Startup Fundraising — Cracking the Code of Angel Investor

Today, we’ll uncover what truly matters to early-stage investors, help you identify which stage you’re currently in, and highlight the types of support you can access. Here are the six points of Early-Stage Fundraising for Youth-Led Startups in the following:

• What exactly is equity fundraising, and how does it work?
• What are investors really looking for when offering capital in exchange for equity?
• Beyond equity, what other funding options are available for young founders?
• How should you prepare for equity fundraising, and what steps will you go through?
• How do venture capitalists evaluate your startup’s value?
• What should you watch out for in an investment agreement?

Whether you’re just getting started or planning to raise your first round, this article will guide you through the key insights you need to take the next step with confidence.

Private equity investment in the startup market is a high-risk, high-return asset class. Equity investment in private markets is, in itself, a form of financial investment — distinct from investing in publicly listed companies. The key differences lie in transparency (public vs. private), credibility (institutional endorsement vs. none), regulatory oversight (regulated vs. unregulated), and governance structure (contractual agreements vs. limited formal obligations).

Unlike conventional investments where hedging is a top priority, private equity — particularly in startups — is inherently high risk, yet offers the potential for high returns.

Startup fundraising typically progresses in stages based on business performance and organizational scale, from small to large:

• Angel / Seed Round
• Pre-A Round
• Series A, B, C…
• Up to IPO (Initial Public Offering)

Not every startup needs to go through multiple fundraising rounds before going public. Fundraising exists only when capital is needed — it’s essentially the act of selling equity to those who believe in your future growth.

If a company is already self-sustaining and generating enough revenue to support its growth, it may opt for bank financing instead of equity dilution. A classic example is Google, which raised only one funding round (Series A) before going public.

💡 What Is Equity Fundraising?

To understand equity fundraising, we first need to start with the fundamentals of how companies are formed. In Taiwan, there are five common legal structures for businesses:

• Company Limited by Shares (股份有限公司)
• Limited Company (有限公司)
• Unlimited Company (無限公司)
• Unlimited Company with Limited Liability Shareholders (兩合公司)
• Close Company (閉鎖型股份有限公司)

Among these, over 99% of companies you see in the market are either Limited Companies or Companies Limited by Shares. The key differences between the two lie in areas such as:

• Number of shareholders
• Types of capital contributions
• Transferability of shares
• Board composition
• Voting rights
• Profit distribution methods

Most Limited Companies are founded as family-run businesses to limit external interference. In contrast, a Company Limited by Shares offers greater flexibility in equity transfer and profit-sharing, which is why investors prefer investing in this structure.

🧾 Equity = Your Stake in the Company

When a business registers as a Company Limited by Shares, it must submit:

• Articles of Incorporation
• Shareholders’ Agreement
• Director’s Consent to Serve
• Accounting and legal documents

Your equity represents your financial stake in the company, and your ownership rights and shareholding percentage are outlined in the Articles and Shareholders’ Agreement.

A Simple Example:

If you and a partner contribute NT$600,000 and NT$400,000 respectively to start a business with NT$1 million in total capital, and ordinary shares are priced at NT$10 each:

• You hold 60,000 shares (60%) → the major shareholder, with decision-making power
• Your partner holds 40,000 shares (40%)

You can also add special shares or technical shares clauses in the Shareholders’ Agreement to recognize early contributors or co-founders.

💰 Equity Fundraising = Selling Ownership for Capital

During the company’s operation, under the terms defined in your Shareholders’ Agreement, you may invite external investors to purchase newly issued shares. This is called equity fundraising.

But how much should they pay for a share of your company? This leads us to the core of equity fundraising: Valuation.

A reasonable valuation — based on your current business performance, financial health, technological potential, and market outlook — is something you must be ready to present and justify to potential investors.

Let’s say your company’s valuation grows to NT$3 million. Here are two common approaches to raising funds:

Option 1: Issue New Shares

• You issue 50,000 new shares at NT$20 per share (price doubled)
• Total shares = 150,000
• New ownership breakdown:
  - You: 60,000 shares → 40%- Partner: 40,000 shares → 26.6%- Investor: 50,000 shares → 33.3%

Option 2: Sell Existing Shares

• You and your partner each sell 10,000 of your own shares at NT$30 per share
• Total shares remain at 100,000
• New ownership breakdown:
  - You: 50,000 shares → 50%- Partner: 30,000 shares → 30%- Investor: 20,000 shares → 20%

It’s Not Just Math — It’s Legal Structure

In reality, equity fundraising is far more complex than just addition and division. Every fundraising process must be supported by a Share Purchase Agreement (SPA), which carefully defines the terms of investment:

• Protecting investors’ rights
• Preventing excessive dilution of the founding team’s shares
• Preserving control over company decisions

A well-structured fundraising plan balances capital injection, ownership retention, and governance clarity, helping your startup grow without losing control.

💬 What Do Equity Investors Really Care About?

To understand what equity investors are looking for, let’s shift perspectives and examine how venture capitalists (VCs) actually think.

Most VCs come from backgrounds in banking, accounting firms, securities brokerages, industry research institutes, or are former corporate executives. They typically possess strong financial acumen, industry expertise, and — most importantly — deep professional networks. Why are networks important? Because for VCs, deal sourcing is everything. And over 50% of deals come from referrals within their network — accountants, brokers, peers in other VC firms, and corporate leaders.

In contrast, startup expos, pitch competitions, and government demo days contribute to less than 10% of their actual investments. Ironically, unsolicited emails and cold LinkedIn messages may actually have a higher chance of standing out — not because of randomness, but because these founders often did their homework on the VC firm before reaching out.

So let’s move beyond the romanticized “angel investor” stories in media. From the investor’s standpoint, startups are high-risk financial instruments that require rigorous due diligence and valuation assessment before any capital is committed.

🎙 Insights from Early-Stage VCs: Charles & Gary

Both Charles and Gary are early-stage investors connected to major banks, government initiatives, and institutional VC firms in Taiwan. Here’s what their real-world numbers looked like last year:

• Gary reviewed 300+ startup decks
• Held discussions with 120 teams
• Conducted in-depth due diligence on 13
• Prepared 2 Term Sheets
• Invested in 0 companies

As a General Partner (GP), Gary is under pressure to find startups with 10x return potential within a 5–7 year investment horizon. But many Taiwanese startups lack the capital linkage and cross-border execution capacity required to scale internationally.Even Gary eventually had to convince his board to lower the expected return multiple from 10x to 5x — otherwise, no deals would make the cut.

Charles’ fund, which is partially backed by government capital, initially planned to allocate 70% to Pre-A early-stage investments. However, within two years, they shifted most capital toward Series C or later-stage deals due to market realities.

🏢 So What Is a VC Firm, Really?

Most VC firms are lean teams of around 10 people, managing funds ranging from NT$500 million to NT$2 billion. They earn a 2% management fee, meaning their main income comes not from operations, but from successful investment exits.

Let’s say a startup grows 5x in valuation over 10 years, and the fund originally invested NT$15 million. That becomes a NT$60 million gain.

After returning the principal and a preferred return to the Limited Partners (LPs), the remaining profit is usually split 80/20:

• LPs receive NT$48 million
• GPs (the VC team) share NT$12 million

But after splitting the reward across multiple partners, individual bonuses often average under NT$2 million per year — which is less than what a TSMC engineer makes.

So, How Do VCs Evaluate Early-Stage Startups?

1. Does it fit their mandate?
   They look at geography, sector strategy, check size, and fund stage.
2. What’s the growth potential?
   The earlier the stage, the more the focus is on the founding team.
   Both Gary and Charles emphasized that founders are key. It’s not about being overly agreeable — it’s about having the resilience to argue fiercely and still trust each other afterward.
3. Is the vision scalable?
   Taiwan or any single market may be too limited.
   So they ask:

If I gave you NT$100 million today, could you become one of the top 3 players in your industry in this country — or even across multiple countries?

💡 How Can University Students & Young Founders Raise Capital?

Beyond Equity Fundraising: Government & Institutional Resources in Taiwan

If you’re a student or young entrepreneur in Taiwan, there are multiple funding and resource channels available beyond equity investment. The key is to identify your current stage of entrepreneurship and align with the most suitable programs.

🎓 Before You Have a Product：University-level Competitions (e.g., 戰國策, ATCC):

Ideal for early-stage ideas before a product exists. Focus on drafting a solid business plan and team formation.

🧪 After You Build a Prototype：National Startup Competitions (e.g., U-Start, FITI):

Apply when you’ve developed a prototype. These programs support early testing, often encouraging you to share your MVP with friends and early users.

🌏 Going Global：Overseas Innovation Programs (e.g., Asia Silicon Valley, TIEC):

These support startups aiming to connect with global ecosystems.Example: Grants to attend Draper University Hero Training or other international accelerators.

After Company Registration. Once your company is officially established, you can apply for government subsidies and incentive programs tailored to your sector. Examples include:

• SBIR (Small Business Innovation Research)
• SIIR (Service Industry Innovation Research)
• CITD (Industry Technology Development Program)
• Local government or enterprise-led accelerators

⚠️ Note: Most of these programs require matching funds — typically 40% or more of the total project budget. Funds are reimbursed based on approved receipts, so startups often prefer bank loans for faster access to working capital — unless they’re applying for a specific government project.

For tips on how to write a winning startup proposal, check out this video: “How to Write a Startup Business Plan”

💼 How to Prepare for Equity Fundraising?

When you begin preparing for equity fundraising, you must understand how venture capital (VC) firms evaluate startups. Here’s how early-stage investor Gary typically approaches startup proposals:

🧑‍💼 Gary’s Investment Evaluation Framework:

1. Market Analysis
   Market size, compound growth rate, trends, momentum, barriers to growth
2. Industry Analysis
   Industry size, competitive landscape, market share, segmentation, supply chain, entry barriers
3. Technology Analysis
   Product testing, comparison with existing solutions, intellectual property, technical uniqueness
4. Business Model Analysis
   Revenue model, target customers, marketing strategy, competitive advantages, growth plans, team structure
5. Financial Analysis
   Financial issues, growth forecast, cash flow projection, valuation model, exit strategy
6. Legal Analysis
   Shareholding structure, equity distribution, governance, compliance with local laws, review of Articles of Incorporation (AOI)

🧑‍💼 What Charles (Gov-backed Early-Stage Investor) Looks For

When evaluating startups under government-funded programs, Charles conducts structured interviews covering:

1. Basic Info — Company background, timeline, cap table, changes in shareholding
2. Product
3. Future Outlook — Growth potential, market scalability, execution feasibility
4. Industry — Positioning and relevance within the broader ecosystem
5. Peer Comparison — Benchmarking for startup valuation
6. Financials — Balance sheets, profit/loss, forecasting, with a strong focus on logic behind the numbers
7. Exit Strategy — Potential M&A pathways and market endorsement

Whether it’s Gary’s analytical breakdown or Charles’ staged review, both investors are validating one thing:

“Is your valuation credible based on sound logic and solid data?”

📊 Before Valuation: 4 Questions to Answer from Gary

1. Liquidity (Short-term Cash Flow):
   Can your company handle unexpected disruptions, like delayed payments from clients or vendors?
2. Solvency (Long-term Debt Capacity):
   Are your profits sufficient to repay debts and maintain operations over time?
3. Profitability (Current Financial Performance):
   Are your revenue and sales improving quarter-over-quarter or year-over-year? What are the reasons for growth or decline?
4. Capital Management (Use of Funds):
   Can your founding team manage and allocate funding in a way that maximizes future returns?

Once these four fundamentals are clear, VCs will start working on a formal valuation.

🧾 Internal VC Process — What Happens Next

The internal review process is usually straightforward:

1. Associate Review — Initial assessment and internal report
2. Manager Involvement — Further inquiry and site visits
3. Investment Committee — Due diligence and internal discussion
4. Board Approval — Due diligence report + investment decision

🕵️‍♂️ What Happens During Due Diligence (DD)?

Charles outlines three key areas:

1. Financial Due Diligence

• Review financial forecasts to assess the team’s strategic thinking
• For early-stage firms, the focus is on income statements
• Accountants are asked to validate key assumptions and provide third-party valuations

2. Cap Table & Shareholding

• Founders must present an accurate shareholder registry
• Include all preferred shares, employee option pools, unissued shares, and warrants
• Clarify whether previous small shareholders have been bought out

3. Third-Party Investigations

• Hire CPAs and background check agencies to validate financial and legal status
• Understand if high dividend/capital gain scenarios are sustainable
• Confirm whether the founder’s goal is strategic growth or a quick exit
• Verify client and business partner backgrounds

✅ Final Tips from Charles

“As a founder, you don’t need to create anything extra for due diligence. Just regularly organize your key business documents — product, sales, HR, legal, and financial records — so you can confidently present them anytime.”

Also:

• Don’t dump all your documents at once just because an investor asks (e.g., Form 401, equity agreements, patents)
• Remember: Fundraising is a two-way, trust-based conversation, not a one-sided request
• Most investors care more about your vision, insights into the market, and your team’s ability to execute effectively

What to prepare before your first investor meeting:

• Recent performance report
• Capital structure & registration documents
• Financial statements

💰 How Do VCs Evaluate Your Company’s Value?

You may have heard of Price-to-Earnings (P/E) ratios when buying stocks. But in the private market, there’s no public benchmark, so how do VCs evaluate a startup?

The truth is There’s no one-size-fits-all formula for valuation in the private market. Because valuation depends on macro and micro variables like:

• Macro factors: Market size, industry structure, inflation, CPI, interest rates
• Micro factors: Market development stage, company scale, revenue model, leverage, liquidity

Apart from common metrics like P/S and P/E, VCs may apply:

• EV/EBITDA (Enterprise Value / Earnings Before Interest, Tax, Depreciation, Amortization)
• DCF (Discounted Cash Flow)

But early-stage negotiations rarely focus on the formulas — they revolve around negotiation leverage and value perception, often framed by:

• BATNA: Best Alternative to a Negotiated Agreement
• ZOPA: Zone of Possible Agreement

In simple terms: You’re not negotiating based on math. You’re negotiating based on leverage and perception.

🧑‍💼 Gary, a seasoned investor, shares:

• Startup A asked for US$20M → he negotiated it down to US$7M
• Startup B asked for US$5M → he negotiated to US$1.5M

Based on his analysis, their actual values were closer to:

• Startup A: US$4–5M
• Startup B: < US$2M

So how does Gary arrive at those numbers?

🔍 4 Evaluation Pillars Behind Every VC Valuation

1. Liquidity — Can you respond to short-term cash flow crises? Key Metrics:

• Current Ratio — Assets convertible to cash within 12 months
• Quick Ratio — Assets convertible to cash within 3 months

E.g., Retail/F&B companies need higher liquidity than banks.

2. Solvency — Can your company repay debts over time? Key Metrics:

• DRO (Days Receivable Outstanding) — How long until customers pay?
• DIO (Days Inventory Outstanding) — How fast do you sell inventory?

Example: McDonald’s had a DRO of 22 days in 2001, which dropped to 14 by 2005. DIO remained for 4 days. That’s excellent on paper — but what if burger patties spoil after 2 days? This is where financial metrics meet real-world risks.

3. Profitability & 4. Capital Management — Combined View

Understanding revenue sources:

• Earning — Operating income
• Lending — Debt-based capital
• Financing — Equity fundraising

Startup Financial Formula:

Assets = Liabilities (S/T + L/T) + Equity (Current + Retained Earnings + Capital)

Revenue - Cost of Goods Sold (COGS) = Gross Margin

Gross Margin - Operating Expenses = Operating Income

Operating Income - Interest & Tax = Net Income

But actual cash flow often matters more than reported revenue due to differences in revenue recognition.

Key Financial Ratios VCs Use:

Example: McDonald’s had a 49% debt-to-assets ratio. Sounds good, but is it sustainable given market trends and expansion slowdowns?

Fundraising Mindset: It’s a Game of Anchors & Leverage

If your company has already secured interest from other investors, you have anchor pricing that limits VC negotiation space. If demand exceeds supply (oversubscription), you’re in the driver’s seat. Otherwise, VCs might suggest alternatives like ESOP restructuring if you’re unwilling to give up equity.

In early-stage without financial statements, what do VCs look at?

When financial documents like the balance sheet and cash flow statement are unavailable, VCs focus on qualitative indicators such as:

• User base scale
• Service/product theme
• Exit value potential
• Projected business size
• Market opportunity and expected exit price

Founders should proactively map out:

• How many fundraising rounds will be needed before IPO or M&A?
• How much equity will be diluted in each round?
• What proportion of this round’s investment will remain at exit?
• What is the estimated investment return (ROI) at exit?

📑 When You Receive a Term Sheet (TS) or Investment Agreement…

Realize this: The VC has already investigated you thoroughly.

Personal privacy, funding history, competitors — they know it. Especially if you’ve met with multiple investors. VC circles are tight and fast with information.

So what are they really evaluating?

“Is your startup a self-sustaining, cash-generating business with real long-term value? Or just a short-term play where success depends on finding the next buyer?”

🕵️‍♂️ What Happens After a VC Invests? (DI: Deal Implementation)

After investment, VCs often monitor and engage in the following ways

Ongoing Involvement:

• Join board meetings at least once per year for major strategic decisions
• Review financial statements and business performance every 6–12 months
• Discuss industry trends and competitive landscape every 3–6 months
• Touch base on operational support needs at least once every quarter

Internal VC Tasks:

• Maintain portfolio company tracking and KPI dashboards
• Prepare quarterly and annual fund performance reports

Conduct policy and regulatory research by sector and geography.

🧾 Common Clauses in Angel/Seed Round Investment Agreements

What VCs Consider: Exit, Return, Risk Protection & Equity Liquidity

Liquidation Preference

In the event of a Deemed Liquidation Event (e.g., dissolution, bankruptcy, M&A, asset sale), preferred shareholders are entitled to 1x / 2x / 3x return of their original investment before common shareholders receive any distribution.

If the exit valuation is high, participating preferred shareholders can receive both liquidation preference and pro-rata share of remaining proceeds.

Redemption Right

Used when a company is performing well but lacks a clear exit opportunity.

Allows investors to demand the company buys back their shares at a pre-agreed price if:

• The company fails to go public by year XX, or
• The founders refuse to seek an exit despite investor expectations.

Right of First Refusal & Co-Sale (ROFR & Tag-Along Rights)

These rights prevent unauthorized share transfers to unsuitable parties (e.g., competitors). Exceptions may apply (e.g., founder’s family trust).

• ROFR: If the founder sells 100,000 shares and preferred shareholders hold 20% of the total equity, they get the first right to buy 20,000 shares on the same terms.
• Co-Sale: If the founder sells 100,000 shares at NT$18/share, investors can sell their proportionate shares alongside (e.g., founder sells 80,000, investor 20,000).

Usually triggered only for large-scale share transfers or shareholders holding significant percentages.

Anti-Dilution Protection

Protects early investors from equity dilution if future fundraising occurs at a lower valuation than theirs. Two common methods:

1. Full Ratchet

If the next round is priced lower (e.g., NT$2.5 vs. NT$5 per share), the company issues free shares to early investors to maintain their original investment value. Example:

• Original: NT$1M buys 200,000 shares at NT$5 = 20% equity
• Down round: NT$2.5/share → new shares issued → investor gets 400,000 shares → 32% equity post-round

2. Weighted Average

Less aggressive. Adjusts share price based on a weighted formula considering new investment amount and price. Example formula:

New Price = 5 x [(1M + (625k / 5)) / (1M + (625k / 2.5))] = NT$4.5/share→ 1M / 4.5 = 222,222 shares

Performance-based Ratchet / Bet-on Agreement

Also known as Valuation Adjustment Mechanism (VAM).
Triggered if the company fails to meet revenue, growth, or operational milestones (e.g., “achieve X revenue by Year Y”).Mechanisms may include:

• Equity clawback
• Share repurchase
• Investment amount adjustment
• Cash compensation

Drag-Along Right

Ensures majority-approved M&A or exit is not blocked by minority shareholders. Trigger condition:

• 2/3 of preferred shareholders approve, and
• Board majority approves the deal

Note: These clauses are commonly seen in Seed or Series A term sheets. Investors negotiate them not to control the company, but to protect downside, maximize return, and ensure liquidity.

🎓 Upcoming Talk — 2025/06/25 @ NYCU

We’ll dive deeper into these clauses and negotiation strategies at our in-person university seminar.A Fundraising Simulation Game will be conducted where participants take on roles as founders or investors, experiencing real-world logic and dynamics behind the term sheet process.

Register here: Youth Entrepreneur Fundraising Lecture in NYCU on Jun 25