How First-Time Founders Can Win Their First Funding Round
An article we liked from Shaheen Sheik-Sadhal of Esse Law:
How to Structure Your First Funding Round Without Giving Away Too Much
The earliest capital decisions you make will shape everything that follows, economically, operationally, and personally. Here's how to be intentional about them.
There is an exciting moment in every founder’s journey when capital stops being theoretical and instead transforms into a term sheet, a valuation, a percentage that, once given away, changes the landscape of who founders consider part of their team going forward.
For many first-time founders, the earliest funding decisions are made under the greatest pressure with the least amount of leverage, the least amount of information, and often, the least amount of guidance. This is where the story of ownership begins to quietly diverge. In this article, I want to help frame the key aspects of a first round to keep paramount so you are setting yourself up for long-term success.
The Data Tells a Clear Story
According to PitchBook, founders who raise institutional capital early often give up 20–30% of their company in a seed round, with dilution compounding quickly across subsequent financings. By Series A, it is not uncommon for founding teams to own less than 50% of the business they created. And for founders in sectors like women’s health, where capital is both more limited and more skeptical, the dilution can be even sharper. Where I see founders falter is when they get possessive of ownership instead of being focused on a winning exit strategy.
What I always tell early-stage founders is you’d rather own 40% of a $100M company than 100% of a $100K company. Capital is what allows you to grow and scale; it also requires you to let go of some control. In other words, it’s important to remember that venture capital is designed to exchange ownership for acceleration.
That said, there are still important considerations so founders don’t give away long-term control for not enough return. Valuation is not the only thing we need to consider, even though it can sometimes feel like a proxy for success. “My pre-money valuation is $15M” sounds good, but is it supporting your long-term strategy and needs?
Other issues that are critically important when building around include:
Amount raised relative to need
Type of security (SAFE vs. priced round)
Liquidation preferences
Pro rata and participation rights
Board composition and control provisions
Consider the architecture behind the valuation number.
A $10M valuation with a clean cap table and founder-friendly terms is often far more valuable than a $15M valuation with constrictive preferences and control concessions.
The First Principle: Raise the Right Amount
The most common mistake I see is over-valuing and over-raising in the first round. I get it. Raising more money feels safer and creates a buffer, but what you want is an 18-24 month runway to get you to your next meaningful milestone, whether that is product, revenue, clinical validation, key hires, etc. That means you have to build a model and map out what capital needs you’re likely to have. Of course, put in some buffer, but don’t inflate it in such a way that you have to maintain an unsustainable pace on your pre-money valuation so you don’t give away the farm. It will be nearly impossible (in most sectors) to maintain a steep pace of valuation increases.
A disciplined first round is about buying time at the lowest possible cost of equity.
The Second Principle: Choose Structure Intentionally
Early-stage financings often default to SAFEs or convertible notes for speed.
There is nothing inherently wrong with that, but…
Read the rest of this article at theesselaw.substack.com...
Thanks for this article excerpt and its graphics to Shaheen Sheik-Sadhal, Founder of Esse Law.
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