thrilling yet daunting experience. Many founders dive in without fully understanding the nuances that can make or break their startup’s future. Here are seven essential insights to guide you through this journey.

1. Legal Structure Matters: Most VCs expect startups to be C corporations. This setup allows issuing preferred stock and multiple classes of shares, facilitating investment and governance.
2. Equity Vesting Protects Commitment: Founders’ equity usually vests over four years with a one-year cliff. This protects the company from founders leaving early and ensures aligned incentives.
3. Intellectual Property Ownership Is Critical: Clear assignment of IP rights avoids legal disputes and reassures investors during due diligence.
4. Market Size Is King: Venture capitalists seek startups targeting large, scalable markets. Without a big market, even great products struggle to attract VC.
5. Convertible Notes Offer Flexibility: Early-stage funding often uses convertible notes, which start as debt but convert to equity during priced rounds, delaying valuation debates.
6. Understand Term Sheets and Governance: Negotiating term sheets involves balancing economic terms like liquidation preferences and governance rights such as board seats and voting.
7. Prepare for Exits and Challenges: Know the common exit routes—acquisitions and IPOs—and be ready to navigate down rounds or recapitalizations if needed.

By mastering these fundamentals, you position your startup for successful fundraising and long-term growth. Remember, venture capital is not just about money; it’s about building lasting partnerships that can help your vision come to life.

For further reading, explore detailed analyses from PitchBook NVCA Venture Monitor and LinkedIn insights on recent fundraising trends to see how these principles play out in today’s market. 3 1