Startup Finance and Private Equity / Venture Capital
This domain tests the funding ladder, the term-sheet economics that decide who gets what, and valuation methods suited to pre-revenue companies.
Funding ladder and instruments
Bootstrapping, then angel/seed, Series A/B/C, growth PE and exit (IPO, strategic sale, secondary). Instruments include equity, CCPS (converting at a discount or on a trigger), convertible notes and SAFEs. Term sheet items: pre-money versus post-money (post = pre + investment), liquidation preference (1x non-participating versus participating), anti-dilution (full ratchet versus broad-based weighted average), ESOP pool, vesting, drag/tag and board seats.
Valuation and fund economics
The VC method estimates exit value (terminal multiple × terminal metric), applies the fund's required multiple or target IRR to derive post-money, subtracts the investment for pre-money, and divides by fully diluted shares. Scorecard and Berkus methods serve the earliest stages. PE fund economics: 2/20 fee and carry above an 8% hurdle, often with a catch-up; LPs track IRR, TVPI and DPI.
Worked example
A VC invests ₹20 crore for 25%, so post-money is ₹80 crore and pre-money ₹60 crore. Exit after five years at ₹800 crore equity value: the stake is worth ₹200 crore, a 10× multiple, IRR = 10^(1/5) − 1 = 58.5%. Reverse check: if the fund requires 5× on ₹20 crore (₹100 crore) and exit equity value is ₹800 crore, the required stake is 12.5% - so paying 25% only works if exit exceeds ₹1,600 crore.
Traps
Confusing pre-money and post-money; forgetting the ESOP top-up is carved from pre-money and dilutes founders; treating a 1x non-participating preference as guaranteeing capital plus pro-rata; running a plain DCF on a pre-revenue startup without scenario weighting; ignoring anti-dilution in down rounds; quoting a multiple as an IRR.