Priced rounds

Fundraising generally falls into two categories: priced rounds and unpriced rounds. The best option for your business depends on several factors, including your growth stage, investor preferences and – most importantly – whether you know your company valuation. 

In this article, we’ll explain everything founders need to know about priced round fundraising.

What is a priced round? 

A priced round is when financial investment is exchanged for shares in a private company, based on a negotiated company valuation. This valuation allows founders to set a price per share when selling equity to investors – hence the term “priced round”.

Priced rounds vs. unpriced rounds

For many companies, pre-seed funding, seed funding or financing from angel investors is unpriced. At this early stage, it’s usually quicker and easier to use convertible securities instead of raising a priced round. Unpriced rounds are especially useful if a founder doesn’t want to issue preferred shares to early investors or the company doesn’t have a set valuation.

An unpriced round typically involves an investor providing cash or a loan in exchange for a convertible security (also known as a convertible). The most common convertibles are Advance Subscription Agreements (ASAs), convertible loan notes (CLNs) and Simple Agreements for Future Equity (SAFEs). At a later date, the unpriced securities convert into actual shares or the loan is repaid. Generally, this happens during a priced round (such as Series A), when the company receives funding from venture capital (VC) firms or other institutional investors.  

Priced round vs. SAFEs, CLNs and ASAs

Issuing equity in a priced round requires more upfront negotiating and legal involvement than using ASAs, CLNs or SAFEs in an unpriced round. However, the benefit of raising through a priced round is that founders have a much clearer picture of how much their company is worth and what percentage each stakeholder owns.

On the other hand, convertible securities can offer more flexibility and control for startups still in the early stages of their growth journey.

How do priced rounds work? 

 In a priced round, an investor gives you money in exchange for equity (usually preferred shares). The price per share is determined by your company valuation at the time of the investment. Priced rounds can be a good option for founders who need to raise a lot of capital, are confident about what their business is worth and expect to achieve significant growth.

Liquidation preferences

Generally, preferred share financing rounds provide investors with liquidation rights and preferences, which means they get paid before other shareholders in the event of a company exit or another liquidity event. In the UK, 1x non-participating preferences are fairly standard. These terms guarantee that investors receive a minimum return on their investment, giving them the option to either recover their initial investment as a lump sum or receive a share of the fully diluted equity.

It’s also not uncommon for later investors to negotiate ‘senior preferences’, which give them priority over earlier investors with liquidation preferences.

Control rights

Another reason why investors often prefer priced rounds is because they’re likely to receive more control rights in your company – such as voting rights and, for lead investors, a seat on your board of directors.

For UK companies, operational controls typically take the form of  investor majority and investor director consents, which are specified in a shareholders’ agreement. This essentially means that certain business decisions – from budgets and loans to employee equity grants – are subject to investor approval.

Pros and cons of a priced round