What are the terms in valuation?

Why would a startup offer investors the same terms in the second round as the first round but at a higher valuation?

• Answer:

  The two parts of this question are orthogonal so I'll answer each separately. Why offer higher valuation in a subsequent financing? Because the company is worth more and can command a higher price per share. Why offer identical terms in two rounds? Because the company and investors are already familiar with the documents, there is less to re-do, and by aligning all of the terms they fit together. For example, if the first round has a list of 20 things that need investor approval, and the second round has a different list of 20 things, the company has now (approximately) doubled the difficulty, expense, and complexity of getting anything done. If the list is exactly the same, word for word, then it keeps a cleaner structure. However, it's not always clear what it means to have identical terms in two rounds. Take the approval rights (technically called "negative covenants"). If the company promises to seek approval from Series A investors before, say, raising a new round of funding, what does it mean to offer Series B investors the same right? There are several options, all of which could be considered the same terms: Series A investors no longer have approval rights, they've already approved Series A investors and Series B investors both have to approve any new funding Series A investors and Series B investors join together and approve as a group The advantages of conforming Series B terms to Series A terms run through almost every aspect of a funding round. So does the question of whether offering the same rights means making the new rights senior, pari passu (on equal footing), pooled, junior, or in place of the old rights.