Money for Startups: How the Game Actually Works

If Part 1 was the map, this is the terrain.

We covered the landscape — all the ways money can enter a startup, and why the world of venture capital is smaller and more human than it looks from the outside. Now we go deeper. What actually happens when money moves? What are you trading when you take it? And what does the whole process look like from first pitch to signed check?

Before we go further — a quick cheat sheet. These terms will come up again and again throughout the series, so keep this close.

Term	What it means
VC (Venture Capital)	Professional investors using other people's money to fund startups
Angel Investor	An individual investing their own money in early startups
Equity	Ownership in a company, represented by shares
Dilution	Your ownership % shrinking as new investors come in
SAFE	Simple Agreement for Future Equity — a way to invest now, price later
Convertible Note	A loan that converts into equity at a future round
Term Sheet	A document summarizing the deal terms between founder and investor
Pre-money Valuation	What your company is worth before investment
Post-money Valuation	What your company is worth after investment comes in
Round	One moment in time when money is raised and closed
Exit	When a company is sold or goes public — investors cash out

You don't need to memorize these. Just know they're here.

First — what are you actually giving away?

Someone once asked: is VC evil?

The honest answer is — it's a trade. And before you make it, you need to understand exactly what you're trading.

When you create a company — in Saudi Arabia through the Ministry of Commerce portal, or in the US overwhelmingly in Delaware, both done fully online — you get a founding document that proves your company legally exists. In Saudi Arabia it's called the commercial registration (السجل التجاري), in the US, you file paperwork to create a company — overwhelmingly in Delaware, done electronically — you get a certificate of incorporation.

Think of it as a piece of paper that proves your company exists. Now tear that paper into thousands of tiny pieces. Each piece is a share of stock. Put them all together and they represent 100% of your company.

When you bring in an outside investor, you hand some of those tiny pieces over. In exchange, they give you money. And the moment that happens, you no longer own 100%. You've been diluted.

This is why non-dilutive funding — grants, prizes, competitions, gifts — is so valuable early on. You still own all the pieces. No one has taken any. Non-dilutive just means free. Free is a good word.

Non-dilutive just means free. Free is a good word.

Note: Many investors want to see that you've put your own money in first. It proves you believe in your idea enough to bet on it yourself — before asking anyone else to.

The certificate of incorporation torn into shares — showing how dilution works as investors come in at each round.

The three flavors of money

Not all investment is the same. There are really three types to know:

1- Non-dilutive — grants, competitions, fellowships. You keep 100% of the company. Start here if you can.

2- Convertibles — the most common entry point for very early outside money. The two instruments you'll hear about most are the SAFE (Simple Agreement for Future Equity) and the convertible note. Both are faster, cheaper, and simpler than a full equity round.

The key idea: you're getting money now, but you're delaying the harder conversation — what is my company actually worth? — until later, when a bigger investor comes in and sets a price.

One iron rule here: always, always model how much ownership you're giving away. There are free tools online (like Carta) . Use them. Founders who don't track this end up in painful situations they could have avoided.

Always, always model how much ownership you're giving away.

For example — you take a SAFE from one investor, then another SAFE from someone else, then a convertible note from a third. Each one will eventually convert into shares. If you're not tracking the math as you go, you'll wake up one day and realize you've given away 60% of your company without noticing.

In simple terms:

Every time you take money, someone gets a piece of your company. Keep a running record of who owns what

3- Equity — this is a priced round. Someone (e.g. an investor) has decided your company is worth a number — $1 million, $10 million, $100 million — and from that number, you work out exactly how many shares they get and what percentage that represents.

A round is simply one moment in time when money comes in. It has a beginning, middle, and end — you raise, you close, you go back to building. Then a year or two later, you do it again.

Who is actually writing the checks?

Venture capital is — at its core — other people's money.

Here's how it works: universities like MIT have large endowment funds. Rich people donate to foundations and pension plans. Those institutions don't invest directly in startups — they don't know you, and they don't have access to you. So they hand their money to professional investors — VCs — who do. The VCs are the experts. They're the ones walking the halls, meeting founders, making bets.

So when a VC invests in you, they're investing money that ultimately came from somewhere else. That's OPM — other people's money. And those people up the chain are waiting for a return.

VCs also come in different flavors

• by stage (pre-seed, seed, Series A and beyond)

• by sector (life sciences, deep tech, AI, impact investing, corporate venture).

• Some are generalists.

• Some will only look at companies in a very specific lane.

  
  

Knowing which type of investor fits your company at your stage is part of the research you have to do before you ever send a cold email.

And angels? Angels are doing the same job as VCs — finding and funding startups — but with one key difference: it's their own money. They write smaller checks, they move faster, and they're often more willing to bet early. For a lot of founders, an angel is the first real outside investor they'll ever have.

VCs invest other people's money. Angels invest their own.

The power law — the thing that explains everything

Here's the slide that gets shown again and again in every serious VC article, because it's the one thing you have to understand about how this industry actually thinks.

Out of roughly 21,000 venture deals studied: two out of every three return nothing — or at best, return exactly what was put in. That's not a win for anyone. And yet investors do those deals anyway, because they can't tell in advance which ones will fail.

The reason the whole model works is the ones at the far end — the massive outliers. The Ubers, the Airbnbs, the SpaceXes.

Those returns are so large they cover every loss and then some. That's the power law. A small number of enormous wins subsidize everything else.

What this means for you as a founder: VCs are not looking for good companies. They're looking for potentially enormouscompanies. If you're not building something that could be very, very big, you may be building something real and valuable — but you may not be the right fit for venture capital. And that's okay. But it's worth knowing.

What the process actually looks like

The VC process is more ritualized than most people think — which is actually good news, because it means you can learn it.

It goes like this: you pitch. Sometimes it's one meeting, sometimes it takes months. The VC goes through their own internal decision-making — often a weekly partnership meeting where they debate which companies to back. Then comes the term sheet negotiation, which is where the real work happens. Then lawyers take over and turn the agreed terms into actual documents. Then everyone signs. Money moves. Shares transfer. The deal is done.

The document at the center of all of this is the term sheet. It's written in businessy language but it's not a legal document — it's a summary of the deal. It always comes from the investor to you, not the other way around.

Term sheet is not legally binding - It's a summary of the deal.

And it covers two main things:

• the economics (how much, at what valuation, for what percentage)

• the control (who sits on the board, who has veto rights, what happens if the company is sold).

Stock, it turns out, comes in two flavors.

• Common stock is what founders and employees get.

• Preferred stock is what investors get — it comes with extra rights, protections, and advantages that get negotiated deal by deal. If you do another round later, the new investors get their own class of preferred, with their own set of negotiated terms. Every round layers on top of the last (will discuss this later)

This picture summarizes it for you.

Valuation — the number everyone fixates on

Pre-money valuation is the value of everything you've built before the investor arrives. Post-money valuation is that number plus whatever the investor puts in.

The shorthand you'll hear: "we raised two on eight" — meaning $2 million invested on an $8 million pre-money valuation, which gives you a $10 million post-money, and the investor owns 20%.

Here's the frustrating truth about early-stage valuation: if you have no revenue, there is no mathematical formula. You can't discount cash flows that don't exist. So how does it actually get set? Comparables — what are similar companies at similar stages raising at? Investor preference — some VCs like to own 20% of whatever they back, so they back into a number that gives them that. And market conditions — in a hot market, valuations go up. In a cold one, they compress.

Right now in 2026, AI companies have all the leverage. If you're building in AI, investors are competing to fund you. If you're building outside of it, it's a harder road — but not an impossible one.

The trade-off no one talks about enough

Taking venture capital means giving up ownership. It also means giving up some control — because investors who own part of your company often get a seat on your board of directors. And the board's main job is to hire and fire the CEO.

That CEO could be you.

It doesn't happen often. But it happens. And before you take anyone's money, you and your co-founders need to have an honest, explicit conversation about what you're willing to trade. There's no right or wrong answer — but everyone needs to be on the same page before the money arrives, not after.

Is it worth it? For many founders building capital-intensive, high-growth technology companies — yes. The money, the network, the introductions to customers and employees and future investors — it adds up. But go in with eyes open.

What comes next

In the next posts we'll go deeper on SAFEs and convertible notes — the documents you'll almost certainly encounter before you ever see a term sheet. We'll walk through what the clauses actually mean, and which ones matter more than the valuation number everyone obsesses over.

The goal, as always: not to make you a lawyer. To make sure you know what questions to ask when you're in the room.

More soon ♡