M&A Glossary
Venture capital: who it funds and on what terms
Venture capital is high-risk capital invested in young companies with strong growth potential, usually before they are profitable. The fund takes a minority stake and expects that a few portfolio companies will cover the losses on the rest.
How the funding works
Money arrives in rounds, each at a higher valuation and each diluting existing shareholders. A round starts with a term sheet, followed by a review, an investment agreement and a shareholders’ agreement. It is the shareholders’ agreement, not the headline valuation, that determines how much the founder really controls.
Venture capital versus private equity
Venture capital
- early-stage, often pre-profit
- minority stakes
- funds growth, does not buy out the owner
- accepts that part of the portfolio fails
- mature and profitable companies
- usually majority stakes
- often buys out the existing owner
- expects predictable results
What it means for an owner
- VC is not a route out of the business
- VC is growth capital
- the exit comes at the next transaction
If the goal is to sell the company and step away, venture capital is the wrong address. It finances growth, it is not an exit transaction.
Frequently asked
Questions about venture capital.
What are the main differences between venture capital and private equity?
The stage of the company, the size of the stake and the risk profile. VC enters early, takes a minority and expects some companies to fail. PE enters mature businesses, usually with a majority, and expects stable results.
Does a VC fund take control?
Formally usually not, since it holds a minority. Real influence comes from the shareholders’ agreement: consent rights over key decisions, rights in later rounds, and drag along and tag along clauses at exit.
How much dilution should a founder expect?
It depends on the round and the valuation, but each round moves ownership. What matters more than the percentage is the set of rights attached to the new shares, because those decide who controls the next decision.
See also
- M&A glossary - 72 terms used in transactions
- How we run a company sale
- How we work and how we charge