Understanding Startup Investments
Chapter 3
Chapter 3
How Equity Rounds Come Together
Understanding how equity rounds come together for startup investors, and how investors profit off of their investments in equity round startup funding.

Most equity rounds have one or more lead investors, who generally act to align startup founders and any additional investors around the terms of the round of funding, and invest a significant portion of the round.

A Lead Investor Generally:

  • Specifies terms of the round (such as pre-money valuation and liquidation preference)
  • Invests a large percentage of the overall round
  • Issues a term sheet, which is a non-binding summary of terms for an investment in the startup
  • Aligns founders and any additional investors around the closing documents that govern the financing (including the stock purchase agreement)
  • Takes a seat on the company board of directors following the round closing.

In a typical equity round, angel investors, strategic investors, or investors with pro rata rights may also contribute additional capital to the round, in addition to the lead investor.

Investors are presented with a term sheet that dictates the terms of the investment, including valuation, the round participants (all investors participating in a particular round of funding), preferred investor rights, and the company board of directors .

Assembling an equity round requires intensive legal review, diligence, and compliance steps, and therefore it can take anywhere from several weeks to a couple months to align all parties on the terms of the investment and organize and coordinate the fund closing.

When all parties are ready to invest, the first closing happens, and most or all investors wire money to the startup at the same time.

How do startup equity holders make money?

Two words: Liquidity Event.

A liquidity event is an opportunity to turn intangible assets, like stock or equity, into cold, hard cash. One example of a liquidity event is an IPO (Initial Public Offering) – the first sale of stock by private companies to the public – often referred to as “going public”.

During successful IPO’s, the price per share of stock rises dramatically from pre-sale values, increasing the value of investors’ holdings, and giving shareholders the opportunity to trade their stock on the public market if they want to liquidate (cash in) any of their assets.

Other liquidity events include mergers and acquisitions, and situations in which profitable companies generate excess cash, and choose to distribute this capital as dividends, but sometimes companies will also distribute additional stock shares (stock dividends), to shareholders.) to investors.


When Pixar Animation Studios went public in 1995, following the blockbuster release of Toy Story, Steve Jobs owned 80% of the company. Before the IPO, Pixar stock was valued at $12-14 per share, and Job’s shares were worth $42.3 million – $49.3 million. Pixar’s stock went public at $22 per share, peaked at $46 per share, and later settled at $39, giving Job’s holdings a valuation of $1.1 billion.