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- Herausgeber: Expound Imprints
- Kategorie: Fachliteratur
- Sprache: Englisch
Unlock the Venture Capital Machine and Take Control of Your Company’s Future
Founders often approach venture capital believing it is only about raising money. In reality, every decision a venture capitalist makes is shaped by the hidden mechanics of their fund: how it was raised, when it must return capital, what promises were made to limited partners, and which incentives drive partners around the boardroom table. Behind every term sheet lies a complex system with rules, economics, and timelines that directly impact your company.
The Fund Equation: How VCs Really Make Decisions (And How to Use That Knowledge) is your practical guide to navigating this system with confidence. Written by Ken Cheney and Robert Gibson, co-founders of Expound Consulting, the book pulls back the curtain on how venture funds actually operate and translates that knowledge into clear, actionable strategies for entrepreneurs at every stage.
You will learn how to
- Decode venture incentives so you can anticipate investor behavior before it affects your business.
- Time your fundraising with VC deployment and fundraising cycles to secure better terms.
- Negotiate smarter by understanding liquidation preferences, option pool math, down rounds, and control rights.
- Build stronger board and investor relationships with updates that create trust and credibility.
- Protect founder control while still aligning with investor goals.
- Master valuation dynamics and avoid the traps that lead to painful down rounds.
- Plan your exit strategy early so you never get forced into a deal that is not right for you.
The book goes beyond theory. It includes real-world case studies, step-by-step frameworks, and practical tools such as:
- Communication templates to keep your investors engaged.
- Checklists to run more effective board meetings and diligence processes.
- Valuation and waterfall models to understand the economics that drive outcomes.
- Scenario guides for funding events, secondary sales, recapitalizations, and exits.
Whether you are raising your first institutional round or scaling toward IPO, The Fund Equation shows you how to manage venture capital as a product with features: timelines, economics, and governance structures. By mastering those features, you gain more than capital. You gain informed control over the future of your company.
Why This Book Matters Now
The venture landscape has shifted. Capital is concentrated in fewer funds. Exits take longer. Down rounds and bridge rounds are more common. Investors are more selective and disciplined. These realities mean that understanding how venture funds really operate is no longer optional for founders. It is essential.
With insights drawn from industry data, academic research, and years of operating and fundraising experience, Cheney and Gibson provide founders with a clear, founder-first perspective. They show that conflicts between entrepreneurs and investors often come from misaligned expectations, not malice—and they give you the tools to align incentives and protect your company’s option value at every stage.
Who Should Read This Book
- Startup founders and executives preparing for funding rounds.
- Growth-stage leaders managing boards, valuations, and exit planning.
- Aspiring entrepreneurs who want to decide if venture capital is right for their company.
- Investors and advisors who want a transparent framework to share with portfolio companies.
The Fund Equation is more than a book. It is a founder’s survival guide for navigating venture capital with clarity and control
Das E-Book können Sie in Legimi-Apps oder einer beliebigen App lesen, die das folgende Format unterstützen:
Seitenzahl: 279
Veröffentlichungsjahr: 2025
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The Fund Equation: How VCs Really Make Decisions (And How to Use That Knowledge)
Initial version by Ken Cheney and Robert Gibson (Founders of Expound Consulting)
Expound Consulting is built to help high-growth B2B technology companies scale smarter and faster. Founded by industry veterans Ken Cheney and Robert Gibson, the firm bridges the gap between bold strategy and day-to-day execution. We partner with leadership teams to refine growth strategies, strengthen operational foundations, and execute go-to-market initiatives with precision. From startups moving beyond Series B to established SaaS firms expanding into new markets, Expound provides the insight, alignment, and tactical firepower needed to turn vision into scalable results.
What sets Expound apart is our hands-on approach. We don’t just advise—we execute alongside our clients. Our work spans strategy, operations, and go-to-market execution, ensuring that ambitious plans translate into measurable growth. With a track record shaped by real-world successes like category creation at Cloudability and scaling revenue engines for fast-growing companies, we bring proven expertise to every engagement. Expound’s mission is simple: empower leaders to accelerate growth without losing speed, clarity, or strategic focus.
This work is made available under the Creative Commons Attribution-ShareAlike 4.0 International License (CC BY-SA 4.0). This means you are free to copy, share, and adapt the material for any purpose, including commercial use, as long as appropriate credit is given to the original authors and Expound Consulting. Any adaptations or derivative works must be distributed under the same license, ensuring that future contributions remain open and accessible to others.
Copyright (c) 2025 [Expound Consulting, Ken Cheney and Robert Gibson]
The Fund Equation: How VCs Really Make Decisions (And How to Use That Knowledge)
This work is licensed under the Creative Commons Attribution-ShareAlike 4.0 International License.
Published by Expound Imprints
ISBN: 979-8-9996977-1-4
To view a copy of this license, visit https://creativecommons.org/licenses/by-sa/4.0/
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Table of Contents
Introduction
Why this book exists
What has changed since the last cycle
How to use this book
What we mean by founder-first
Introduction: Key Takeaways
Chapter 1 — What Every Founder Should Know About VC Incentives
The LP–GP chain in plain English
Founder translation
Signals of healthy fund–founder fit:
Partnership Perspective: Choosing the Right VC
What’s different right now
How LP pressure shows up on your board
Negotiating with fund incentives in mind
Founder-friendly outcomes that stand up in tougher markets
A word on alignment and integrity
Chapter 1: Key Takeaways
Chapter 2: Understanding the Fund Lifecycle for Better Partnership
Opening Scenario
The Fundraising Phase — When VCs Are Most Flexible
Deployment Pressure (and Why Timing Matters)
The Reserve Game: Securing Follow-On Support
Partnership Perspective: Supporting A VC Fund Raise
Exceptional Founder–VC Partnership – Sutter Hill & Snowflake
Chapter 2: Key Takeaways
Chapter 3: The Economics That Drive Every Decision
Opening Scenario
Understanding Exit Timing Economics
Partnership Perspective
Beyond Profits: Management Fees and the Cost of Running a Fund
Partnership Perspective: Timing of Funds
Exceptional Founder–VC Partnership – Sequoia Capital & WhatsApp
Chapter 3: Key Takeaways
Chapter 4: Inside the Investment Decision
Opening Scenario
The Monday Partner Meeting – Prepare Thoroughly for Success
Give Your Champion the Memo (Be Your Own Advocate)
Proactively Addressing Concerns (The “Objection Ledger”)
Chapter 4: Key Takeaways
Chapter 5 — Understanding Fund Operations
Why this chapter matters
The Fund’s Operating Spine: From Commitments to Cash
Capital Calls: How They Work (and Why You Should Care)
Subscription Lines: Pros, Cons, and Founder Implications
Reporting, Audits, and the Annual Rhythm
Fees, Expenses, and “Typical” Operating Costs (Categories)
Process Templates You Can Borrow
When Ops Friction Becomes a Deal Risk
Founder—Investor Partnership: Operating with Empathy
Chapter 5: Key Takeaways
Chapter 6 — Building Strong Investor Relations
Opening
What Great Updates Look Like
Why Updates Work (and What the Data Suggest)
Portfolio Triage: How VCs Categorize Companies (and Why You Should Lean In)
Board-Grade Updates vs. Investor Letters
Turning Asks into Action
Metrics That Build Credibility
Handling Bad News
Chapter 6: Key Takeaways
Chapter 7: Clear Communication with Investors
Opening scenario
The Three Key Stories to Communicate (Every Time)
The Metrics That Actually Matter
Cadence: The Monthly Five (and Why Quarter-Ends Matter)
Board Packs: What to Include (and What to Cut)
Chapter 7: Key Takeaways
Chapter 8: What Your VC’s Back Office Means for You
Capital Calls: How Funding Flows to You
Reporting Cycles and Deadlines
Compliance and Paperwork
Partnership Perspective: Smooth Closings
Coordinating with Your Investor’s Operations
Chapter 8: Key Takeaways
Chapter 9 — How VCs Value Your Company
The Basics of Startup Valuation and Incentives
Case Studies: The High-Valuation Hangover
Stripe
Instacart
Klarna
Lessons from the Case Studies
409A Valuation Dynamics
How Investors Assess Your Value
Comparables (“Comps”)
Milestone-Based Risk Reduction
Ownership Target and Fund Economics
Competitive Dynamics and FOMO
Structured Terms in Down Markets
Summary
Chapter 9: Key Takeaways
Chapter 10 — Finding the Right Investor Fit
Opening
10.1 Decoding a VC Firm’s DNA
When Fit Is Mutual
Partnership Perspective: Choosing the Right VC
Signals of a Good (or Bad) Fit
Doing Your Diligence on Investors
Examples of Founder–VC Fit
When It’s Not a Fit
Aiming for the Long Term
Chapter 10: Key Takeaways
Chapter 11: Diligence & Closing
Opening
The Post-Term Sheet Diligence Sprint
Partnership Perspective: Navigating the Gauntlet
From Term Sheet to Money in the Bank
Chapter 11: Key Takeaways
Chapter 12: Creating Mutual Value
Opening
Beyond the Money: How Investors Add Value
Engaging Your Investors for Success
Chapter 12: Key Takeaways
Chapter 13 — Planning Your Exit Strategy
Opening Scenario
Why You Should Think About Exits Now (Even if You’re Not Ready)
M&A vs. IPO: Different Journeys, Same Destination?
Timing the Market (and Knowing When It’s Impossible)
Designing Your Exit Playbook
Partnership Perspective: Collaborative Exits
Chapter 13: Key Takeaways
Chapter 14 — The Control Stack: Balancing Power Between Founders and Investors
Opening
Board Composition and Control
Voting Rights and Share Classes
Protective Provisions (Veto Rights)
Founder Vesting and Stock Restrictions
Drag-Along Rights and Exit Control
Information and Oversight Rights
Chapter 14: Key Takeaways
Chapter 15: Corporate & Cross-Border Capital – Strategics, CVCs, and Foreign Investors
Opening Scenario
The Rise of Corporate VC and Strategic Investment
How CVCs Differ from Financial VCs
Common “Strings” Attached to Strategic Investments
Cross-Border Capital Considerations (Regulatory and Geopolitical)
When Strategic Investors Add Tremendous Value
Chapter 15: Key Takeaways
Epilogue: Building the Venture Partnership Future
Appendices
Appendix A: Venture Capital Fund Scenarios
Introduction
Scenario 1: Basic “2 and 20” Fund
Scenario 2: Emerging Manager Fund
Scenario 3: Deal-by-Deal vs. Whole-Fund Carry Models
Scenario 4: Management Fee Step-Down Structure
Scenario 5: Recycling Provisions Explained
Scenario 6: GP Commitment Methods
Scenario 7: Varying Fund Lifespans & Extensions
Scenario 8: Clawback Trigger Example in Practice
Scenario 9: Managing Multiple Fundraising Closes
Scenario 10: Illustrating Hypothetical Fund Outcomes
Scenario 11: Annex Funds vs. Opportunity Funds
Scenario 12: ESG / Impact Focused Fund
Scenario 13: Mid-Fund Secondary LP Interest Sale
Scenario 14: Parallel Funds & Special Purpose Vehicles (SPVs)
Scenario 15: Multiple Funds Over Time (Franchise Building)
Appendix B: Portfolio Investment Scenarios
Introduction
Scenario 1: Self Funded / Bootstrapped Startup
Scenario 2: Early SAFE or Convertible Note (Pre-Seed / Angel Round)
Scenario 3: Friends & Family Round (Equity or Convertible Note)
Scenario 4: Seed Round (Priced Equity)
Scenario 5: Bridge Round (Convertible Note between Priced Rounds)
Scenario 6: Series A Round (Up Round with Bridge Conversion)
Scenario 7: Down Round (Illustrative Series B)
Scenario 8: Recapitalization / Restructuring (“Recap”)
Scenario 9: Founder Secondary Sale in Growth Round
Scenario 10: Venture Debt Layer
Scenario 11: Equity Crowdfunding (Reg CF, Reg A+)
Scenario 12: Employee Liquidity Program / Tender Offer
Scenario 13: Acquisition / M&A Exit
Scenario 14: Initial Public Offering (IPO) Exit
Scenario 15: Acqui-Hire (Talent Acquisition)
Scenario 16: Secondary SPV for Late-Stage Liquidity
Scenario 17: Pivot Accompanied by an Extension Round
Scenario 18: Liquidation / Shutdown Scenario
Appendix C: Metrics for Venture Capital Firm Performance Analysis
Introduction: Understanding Fund Level Performance
A. Key Fund Performance & Valuation Metrics
B. Fund Operational & Efficiency Metrics
C. Portfolio Construction & Risk Metrics
D. Fundraising & Firm Metrics
Practical Guidance on Using Fund Metrics
Appendix D: Metrics for Portfolio Company Analysis
Introduction: Assessing Startup Health and Traction
A. Revenue & Growth Metrics
B. Profitability & Efficiency Metrics
C. Customer Metrics
D. Product & Engagement Metrics
E. Team & Hiring Metrics
Practical Guidance on Using Portfolio Metrics
Appendix E: Glossary of Venture Capital Terms
Appendix F: Communication Templates
Appendix G: Calculators & Worksheets (How to Do the Math Fast)
G.1 Waterfall – Who Actually Gets Paid
G.2 Dilution by Round – Ownership Planning
G.3 Burn Multiple & Runway
G.4 Price of Round → Implied Multiple
G.5 Marking & Caps (for Complex Preference Stacks)
Appendix H: Templates & Checklists (Drop-in Assets)
References
Introduction
Why this book exists
Raising venture capital can help you build a category-defining company. It can also sometimes box you into someone else’s timeline. Venture money is not just money—it arrives with a fund’s promises to its own investors, a portfolio strategy, and a clock. This book provides founders with practical tools to navigate that reality, allowing you to utilize venture capital without letting it use you. In short, it shows you how to leverage VC funding without losing control of your company’s trajectory.
What has changed since the last cycle
The venture market you are raising in today looks different from the zero-interest-rate policy (ZIRP) era. A few changes matter most for founders:
You will see these realities referenced throughout the book, but we use progressive disclosure to avoid repetition. For example, we mention dry powder here once, then revisit its implications for your round timing and leverage in Chapter 3 (Process), and how it shapes exits in Chapter 7 (Exits).
How to use this book
What we mean by founder-first
“Founder-first” in this book means informed control. You likely won’t succeed by ignoring investor incentives; you’ll have a much better chance of success by understanding them, designing processes that align investor goals with your own, and protecting your option value at each step. We combine negotiation checklists, board management tactics, and realistic cap table (ownership table) math to help you maintain leverage while preserving relationships.
Introduction: Key Takeaways
Venture Capital is a Product with Features:
Treat VC funding not as just money, but as a product that comes with binding features: a timeline, a portfolio strategy, and a set of investor expectations you must now manage.
The Fundraising Playbook Has Changed:
The post-ZIRP (zero-interest-rate policy) market is defined by capital concentration, longer exit horizons, and a higher bar for investment. Speed and easy money are out; discipline and strategic alignment are in.
Informed Control is Your Greatest Asset:
Success comes not from ignoring investor incentives, but from understanding them deeply and using that knowledge to align their goals with yours, preserving your control and option value at every stage.
Chapter 1 — What Every Founder Should Know About VC Incentives
The one idea to remember: When you take venture capital, you are accepting a partner that is itself financed by Limited Partners (LPs), governed by a ~10-year fund structure, and measured by distributions and outlier outcomes. Your term sheet is a product of that machine. Learn how the machine works, and your odds may go up.
The LP–GP chain in plain English
Founder translation
In practice, these dynamics translate to concrete questions you should ask any lead investor before you sign a term sheet. By understanding a VC’s fund status and incentives, you can better predict how they’ll behave over your company’s life. Here are four key questions to ask every prospective lead:
“What percentage of your current fund is reserved for follow-ons, and what portion would be earmarked for my company if we hit plan?”
– This reveals how much dry powder they have for supporting you in future rounds.
“Where is your fund in its life, and how do you think about exit timing for companies that may need 7–10 years?”
– An early-cycle fund can be more patient; a later-cycle fund might push for quicker exits or mergers, especially if an IPO looks distant.
“How many boards do you (or the lead partner) sit on currently, and what is your post-investment meeting cadence?”
– This gauges the partner’s bandwidth and how engaged they can be. A heavy board load or sparse meeting rhythm might mean less attention for your company.
“What is your follow-on policy if we hit plan, and if we miss?”
– You need to know upfront whether the investor will aggressively back you in success and how they’ll behave if things don’t go to plan (e.g., insider bridge rounds, support vs. pressure to cut losses).
Signals of healthy fund–founder fit:
Partnership Perspective: Choosing the Right VC
Founder’s View: “I realized a VC isn’t just writing a check—they’re joining my company’s journey. I needed an investor who gets my vision and won’t force a pivot for the wrong reasons. In diligence, I started asking investors about their fund timeline and what a win looks like for them. One candidate’s fund was nearing the end of its life and kept pushing scenarios of an early sale. That didn’t sit right. In contrast, another firm talked about building a 10-year category leader—much closer to my ambitions. That’s who I went with.”
VC’s View: “From our side, we look for founders who understand our approach too. I’ve had founders ask pointed questions about our fund’s strategy—and I respect that. It shows they care about fit. We want to invest where we can add real value. If a company needs heavy lifting in an area where we’re experts, that’s fantastic. However, if they truly need assistance scaling sales, and our strength lies in product development, we might not be the ideal partner. The best deals for us are those mutual fits where the founder’s needs and our resources align, and we both trust each other’s intentions.”
What’s different right now
Beyond fund mechanics, the market environment has undergone significant shifts. Here are the most critical current factors shaping venture deals:
Concentration and pacing:
Fewer funds are raising more of the money. Carta’s 2024 data show the average fund size up ~44% and first-time fund formation down 57%, which tightens access for emerging managers and makes founders’ choices more “barbelled”—either brand-name mega-funds or niche specialists (Dowd, 2025).
Plenty of capital, stricter gates:
U.S. dry powder remained above $300B through 2024, yet deployment has been slower than in prior boom years. Your takeaway: you can still raise, but expect deeper diligence, more staged commitments, and firmer investor protections—especially beyond Series A (AlphaSense, 2024).
Longer private timelines:
The median time from first money to IPO hit ~7.5 years for companies that went public in 2024. Many “unicorns” are staying private longer, raising late-stage rounds often with crossover (public-market) or strategic investors. Set expectations with your team, board, and family accordingly—this will often be a long journey (Kupec, 2025).
More bridges and structured terms:
Nearly half of seed deals in Q1 2025 were bridge rounds. Major law firm deal studies also report greater use of investor-protective terms in 2024–2025, including pay-to-play provisions (which require insiders to invest in follow-ons or face penalties) and participating liquidation preferences (which allow investors to double-dip on exit proceeds) in tougher rounds (Primack, 2025). In short, design your operating plan so that a bridge round becomes a tool by design—not a last-resort surprise.
How LP pressure shows up on your board
LP expectations are not abstract; they can directly influence your company’s governance via the incentives and constraints on your VCs. For example, a fund’s Limited Partnership Agreement (LPA) may shape a VC’s support:
Board hygiene checklist: To preempt conflicts, bake fund-awareness into your board governance:
Capture any commitments or constraints discussed in the board minutes for accountability.
Revisit these protocols after each new financing round to ensure alignment.
Negotiating with fund incentives in mind
Create competition and compress time in your fundraising. Running a short, parallel process often encourages investors to reveal their true preferences on valuation, control, and follow-ons. In other words, your best terms typically emerge when two or more funds (with ample reserves) are still early in their investment periods and actively vying to lead your deal.
Stage your story for step-ups. Carta’s data shows seed and Series A valuations recovered in 2024–2025, while later-stage rounds remain very selective (Neville & Dowd, 2025). Focus your milestones to earn a clean step-up between your A and B rounds—that sequence protects your ownership and reduces the chance of needing structured “fixes” later on.
Secure follow-ons in writing. Ask your lead to spell out their intended pro rata commitment in the term sheet, and even consider requesting an internal memo (or investment committee note) confirming what they’ve reserved for you. If you know you’ll need inside support over the next year, get an agreed-upon process and timeline for how those follow-on decisions will be made.
Plan for bridges; do not drift into them. If market timing or dependency risk is high in your situation, negotiate a pre-wired bridge framework as part of closing your current round. Agree on the target metrics that would trigger an insider bridge, a window (deadline) for the decision, and the type of instrument you’ll use. By defining the “what if we need a bridge” plan upfront, you turn a potential surprise into a simple executable option.
Founder-friendly outcomes that stand up in tougher markets
Not everything has to tilt in favor of investors. Even in a cautious market, you can still secure healthy terms that will age well:
A word on alignment and integrity
Most founder–investor conflicts often stem from misaligned expectations, rather than malice. Open communication and clear, codified decision-making processes can prevent problems from escalating into crises. And if conflict does start to escalate, use neutral mediators and keep heated debates off the company floor (i.e., out of day-to-day operations) until a final decision is ready to share.
Chapter 1: Key Takeaways
Decode the LP–GP Chain to Predict VC Behavior:
A VC's decisions are driven by their promises to their own investors (LPs). Understanding this chain of command is the key to anticipating their moves on everything from valuation to exit timing.
A Fund's Age Dictates Its Agenda:
An early-cycle fund has time and is hungry for new deals. A late-cycle fund is focused on exits and returning capital. Ask "Where is your fund in its life?" to understand how much patience they really have.
"Dry Powder" Isn't a Blank Check:
A fund's reserve policy for follow-on rounds determines if your current investor will be a source of future capital or just a spectator. Clarify their reserve strategy for your company before you sign the term sheet.
(Chapter 2 will take a deeper look at the VC fund lifecycle—so you can time your raise for maximum leverage.)
Chapter 2: Understanding the Fund Lifecycle for Better Partnership
Opening Scenario
Timing Is Everything: In 2009, Airbnb’s founders were scrambling to keep their startup alive—even selling novelty cereal boxes to raise cash. Around the same time, a venture firm that had initially hesitated came under pressure to make new investments before closing its fund. When Airbnb and the VC finally connected, both sides capitalized on the moment. The VC offered favorable terms (needing a flagship deal to show its own investors), and Airbnb gained a committed partner who understood its urgency. Both founders and investors benefited from understanding each other’s timing constraints—Airbnb secured the funding it desperately needed, and the VC got to back a future unicorn at the perfect point in its fund’s cycle.
The Fundraising Phase — When VCs Are Most Flexible
Venture capital firms periodically raise new funds from their limited partners (LPs). During these fundraising phases, a curious dynamic unfolds: VCs can become more accommodating and founder-friendly than at other times. The reason is simple—while founders are pitching investors, those investors are simultaneously pitching their own investors (the LPs). A VC raising a fund wants to show momentum, which means closing great deals. Your term sheet during this phase reflects the intersection of your needs and your investor’s structural constraints. Understanding both creates better outcomes. In practice, when a VC is fundraising, they are often most flexible with founders:
Deployment Pressure (and Why Timing Matters)
Once a VC firm closes a fund, the clock starts on putting that capital to work. Deployment pressure refers to the need to invest the fund’s money within a specific period to meet return targets and avoid sitting on idle capital. Early in a fund’s lifecycle, VCs are hunting for new deals; as the fund ages, the focus shifts to follow-on investments and exiting existing ones. A venture fund typically has a 10-year life (with possible extensions), so VCs are under pressure to return capital (and profit) to their LPs on roughly that timeline. This doesn’t mean every company must exit in under 10 years, but it does mean VCs start thinking about liquidity by years 5–8 of a fund. The result? There is sometimes an implicit tension between founders who want to continue building and investors who eventually need an exit. Understanding the economics behind this can help you navigate those conversations more productively.
The 10× in 10 Years Benchmark: A common goal you’ll hear from VCs is aiming for “10× in 10 years.” If they invest $10 million, they’d love to get $100 million or more back within a decade. In reality, venture returns are rarely so neat. Some exits occur much faster (e.g., an acquisition after 2 years), while others remain private for 15 years or more. However, fund math tends to push toward bigger, sooner exits whenever possible. One reason is the concept of IRR (Internal Rate of Return), which values time in returns. For instance, a 3× return in 3 years can beat a 5× return in 6 years in IRR terms because the quicker win boosts annualized performance. In short, time is a crucial factor in venture outcomes.
The Reserve Game: Securing Follow-On Support
Venture capital isn’t just about the first check. Great VCs hold money in reserve to support companies in future rounds. Understanding how reserves work is crucial for founders because it determines who will help you in both good times and bad. Reserve allocation is a critical portfolio construction decision that, when done well, supports breakout companies at crucial moments. Here’s the gist: a VC fund usually reserves ~30–50% of its capital for follow-on investments in existing portfolio companies. That means if you raised $5M in a Series A from a $100M fund, that fund might be holding another $5M–8M in reserve earmarked for you (assuming you execute well). This practice has huge implications:
