Navigating Your Series A: What Founders Need to Know Before Raising Their Second Priced Round
Congratulations-you’ve built something real! Your seed funding helped you find product-market fit, build a team, and generate the traction that’s now attracting larger institutional investors. But as you prepare to raise your Series A, you're entering a different territory. Unlike your seed round, which was likely straightforward with a lead investor, perhaps a few angels, and founder-friendly term, Series A involves larger institutional investors with fiduciary duties to their LPs, more sophisticated legal teams, and specific rules for building portfolios. You're now balancing the interests of existing seed investors, your team, your board, and incoming Series A investors, all while trying to maintain control and flexibility for your company's future. The decisions you make will shape your company’s governance structure for years to come, so this guide will walk you through the critical issues that founders often overlook, helping you avoid common pitfalls and negotiate terms that set your company up for long-term success.
Balancing Interests with Existing Seed Investors
One of the most underestimated challenges in a Series A is managing your existing seed investors. During your seed round, everyone’s interests were perfectly aligned: get the company funded and build something valuable. Now, as you bring in new capital at a new valuation, those interests begin to diverge in subtle but important ways.
Understanding Pro-Rata Rights
Most seed investors negotiated for pro-rata rights-the ability to invest their proportional share in future rounds to avoid dilution. In theory, this seems straightforward. If an investor owns 5% of your company, they can invest enough in the Series A to maintain that 5% ownership.
In practice, pro-rata rights create a little bit more complexity. First, not all seed investors will have the capital or fund strategy to exercise their pro-rata rights. A small angel investor who wrote a $25,000 check in your seed round might need to invest $100,000 or more to maintain their ownership percentage. The Company needs to first calculate the pro-rata amount for each seed investor who has been granted pro-rata rights, notify them about their pro-rata amount pursuant to the notice requirement in the Series Seed documents, and receive confirmation from seed investors whether they are exercising or waiving their pro-rata rights. All of these steps require individual conversation with each seed investor, which can take time depending on seed investors’ responsiveness. Founders often forget to build that into the Series A fundraising and closing timeline.
Second, your Series A lead will want to deploy a meaningful amount of capital - typically $10-20 million or more. If all your seed investors exercise their pro-rata rights, there may not be enough room in the round for your new lead to take the ownership percentage they require (often 15-20% post-money). As a founder, you need to need to balance these competing priorities.
Managing Seed Investors' Expectations Early
Your seed investors can slow down or even block your Series A in several ways, even if unintentionally. If your seed round included protective provisions (and it probably did), certain actions may require approval from a majority or supermajority of preferred stockholders. Issuing new preferred stock - which is exactly what you're doing in a Series A - often requires this approval. Sometimes seed investors slow down rounds through passive resistance. They don’t respond quickly to requests for consent or they request multiple calls to “discuss the round.” Each delay can frustrate your Series A lead, who’s trying to close the deal and move on to their next investment.
The key to avoiding these problems is early, transparent communication. As soon as you begin serious Series A conversations, you should inform your seed investors. Explain the likely size of the round, the expected valuation range, and how much room there will be for pro-rata participation.
Be honest about who will and won’t get to participate. If your Series A lead wants to take certain percentage of the Series A round, tell your seed investors early. Most investors will understand but they’ll be frustrated if they learn about it at the last minute or, worse, from someone other than you. For investors who won’t get to participate, consider other ways to maintain the relationship. The goal is to keep them as allies and advocates, not create enemies who might bad-mouth you to future investors or acquirers.
Structuring Consent and Veto Rights
Protective provisions - the rights that give investors veto power over certain company decisions - are where many founders make mistakes that haunt them for years. These provisions seem reasonable when you're desperate to close a round, but they can create governance nightmares down the road.
What Are Protective Provisions?
Protective provisions give preferred stockholders (your investors) the right to approve or veto certain major company decisions. Common examples include:
Issuing new equity securities (or securities senior to or on parity with the preferred stock)
Amending the certificate of incorporation or bylaws
Selling the company or substantially all its assets
Declaring dividends or repurchasing shares
Increasing or decreasing the size of the board
Incurring debt above a certain threshold
Making acquisitions above a certain dollar amount
These provisions exist because investors want to protect their investment from actions that could harm them. Without protective provisions, founders could theoretically issue themselves millions of new shares, diluting investors to nothing, or sell the company for a lowball price that doesn't provide investors with a return.
Major Investor Rights vs. Series-Specific Rights
Here’s where it gets tricky: protective provisions can be structured to require approval from (1) all preferred stockholders voting together, (2) each series of preferred stock voting separately, or (3) some combination of both.
The difference matters enormously. If protective provisions require approval from “a majority of the preferred stock, voting together as a single class,” then your Series A investors and seed investors vote together. As long as you get 50%+ of all preferred shares to approve something, you’re fine. This structure is generally founder- friendly because it prevents any single small investor from blocking important decisions.
However, if protective provisions require approval from “a majority of the Series A preferred stock, voting as a separate class,” then your Series A investors alone can block decisions, regardless of what seed investors or other stakeholders think. This gives your Series A lead enormous power and can create deadlock situations.
Founders need to be very careful about agreeing to a governance structure requiring approval from “a majority of each series of preferred stock, voting as separate classes.” Now both your seed investors and your Series A investors each have a veto. You’ve created multiple potential blocking coalitions, and any major decision requires satisfying every class of Preferred Stock. A good lawyer can help founders negotiate the right balance and limit series-specific voting rights to only the most fundamental issues.
Drag-Along Rights and Why They Matter
Drag-along rights allow a specified percentage of stockholders (usually a majority of common and preferred, voting together) to force all other stockholders to participate in a sale of the company on the same terms. Without drag-along rights, a small minority investor could theoretically block an acquisition by refusing to sell their shares.
Most Series A term sheets include drag-along rights, and you should make sure yours does too. But pay attention to the details. What percentage of stockholders must approve a drag-along? Is it a simple majority of all stockholders, or does it allow certain class of investors to force a sale even if you and your co-founders oppose it? Check whether the drag-along includes reasonable protections for minority stockholders and holders of Common Stock. Make sure there are mechanism in place to prevent investors from selling the company for a lowball price that benefits them while leaving holders of Common Stock with little return.
Choosing Your Series A Lead Investor
Founders often overweight valuation while underweighting the right lead investor. Your Series A lead will sit on your board, influence governance, and set terms others follow - making a bad lead at high valuation worse than a good lead at slightly lower valuation. Beyond valuation, focus on: reputation and track record; genuine value-add (recruiting, customers, expertise); fund dynamics (follow-on capital, bet size relative to fund); and chemistry. Do reference checks beyond their list - talk to founders from their last 10 investments and failed companies about handling difficult situations. Your lead's approach to terms matters enormously: aggressive terms (high liquidation preferences, extensive protective provisions) create difficult capital structures that scare off future investors, while founder-friendly terms ease future fundraising. Finally, ensure your seed lead and Series A lead have a good working relationship (or at least don't hate each other). Board deadlock between investors who don't get along can paralyze your company at critical moments.
Board Dynamics and Composition
Your Series A will almost certainly involve adding a new board member - typically a partner from your lead investor's firm. This changes your board dynamics significantly and requires careful thought about board composition and structure.
Typical Series A Board Structure
The most common Series A board structure is five members:
Two common stock seats (typically the CEO and one other founder or executive)
Two preferred stock seats (one for your Series A lead, one for your seed lead or another investor)
One independent seat (someone mutually agreed upon by common and preferred stockholders)
This structure provides balance. Founders maintain meaningful influence through their two seats, investors have two seats to protect their interests, and the independent director can serve as a tiebreaker and bring outside perspective.
Some founders try to maintain board control by negotiating for three common seats and two preferred seats. This can work, but it often creates problems. Investors may feel they don't have enough influence and may compensate by demanding more protective provisions or other governance rights.
Board Observers and Information Rights
Be cautious about granting too many board observer rights - while observers can attend meetings and receive materials without voting, each one adds complexity to scheduling, materials distribution, and meeting dynamics. A reasonable approach is to limit observer rights only to your most significant investors who don’t have a Board seat, while providing standard information rights (financial statements, annual budgets, and company information) to other investors. Some investors will push for enhanced information rights like site visits or more frequent updates, but be thoughtful about these requests since servicing multiple investors can become a significant time drain. Most importantly, resist board bloat: keep your board at five members rather than adding seats for every new investor, and ensure any independent directors bring genuine operating experience, industry relationships, or specific expertise rather than just filling a seat.
Other Issues That Slow Down Series A Negotiations
Option Pool Refreshes and Dilution
Most Series A term sheets include an option pool refresh - increasing the size of your employee option pool to ensure you have enough equity to hire the team you'll need over the next 18-24 months. The question is: who bears the dilution from this refresh?
Typically, Series A investors want the option pool refresh happen before the Series A investment, which means existing stockholders (founders and seed investors) bear the dilution, not the new Series A investors. This approach is not uncommon, but it effectively reduces the pre-money valuation.
For example, if you negotiate a $40 million pre-money valuation and a 15% option pool refresh, the actual value of the existing shares is only about $34 million-the other $6 million of “pre-money” value is the option pool, which doesn’t belong to anyone yet. Make sure you understand this dynamic and factor it into your valuation negotiations.
Also, be realistic about the size of the option pool you need. Your Series A lead will push for a large pool (20%+) because it reduces their dilution. You should push for a smaller pool (10-15%) if that’s truly all you need. Base the size on your actual hiring plan, not on arbitrary percentages.
Bridge Round, Due Diligence, and Cleanup
New Series A investors will most likely conduct more thorough due diligence than your seed investors did because the Company now has a longer history of operation. Before you begin fundraising, make sure you’ve cleaned up your cap table, resolved unclear ownership issues, and ensure all documentation is complete and organized. Address any outstanding legal or IP issues proactively, including IP assignments, open source software compliance, problematic customer contracts, employment documentation, and regulatory compliance. If you’ve raised a bridge round after your Series Seed, be prepared to clearly explain to Series A investors how those convertible notes will convert in connection with the Series A financing, including the mechanics, timing, and resulting cap table impact.
Preparing for Success
Your Series A is a pivotal moment that will shape your company for years to come, and the most common mistakes founders make include starting too late with existing investors, ignoring cap table issues until they kill the round, not understanding critical terms beyond valuation, letting negotiations drag on for months, choosing based solely on valuation rather than partner quality, not engaging experienced legal counsel early enough, and creating governance structures that are too rigid when speed is critical. The key to success is preparation: start early, clean up your cap table, communicate transparently with existing investors, understand the terms you’re negotiating, and think long-term about what will set your company up for success rather than just what gets the round closed quickly. Remember that your Series A lead is becoming a long-term partner, not just providing capital, so choose wisely, negotiate thoughtfully, and structure your round in a way that preserves flexibility and aligns everyone's interests for the journey ahead.