Tips and tricks

• Typically, equity investments are used in later-stage (priced) rounds, such as Series A and so on. Investors use them to obtain ownership, control, and certain protective provisions of the startup.
• Equity investments are usually made on priced rounds, which involve specific valuations. This is typically for businesses with a proven business model and strong traction. Sometimes people refer to a priced round as an equity round or a qualifying round.
• Startup valuations are based on factors such as growth potential, traction and team. True valuation, however, is not about worth but about supply and demand. Ultimately, it is the result of negotiations between the startup and investors.
• Making an equity investment typically takes more time and requires legal paperwork. Both parties may need to seek the assistance of an attorney as well.
• When an investor funds a startup through equity investment, the amount received is recorded as equity on the balance sheet.
• Equity investments don't have valuation caps or discounts unlike convertible notes and SAFEs. However, they determine the valuation, number of shares, and price per share, requiring more upfront accounting and negotiation.
• All new equity investments will dilute all existing shareholders and holders of convertible securities, such as convertible notes or SAFEs.

Structure

• The structure of equity investments is determined by a term sheet, a document that outlines the key terms and conditions of a proposed investment in the startup by the investor. Each term sheet is unique and may contain different terms.
• The 2 main sections in a term sheet are the economics and the control.

Economics

• Investment amount
• Type of security
• Pre-Money valuation
• Post-Money valuation
• Price per share