Raising Capital: How S-Corps and C-Corps Attract Different Investors
Equity Issuance, Preferred Shares, and Avoiding Investor Deal-Breakers
Every founder’s first investor is the IRS. Long before a VC associate opens your pitch deck, the corporate wrapper you chose in week one is already either putting extra dollars in your future exit or silently bleeding them away. Entity choice sets the tax baseline for everyone on your cap table, from the angel who wires $25,000 to the growth fund writing a $200 million Series D. By 2025, it has become the first filter in diligence. Capital is still abundant—especially for AI, climate, and defense plays—but investors are ruthlessly allergic to paperwork that forces them to re-model waterfalls, sacrifice §1202 gains, or strand foreign LPs. Get the structure right and the term sheets keep flowing; get it wrong and even a hockey-stick forecast can’t rescue the deal.
Key Highlights
Venture capitalists almost always demand a Delaware C-Corp—both for legal predictability and for the tax goodies they alone can unlock (notably §1202 “QSBS”).
S-Corps face three non-negotiables: ≤ 100 shareholders, all U.S. individuals/qualifying trusts, and a single economic class of stock—deal-breakers for institutional money.
Multiple share classes (Common, Series Seed Preferred, Super-Voting, etc.) allow founders to precisely price risk. Still, you need the correct entity and charter language to maintain a clean cap table.
1. 2025: Capital Is Plentiful—But Picky
Money is everywhere, but it’s acting like a sniper, not a sprinkler.
$80 billion poured into U.S. VC-backed companies in Q1 2025—up nearly 30 % versus Q4 2024. Half of that, however, came from one $40 billion AI mega-round (OpenAI’s “Series H”). Without it, aggregate funding would have fallen 36 %.
Dry powder (unspent VC commitments) still hovers just under $300 billion, yet only 87 new funds closed last quarter—the slowest pace in a decade. GPs are hoarding cash for conviction bets.
The Fed’s target range has sat at 4.25 – 4.50 % since late-2024, so discounted-cash-flow models punish slow growers; investors now penalize fat burn multiples more than ever.
Selectivity You Can See
Median seed pre-money is $16 million—18 % below a year ago, while the number of seed rounds is down 28 %. Fewer shots, higher sticker prices.
Nineteen percent of Q1 2025 deals on Carta were down rounds. Better than the 23 % spike in 2024, but still a flashing yellow light.
Pre-seed founders feel it most: average valuation is just $5.7 million, barely one-third of late-2021 highs.
Sector & Geo Skews
AI, defense tech, and frontier compute soaked up roughly 75 % of U.S. VC dollars last quarter.
The Bay Area remains #1 for total dollars, yet NYC jumped to $7.1 billion as fintech and consumer founders sprint toward Wall Street talent.
Heartland hubs (Austin, Denver, Atlanta) are holding their own—thanks mainly to cheaper cost structures, which investors now track right alongside gross margin.
What This Means for Your Raise
Lead with burn efficiency. The new litmus test is a burn multiple (net burn ÷ net new ARR) under 1.5.
Show capital-light growth loops—product-led growth, community flywheels, federal contracts, overpaid ads.
Ride a tailwind. If you’re not in AI, climate infra, or dual-use defense, be ready to argue why you’re the contrarian that still scales.
Keep the cap table tidy. Messy SAFEs or forgotten advisory warrants scare diligence teams faster than a missed forecast.
Mind the QSBS line. If you’re under the $50 million asset cap, a smaller round that keeps the 0 % exit benefit can be smarter than today’s vanity valuation.