Raising investment is framed as an achievement — and it is. But it's also a transaction, and like any transaction, the terms matter as much as the number. Founders who focus on the headline valuation and ignore the term sheet often discover, months later, that they've traded away far more than they intended.
Understanding what you're actually selling
When you raise equity investment, you're selling a percentage of your business. That percentage comes with rights — economic rights (a share of future profits and proceeds) and governance rights (board representation, information rights, consent requirements on certain decisions). The balance of those rights shapes who actually controls the business going forward.
Most first-time founders focus on the economic rights and underweight the governance rights. By the time they realise how much weight a particular clause carries, they're already committed.
The dilution mathematics
If you raise £500,000 at a £2 million pre-money valuation, you're selling 20% of your business. But that's round one. If you raise again — a Series A at a higher valuation — the new investors dilute everyone, including your round-one investors. By Series B, a founder who started with 100% might be down to 40–50% or lower, depending on the deal structures along the way.
None of this is inherently bad — dilution is the price of capital, and capital can create value that more than compensates. But founders who haven't modelled the dilution waterfall sometimes find themselves surprised at how their stake has compressed.
"Valuation is what people talk about. Terms are what matter. A high valuation with aggressive preference terms can be worse than a lower valuation with clean terms."
Preference shares and liquidation preferences
Most institutional investors take preference shares rather than ordinary shares. The key clause to understand is the liquidation preference — what investors get paid before ordinary shareholders (you) receive anything in a sale or winding up.
A 1x non-participating preference is standard and broadly acceptable: investors get their money back first, but then convert to ordinary shares and participate in any upside. A 2x participating preference is materially less founder-friendly: investors get 2x their investment back, and then also participate in remaining proceeds as if they held ordinary shares. In a moderate exit, this structure can significantly reduce what founders receive.
SEIS and EIS: the tax incentives that help you raise
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) provide substantial tax relief to investors — 50% income tax relief on SEIS investments, 30% on EIS — which makes your company significantly more attractive to eligible investors. If you're at the right stage, structuring your raise to qualify for these schemes can meaningfully expand your investor pool.
Qualification has specific requirements around company size, age, and the nature of the trade. It's worth taking advice before you begin your raise, not after you've already issued shares.
The investor-ready financials question
Most founders underestimate how important the quality of your financial model is in a raise. Investors have seen hundreds of decks. What separates the ones who get funded from the ones who don't is often not the idea — it's the credibility of the numbers and the team's ability to defend them.
A robust financial model shows: your current unit economics, how the model scales with the investment, what assumptions drive the projections, and what the capital will actually be spent on. Weak modelling signals weak financial management — which is exactly what investors don't want to fund.
Runway helps founders prepare for investment rounds — building financial models, stress-testing assumptions, structuring cap tables, and advising on term sheet terms. If you're planning to raise in the next 12 months, get in touch now. The preparation is the part most founders leave too late.
