Series B Funding

How Series B funding works

A Series B is a priced round. Unlike a SAFE or a convertible note, it sets an explicit price per share, issues a new class of preferred stock, and amends the company's certificate of incorporation to create the rights that attach to that class. The paperwork follows the same architecture the National Venture Capital Association publishes as its model legal documents: a certificate of incorporation, a stock purchase agreement, an investors' rights agreement, a voting agreement, and a right of first refusal and co-sale agreement.

The arithmetic is the same arithmetic as any priced round. Written in words, the price per share equals the pre-money valuation divided by the fully diluted share count immediately before the round, and the new investors' ownership equals the amount invested divided by the post-money valuation.

Price per share = Pre-money valuation / Fully diluted pre-money shares

Investor ownership % = Investment / (Pre-money valuation + Investment)

Two details make the Series B version of this harder than the Series A version. The first is the fully diluted count. The NVCA model term sheet provides that the pre-money valuation includes an unallocated and uncommitted employee option pool expressed as a percentage of the fully diluted post-money capitalization. If the Series B lead asks for a refreshed pool inside the pre-money, the refresh dilutes everyone who was on the cap table before the round, and the effective price the founders are accepting is lower than the headline pre-money implies.

The second is the preference stack. The company now has two classes of preferred with separate original purchase prices. Whether Series B sits ahead of Series A on liquidation, or the two share pro rata, is a negotiated point, not a default. The NVCA model certificate of incorporation drafts the preferred as pari passu by default, and its footnotes flag that the language has to be revised where one series carries a senior or junior liquidation preference, so the answer sits in the charter rather than in any single term sheet line.

Variants

• Priced insider round, sometimes called an internal round, where existing investors fund the Series B without a new lead and the price is set by the board with an independent valuation.
• Series B-1 or B-2, a second closing at a different price, usually created when the company raises more later at revised terms rather than reopening the original Series B.
• Extension round, where the company sells additional shares of the existing Series B at the original price, typically within a stated window in the stock purchase agreement.
• Structured Series B, where the round carries a preference multiple above 1x, participation, or a guaranteed return, features the NVCA model term sheet lists as alternatives rather than defaults.

Worked example

Suppose a company raises a $25M Series B at a $75M pre-money valuation, and the lead requires that the option pool be increased to 12 percent of the post-money fully diluted capitalization, funded out of the pre-money.

Start with 20,000,000 fully diluted shares before any pool refresh. Post-money valuation is $75M plus $25M, or $100M. The Series B investors will own $25M divided by $100M, or 25 percent.

The refreshed pool must be 12 percent of the post-money fully diluted count. Let T be the post-money fully diluted share count. Series B shares are 25 percent of T. The new pool shares are 12 percent of T. Existing shares of 20,000,000 must therefore represent the remaining 63 percent of T.

T = 20,000,000 / 0.63 = 31,746,032 shares

Series B shares = 0.25 x 31,746,032 = 7,936,508

New pool shares = 0.12 x 31,746,032 = 3,809,524

Price per share = $25,000,000 / 7,936,508 = $3.15

Check the founders' side. Before the round they held 20,000,000 of 20,000,000 fully diluted shares. After, they hold 20,000,000 of 31,746,032, or 63 percent. They were diluted 37 percent, not the 25 percent the headline suggests. The extra 12 points is the pool refresh, and it was paid entirely by the pre-round holders. A pool placed in the post-money instead would have been shared with the new investors. All figures are hypothetical.

Where it shows up

In the term sheet, the relevant line is the pre-money valuation clause. The NVCA model term sheet states that the price per share, which it calls the Original Purchase Price, is determined on the basis of a fully diluted pre-money valuation, and that the pre-money valuation includes an unallocated and uncommitted employee option pool expressed as a percentage of the fully diluted post-money capitalization.

In the charter, Series B appears in the liquidation preference article, which in the NVCA model term sheet offers alternatives for non-participating preferred, full participating preferred, and participation capped at a stated multiple of the Original Purchase Price. Series B also appears in the protective provisions, which under the model terms prevent the company, without the written consent of a defined group of holders, from creating any security that does not rank junior to the existing preferred.

In the voting agreement, Series B shows up as an additional preferred director seat. The NVCA model term sheet's board clause contemplates a representative designated by the lead investor, a representative designated by the remaining investors, a common stockholder representative, the chief executive officer, and one or more mutually acceptable independents.

In the investors' rights agreement, Series B holders above a negotiated threshold become Major Investors, which under the model terms carries information rights, including annual and quarterly financial statements and an annual operating budget, plus a pro rata right to participate in subsequent issuances.

On the regulatory side, a Series B sold under Regulation D is reported to the Securities and Exchange Commission on Form D, which discloses the total offering amount, the amount sold, and the exemption relied upon.

Common mistakes

• Quoting the headline pre-money without asking where the option pool sits. The same dollar amount at the same stated valuation produces materially different founder ownership depending on whether the refresh is pre-money or post-money.
• Assuming Series B automatically sits senior to Series A on liquidation. Seniority is negotiated and recorded in the charter. Standard practice varies, and reading the certificate of incorporation is the only reliable way to know.
• Forgetting that converting SAFEs and notes are shares too. The NVCA model term sheet's amount raised line explicitly contemplates that the total includes amounts from the conversion of SAFEs and bridge note principal and interest.
• Treating the Series A documents as a template without re-reading them. Pay-to-play, redemption rights, and anti-dilution formulas carry forward unless renegotiated. In the NVCA model term sheet pay-to-play and redemption rights are bracketed optional clauses, while anti-dilution is standard text whose footnote describes the broad-based weighted average formula it sets out as the most typical one.
• Citing a market median round size as if it were a benchmark the company will be measured against. Round sizes move with the cycle; the PitchBook-NVCA Venture Monitor publishes the current figures quarterly, and they are the only ones worth quoting.

Related terms

A Series B follows a series-a and typically precedes a series-c. Its price is expressed through pre-money-valuation and post-money-valuation, its downside economics through liquidation-preference and preferred-stock, and its future dilution through anti-dilution, option-pool, and pro-rata rights. The whole structure is first sketched in a term-sheet and first modelled on a cap-table. Investors evaluating the round often screen on net-dollar-retention and rule-of-40.

Frequently asked questions

What does Series B funding mean?

Series B funding means the second named round of priced preferred stock a venture-backed company sells. The company issues a new class of stock, amends its charter to create that class, and sets an explicit price per share. The name carries no legal definition and no required size; it is simply the label given to the second priced institutional round in a sequence.

How much is a Series B round?

There is no fixed amount. Round sizes vary by sector, geography, and market cycle, and the meaningful reference is the current quarterly data rather than a remembered figure. The PitchBook-NVCA Venture Monitor reports deal sizes and valuations by stage each quarter and is the standard source venture investors cite.

What is the difference between Series A and Series B?

Structurally, very little. Both are priced preferred rounds documented with the same agreement set. The NVCA model term sheet itself suggests that for Series B and later transactions the parties consider shortening the document to say that terms are consistent with prior rounds, subject to reasonable review by the lead investor. What differs is the underwriting: a Series A investor prices whether the company can build a repeatable motion, a Series B investor prices how far that motion extends.

Does a Series B dilute founders more than a Series A?

Not necessarily. Dilution is a function of the amount raised relative to the post-money valuation, plus any option pool refresh taken out of the pre-money. A large Series B at a high valuation can dilute less than a small Series A at a low one. The number to compute is the amount divided by the post-money, then adjusted for the pool.

Do Series B investors get a board seat?

Usually the lead does. The NVCA model term sheet's board composition clause contemplates a director designated by the lead investor as one of the named seats, alongside a seat for the remaining investors, a common stockholder representative, the chief executive officer, and one or more independents. The precise composition is recorded in the voting agreement.

What happens to SAFEs and convertible notes at Series B?

An instrument converts at the first financing that clears the qualifying financing threshold written into it, which for most notes and safes is the Series A rather than the Series B. Anything still outstanding converts at Series B on its own terms, and the NVCA model term sheet's amount raised line contemplates including converted SAFE and note amounts in the reported round size.