A priced round is where one or more investors purchases a fixed number of shares of preferred stock in a startup in exchange for a fixed amount of capital. The result of this structure is a fixed price per share for investors. While it's common for very early stage startups to raise money using convertible instruments like SAFEs and convertible notes, more mature startups usually raise money from investors in priced rounds with an agreed-upon valuation and price per share.
Consider an example of a priced round. Let's say TechTrack, a music tech startup, raises a Series A priced round. TechTrack raises a total of $5 million from one investor. The pre-money valuation of TechTrack is $15 million and so, with the new investment, the post-money valuation is $20 million. That means the investor has purchased 25% of the company in exchange for its $5 million investment. So the number of shares the investor owns will be equivalent to a 25% ownership stake.
Unlock the secrets of startup financing with our comprehensive guide to SAFEs. Discover how they work, when to use them, and how they compare with convertible notes and priced rounds.
Common stock does not sound exciting. Preferred stock does. First-time founders are looking for excitement—especially when it comes to their millions of initial shares—and so they’re often surprised to hear that they’ll be receiving common, rather than preferred stock when the startup is incorporated.