US Fundraising Specifics

The US venture capital market has developed specific norms, structures, and practices that differ from other markets. Understanding US-specific fundraising details—SAFE dominance, Delaware C-corp standard, QSBS tax benefits, and US VC market norms—is essential for companies raising capital in the US market or dealing with US investors.

For universal fundraising concepts, see Startup Fundraising Primer. For detailed instrument mechanics, see Fundraising Instruments Deep Dive.

US VC Market Structure

The US venture capital market is the largest and most developed globally, with distinct characteristics: concentration in specific geographic regions (Silicon Valley, Boston, New York), strong network effects (investors know each other, share deals, co-invest), and established legal and regulatory frameworks. The US market has developed standardized term sheets, common practices, and cultural norms that differ from international markets.

Geographic concentration: Silicon Valley dominates early-stage funding, with Boston (biotech, enterprise), New York (fintech, consumer), and Los Angeles (media, consumer) as secondary hubs. Companies outside these hubs face fundraising challenges, though remote investing has increased post-COVID. Location matters less than traction, but investors prefer companies they can easily visit and network with.

Network effects: The US VC market operates through strong networks—investors know each other, share deal flow, co-invest, and follow each other's leads. Getting one respected investor increases credibility with others. Warm introductions matter significantly—cold outreach has lower success rates than introductions from mutual connections.

Market cycles: US VC markets are cyclical—strong markets (2021) see high valuations, easy fundraising, and competitive deals. Weak markets (2023) see lower valuations, longer fundraising timelines, and investor caution. Market conditions significantly impact fundraising terms, valuations, and success rates.

SAFE Dominance in US Seed Market

SAFEs dominate US pre-seed and seed funding, largely replacing convertible notes. Y Combinator created the SAFE in 2013 to simplify seed funding, and it has become the standard instrument for early-stage US fundraising.

YC SAFE templates: Y Combinator publishes standard SAFE templates (pre-money SAFE, post-money SAFE) that most companies use with minimal modifications. These templates reduce legal costs, speed fundraising, and create market familiarity. Using standard templates signals to investors that you're following market norms.

Pre-money vs post-money SAFEs: Pre-money SAFEs (traditional) calculate ownership at conversion, making dilution unclear until conversion. Post-money SAFEs specify ownership immediately—"invest $100K for 2% ownership" means effective post-money is $5M. Post-money SAFEs are now standard in YC's template and provide clearer dilution transparency.

US market norms for SAFE terms: Valuation caps typically range from $2M-$15M for pre-seed, $5M-$30M for seed, depending on traction and market conditions. Discounts are typically 15-25%, with 20% being most common. Most Favored Nation (MFN) clauses are standard in early SAFEs. These ranges vary by market conditions—strong markets see higher caps, weak markets see lower caps.

Why SAFEs dominate: SAFEs are faster, cheaper, and simpler than convertible notes or priced rounds. They don't require valuation negotiation, have no interest or maturity, and use standard templates. They defer dilution calculation until priced rounds, giving companies flexibility. US investors are familiar with SAFEs, making them accepted and expected.

International context: SAFEs are primarily a US instrument. UK/EU markets still use convertible loan notes predominantly. International companies raising in the US may need to adapt to SAFE norms; US companies raising internationally may encounter preference for convertible notes.

Delaware C-Corp Standard

US venture-backed companies almost universally incorporate as Delaware C-corporations. This is a market standard driven by legal, tax, and investor preferences.

Why Delaware: Delaware has well-developed corporate law that's predictable, efficient, and favorable to investors. Delaware courts have extensive case law on corporate matters, providing clarity on governance, fiduciary duties, and shareholder rights. Most investors are familiar with Delaware corporate law.

Why C-corp: C-corporations allow unlimited shareholders, multiple share classes (common stock, preferred stock), and are required for many institutional investors. LLCs and S-corporations face restrictions that make them incompatible with venture capital structures—LLCs have pass-through taxation (investors can't benefit from QSBS tax benefits), S-corps have shareholder limits and class restrictions.

Corporate structure implications: C-corporations are separately taxed entities—the corporation pays taxes on profits, and shareholders pay taxes on dividends. This "double taxation" is a trade-off for the flexibility and investor compatibility. However, C-corps can defer taxes by reinvesting profits, and exits (acquisitions, IPOs) often involve stock sales taxed as capital gains rather than dividends.

Tax implications: C-corporation structure affects tax planning. Companies pay corporate income tax (currently 21% federal). Shareholders don't pay taxes on company profits until distributions. This deferral can be advantageous, but companies must manage cash flow to pay taxes on profits they don't distribute. For tax details, see Tax Primer.

Conversion costs: Companies that start as LLCs or other entities and convert to Delaware C-corps face conversion costs and tax implications. Starting as a Delaware C-corp avoids these costs. Most startup attorneys recommend Delaware C-corp formation from the start if venture funding is anticipated.

Investor requirements: Most institutional VCs require Delaware C-corp structure as a term of investment. This is rarely negotiable—investors need the legal structure, tax treatment, and governance framework that C-corps provide.

QSBS Tax Benefits

Qualified Small Business Stock (QSBS) provides significant tax benefits to investors in certain US startups, making it a valuable consideration in fundraising discussions.

QSBS basics: QSBS allows investors to exclude up to $10 million or 10x basis (whichever is greater) of capital gains from federal taxes if they hold qualified stock for 5 years. For stock acquired before September 27, 2010, the exclusion can be up to 100% of gains. For stock acquired after, it's typically 100% exclusion of the first $10M in gains or 10x the investor's basis.

Qualification requirements: The company must be a C-corporation (not LLC or S-corp), have less than $50 million in aggregate gross assets at and after issuance, use at least 80% of assets in active conduct of a qualified trade or business (excludes certain services like law, accounting, financial services), and meet other IRS requirements.

Investor benefits: QSBS provides investors with substantial tax savings. If an investor puts $1M into a startup, and the company is acquired 5+ years later for $11M (10x return), the investor can exclude $10M of gains from federal taxes. This tax benefit makes early-stage investing more attractive and can influence investor willingness to invest.

Company benefits: QSBS eligibility is a selling point in fundraising—investors value the tax benefits. Companies should verify QSBS qualification with tax advisors and highlight it in investor materials. QSBS is more valuable to individual investors (who can use the exclusion) than to institutional investors (who may not benefit the same way).

Timing matters: QSBS benefits require holding for 5 years. Early exits (before 5 years) don't qualify. This can influence investor preferences for holding periods and exit timing. Companies should understand QSBS implications when discussing exit timelines with investors.

Tax advice required: QSBS qualification is complex and requires tax professional verification. Companies shouldn't guarantee QSBS qualification without professional confirmation. Investors should verify QSBS benefits with their own tax advisors. For broader tax context, see Tax Primer.

US Term Sheet Norms

US venture capital term sheets have developed standard terms that are widely accepted, though specific terms vary by stage, market conditions, and investor preferences.

Liquidation preferences: 1x non-participating is standard for early-stage rounds (seed, Series A). This means investors get their money back first, then share in remaining proceeds based on ownership. Participating preferred (investors get preference back, then also participate in remaining proceeds) is less common but can appear in later rounds or competitive situations. Higher multiples (1.5x, 2x) are rare in early-stage but can appear in distressed situations or bridge rounds.

Board composition: Series A typically involves 3-5 person boards. Founders typically retain control (2-3 seats) with investors getting 1-2 seats and potentially an independent director. Later rounds add more investor seats. Board control matters for major decisions—founders losing board control is a significant consideration.

Anti-dilution: Broad-based weighted average is standard. Full ratchet is rare and highly punitive to founders. Anti-dilution protects investors from down rounds but standard terms provide reasonable protection without being overly punitive.

Vesting: Standard is 4-year vesting with 1-year cliff for founders and employees. Accelerated vesting (single-trigger or double-trigger) on acquisition is sometimes negotiated. Vesting protects companies and investors from equity dilution if key people leave early.

Pro-rata rights: Larger investors typically receive pro-rata rights (ability to invest in future rounds to maintain ownership). Smaller investors may not receive pro-rata or may receive reduced pro-rata. Pro-rata rights become more valuable as companies grow and raise larger rounds.

Information rights: Investors typically receive regular updates (monthly or quarterly), financial statements, board materials, and annual budgets. These rights provide ongoing visibility without requiring board seats.

Right of first refusal: Investors often receive rights to purchase shares if founders or employees want to sell before an exit. This controls who can become shareholders and prevents unwanted investors or competitors from acquiring shares.

Drag-along rights: Allow majority shareholders to force minority shareholders to sell in an acquisition. This ensures clean exits without holdouts. Tag-along rights (opposite) allow minority shareholders to participate in sales initiated by majority shareholders.

These terms are generally standard, but specific negotiations can vary. Companies should work with experienced startup attorneys who understand market norms and can negotiate favorable terms while maintaining investor relationships.

US Market Timing and Cycles

US VC markets are cyclical, with significant impacts on fundraising terms, valuations, and success rates.

Strong markets (like 2021): High valuations, easy fundraising, competitive deals, investor FOMO (fear of missing out), shorter timelines, more favorable terms for founders. Companies can raise larger amounts at higher valuations with less dilution.

Weak markets (like 2023): Lower valuations, longer fundraising timelines, investor caution, higher standards for traction, more dilution, down rounds more common. Companies need stronger metrics to raise, and fundraising takes longer.

Market timing impact: Raising during strong markets provides better terms and valuations, but also higher expectations. Raising during weak markets means more dilution but potentially more realistic expectations. Companies can't control market timing but should understand current conditions and adjust strategy accordingly.

Fundraising timelines: Strong markets see faster closes (4-8 weeks for seed, 8-12 weeks for Series A). Weak markets see longer timelines (6-12 weeks for seed, 12-16 weeks for Series A). Companies should start fundraising 6-9 months before running out of cash to account for market conditions.

Key Differences from International Markets

US fundraising norms differ from UK/EU and other international markets in several ways:

Instruments: US uses SAFEs extensively; UK/EU uses convertible loan notes. This affects terms, conversion mechanics, and legal structure.

Entity structure: US standard is Delaware C-corp; UK uses limited companies, other jurisdictions have different structures. Entity choice affects tax, governance, and investor compatibility.

Regulatory environment: US has SEC regulations (Reg D exemptions, accredited investor requirements). Other jurisdictions have different regulatory frameworks affecting who can invest and how.

Market practices: US market has strong network effects, warm introductions matter more, geographic concentration is higher. International markets may have different investor relationships and deal structures.

Tax benefits: QSBS is US-specific. UK has SEIS/EIS schemes providing different tax benefits. Understanding jurisdiction-specific tax benefits matters for investor discussions.

Companies raising in multiple markets or dealing with international investors should understand these differences and adapt their approach accordingly.

Key Principles for US Fundraising

Delaware C-corp structure is essentially non-negotiable for venture-backed companies. Investors require it, and starting as a C-corp avoids conversion costs.

SAFE dominance means US seed-stage companies typically use SAFEs unless there's a specific reason for convertible notes or priced rounds. Using standard YC templates signals market familiarity.

QSBS is a valuable selling point—verify qualification with tax advisors and highlight benefits in investor materials, especially for individual investors.

Market conditions significantly impact fundraising—strong markets mean better terms, weak markets mean more difficulty. Companies should understand current market conditions and adjust expectations accordingly.

Legal counsel matters—US fundraising involves complex legal documentation. Companies should work with experienced startup attorneys who understand market norms and can negotiate favorable terms while maintaining investor relationships.

For broader fundraising context, reference Startup Fundraising Primer. For detailed instrument mechanics, reference Fundraising Instruments Deep Dive.