I learned more about startup funding from one unexpected envelope than from any book, blog post, conference panel, or attorney.
Years ago, I helped start a SaaS company with a colleague who had already achieved what most founders dream of: a major exit. When we formed the LLC, we were equal partners on paper. I came up with the concept, helped shape the product vision, met with the teams that would build it, and watched the platform launch from a distance. I was, however, not in a financial position to work full-time on the business.
My partner funded the company through a friends-and-family raise, hired the development and sales teams, and began selling shortly after launch. Periodically, a thick stack of documents would arrive in the mail. I didn’t understand them and didn’t have the money to hire an attorney to review them. I signed where I was told to sign and sent them back.
Years later, the company was sold for several million dollars. We celebrated. Then my check arrived. It was for several thousand dollars.
It would be easy to frame this as a story about being taken advantage of. It is not. What happened to me is what happens to many founders and early startup employees. Companies evolve, capital comes in, structures change, and ownership is reshaped along the way. I walked away disappointed, sure, but also educated and still better off than when I started.
This article is meant to translate startup funding and equity language into plain English so founders and employees understand what they are actually agreeing to before they sign.
How Startups Are Funded
Most startups begin with personal risk. Founders use savings, credit cards, or personal loans to get an idea off the ground. Loans are the simplest form of funding. You borrow money and agree to repay it with interest. The lender does not own part of the company, but repayment obligations can put real pressure on a young business.
Friends and family funding often follows. This capital feels informal because it comes from people who trust you, but it should never be treated casually. Sometimes this funding is structured as a loan. Other times, it is equity, meaning the investor owns part of the company. How this money is documented affects ownership, control, and future dilution.
Angel investors usually come next. Angels invest their own money in exchange for equity and often provide advice, introductions, and credibility. At this stage, companies frequently use SAFEs or convertible notes. These are not shares yet. They are agreements that say the investment will turn into shares later, usually when a larger financing round occurs.
As the company grows, it may raise what people commonly call Series A, B, and C rounds. These labels are not legal definitions. They are industry shorthand for successive stages of institutional funding. What makes each round legally meaningful is not the letter but the paperwork behind it. Each round typically involves issuing a new class of shares, often preferred stock, updating governing documents, and defining investor rights such as voting power, liquidation preferences, and protections against future dilution.
Each new round brings capital, but it also reshapes ownership.
Shares, Options, And What Ownership Really Means
One of the most misunderstood aspects of startups is ownership itself.
Shares represent actual ownership. If you hold shares, you own a percentage of the company. Not all shares are created equal. Preferred shares often come with advantages, such as being paid first if the company is sold.
Options are different. Options give you the right to buy shares at a fixed price, called the strike price, later. Until you exercise those options and purchase the shares, you do not own part of the company.
Many startup employees believe they are owners when they are really holding a conditional promise. That promise can be valuable, but only if certain events occur and only if you can afford to act on it.
Dilution And Why Your Percentage Shrinks
Dilution happens when a company issues additional shares. If you own 10 percent of a company and new shares are issued to investors or employees, your ownership percentage decreases.
Dilution is not inherently negative. New capital can increase the company’s overall value. The challenge is that dilution compounds over time. Multiple funding rounds, new hires, and restructurings can steadily reduce early ownership.
Founders experience dilution. Early employees experience dilution. In my case, repeated rounds and structural changes gradually reduced my stake until the outcome surprised me.
Vesting And Why Equity Is Earned Over Time
Vesting exists to keep incentives aligned. Instead of receiving all your equity immediately, you earn it over a defined period. A typical structure is four years with a one-year cliff. That means you earn nothing in the first year and then earn the remainder gradually.
If you leave before your equity fully vests, you typically forfeit any equity you have not yet earned. Vesting protects the company from someone leaving early with a significant ownership stake.
Founders are often subject to vesting as well, even though it feels strange when you are the one who started the business.
What Happens When You Leave With Options
This is where many people are caught off guard.
If you leave a company and have vested options, you usually have a limited window to exercise them, often 30 to 90 days. Exercising options means paying the strike price to convert them into shares.
This decision can trigger taxes. Depending on the type of options and the company’s valuation, you may owe taxes based on the difference between the strike price and the current value of the shares, even though you cannot sell them.
This creates a problematic situation. You may need cash to buy the shares, money to pay the taxes, and patience to wait for a possible future exit that may never come.
The Agreements You Are Probably Signing
Startup paperwork often arrives in intimidating stacks. Operating agreements define how an LLC functions. Stock purchase agreements govern the issuance and transfer of shares. Option grant agreements explain how and when you can buy shares. Shareholder agreements outline voting rights and restrictions. SAFEs and convertible notes define how early-stage investments can convert into equity later.
These documents are not formalities. They define control, risk, and upside.
Why This Is Not A Story About Betrayal
I do not share this article with bitterness. My partner acted in accordance with the agreements we signed and for the best interest of the company’s growth. The documents worked exactly as designed. I simply did not understand the long-term impact at the time.
Startups are living systems. Ownership is fluid. Early assumptions rarely survive years of growth and fundraising. I walked away with a check I did not have before and an education that has shaped every business decision since.
A Simple Analogy That Helps
Think of a startup like a pizza that keeps getting bigger. Every time new money comes in, the pizza grows, but more people want slices. If you are not paying attention, you can go from owning two thick slices to one thin one. It may still be worth more in dollars, but it will not feel the same if your expectations were different.
When To Get Help (And Why You Always Should)
There is a quote often repeated in business: Trust, but verify. In startups, that means trusting your partners while verifying the structure.
If you are founding a company, joining a startup, or receiving equity of any kind, talk to an attorney. Even a short consultation can change how you negotiate, what you accept, and what you decline.
Optimism builds companies. Understanding protects people. The difference between the two is often buried in the paperwork you are asked to sign.
©2025 DK New Media, LLC, All rights reserved | DisclosureOriginally Published on Martech Zone: The Life Lesson I Learned About Startup Funding… After Signing Papers I Didn’t Understand