Priced vs. Unpriced Round in Venture Capital

Priced vs. Unpriced Rounds in Venture Capital

When investing in private market startups, investors may come across priced and unpriced rounds. Understanding these investment structures can help investors understand how capital is deployed, how ownership is structured and allocated between founders and investors. In this blog, MicroVentures is sharing more about priced vs unpriced rounds, examples of each, and how investors can understand the benefits and limitations of each type.

Understanding Priced vs Unpriced Rounds

The main difference between priced and unpriced rounds is inherently in their names—a priced round establishes a company’s valuation, or price, immediately. An unpriced round defers that valuation decision to the future, making it unpriced at the time of investment. Both types of rounds can be used strategically at various points of a startup’s lifecycle, with each having its own unique benefits and limitations.

What Is a Priced Round?

In venture capital, a priced round is a financing event in which investors can purchase equity at a defined price per share based on an agreed-upon company valuation. This involves the startup negotiating and setting a valuation up front. Once the valuation has been set, the company issues a specific number of shares, and ownership percentages are able to be clearly defined once the round closes.

Key Characteristics of Priced Rounds

Priced rounds tend to include standard features including:

Defined Valuation – A pre-money or post-money valuation establishes share price and ownership allocation
Immediate Equity Issuance – Investors receive shares at round close
Investor Protections – A priced round may include terms like liquidation preferences, anti-dilution provisions, and pro rata rights
Governance Rights – Investors may receive voting rights or board representation

Because the valuation is fixed in a priced round, both founders and investors can gain clarity on dilution and ownership structure. However, priced rounds may be more time intensive, expensive, and complex due to the up-front pricing negotiations.

Examples of Priced Rounds

Named venture capital rounds that occur farther along, such as Series A, Series B, and Series C, are commonly structured as priced rounds. At these stages, companies are more likely to have an operating history, financial data, and market validation in order to support a negotiated valuation.

However, it is important to note that a “Series” label does not inherently imply a priced round. It’s still possible to use convertible instruments in later-stage financings.

What Is an Unpriced Round?

An unpriced round is a financing structure where the company does not establish a valuation at the time of investment, essentially deferring this decision to a point in the future. Investors provide capital to the startup in exchange for the right to receive equity in the future, commonly once the startup has conducted a priced round. Unpriced rounds are typically associated with early-stage financing but aren’t limited to any specific stage.

Key Characteristics of Unpriced Rounds

Unpriced rounds are generally structured around convertible securities and typically have the following characteristics:

No Immediate Valuation – Equity ownership is not determined at the time of round close
Deferred Pricing – Conversion into equity occurs at a preset future qualified financing event
Simplified Documentation – Fewer negotiated terms can help simplify upfront round documentation
Faster Execution – Can typically be less time and cost intensive compared to priced rounds

Examples of Unpriced Rounds

Convertible Notes

Convertible notes are typically converted into equity at a future financing event. Key components of a convertible note can include:

Interest Rate – Accrues over time until conversion event
Maturity Date – Specifies when the note must convert or be repaid
Conversion Mechanics – Often tied to a qualified financing event

Convertible notes allow companies to raise capital while delaying valuation discussion. Upon a qualified conversion event, usually a future priced round, the note converts into equity at a price determined by the negotiated terms.

Simple Agreements for Future Equity (SAFEs)

A SAFE is an equity-linked instrument that provides the right for the investor to purchase future equity, without being a debt instrument. SAFEs generally do not include interest or contain maturity dates, but convert into equity at a future priced round, typically using a valuation cap, discount, or both. SAFEs are often viewed as more founder-friendly and simple administratively.

Crowd Notes

Crowd notes are a variation of convertible instruments that are commonly used in equity crowdfunding raises. While specific terms may vary, they generally function similarly to convertibles notes. They are designed to standardize investment terms across a large number of investors, reducing administrative complexity.

Key Considerations

As investors come across priced vs unpriced round structures, what are some key considerations when making investment decisions?

Valuation Certainty vs Optionality

In a priced round, the valuation is specifically set. Investors know the exact price per share and ownership percentage. Alternatively, in unpriced rounds, valuation is deferred. Therefore, investors rely on mechanisms like valuation caps and discounts to estimate their potential future ownership. This can create uncertainty regarding the eventual equity stake in the startup.

Dilution Dynamics

Priced rounds can also provide immediate clarity on dilution. Cap tables are updated at closing, and ownership percentages are clearly laid out. In unpriced rounds, dilution can be more of a question mark until the qualified conversion event has occurred. If a company has conducted multiple funding rounds with convertible instruments, this can result in a complex cap table once a priced round occurs.

Investor Rights and Protections

Priced rounds may include investor protections such as liquidation preferences, anti-dilution provisions, voting rights, and board representation. Conversely, unpriced rounds generally offer limited control rights, without a formal governance structure.

Final Thoughts

Priced and unpriced rounds play different roles in a startup’s funding history, with each providing unique benefits and limitations for private market investors. The core difference lies in whether or not a defined price is set for the startup at the beginning of the round, but there are additional differences in how each round is structured. Understanding the difference between priced and unpriced rounds can help investors understand term sheets and make informed investment decisions.

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.

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