Lead Series A investors usually get pro-rata rights. Generally, the wisdom in startup investment is to double down on your winners and you typically can only do so if you have pro-rata rights. In other words, if the startup does super well, that VC will likely invest 10x more in real dollar terms to upkeep their pro-rata.

Take 2 pretend funds: CoolVC has a 20% target ownership and CheapVC has a 10% target ownership. They do their pro rata every round.

Rocketship Corp. will have the following rounds (super simplified):

Series A @ $25M post-money

Series B @ $100M post-money (15% dilution)

Series C @ $600M post-money (10% dilution)

Series D @ $3B post-money (5% dilution)

Series E @ $5B post-money (5% dilution)

Exit @ $9B

CoolVC would have exited with $1.8B + spent $100M (profit $1.7B) CheapVC would have exited with $900M + spent $50M (profit $850M)

In other words, for an additional $2.5M in the Series A, CoolVC bought an option that would ultimately make $850M more in real dollars than CheapVC.

In the VC world where 1 needle in the haystack makes or breaks your fund, it's an inexpensive option. At Series A, there should still be at least 50X potential upside.

Why do most VC funds target 15-20% ownership? Probably that's probably the most they should get to balance founder ownership through further dilutive rounds. If you look at my above example, remember that founders will probably own less than 36% of the company (they also will get diluted by employee incentive plans).

Anyways, VCs at series A want to buy enough equity percentage (e.g. 15% to 25% ownership) to make their exit numbers work. Investing a smaller amount to only get 5% of a company is not a "meaningful percentage" or "meaningful stake". (In contrast, YC does buy a smaller 7% equity but their $150k isn't considered "Series A".)

To me, talking about investment scenarios in terms of "valuation" always seemed to make things more difficult to understand. The following math is equivalent but I think the explicit percentages layout is easier to grasp in a few seconds:

Mark Z is considering 2 offers of investments for his young Facebook startup in 2005:

  Don Graham offers $6 million at a $60 million post money valuation.
  Accel Partners offers $12.7 million at a $80 million post money valuation

  Don Graham offers $6 million for 10% of the company
  Accel Partners offers $12.7 million for 15.7% of the company

Example:

"We're going to invest in a basket of startups whose aggregate value will be $X billion in 5 years and we will own Y% of those companies at that time."

If they can't hit that Y number, they are not doing what they said they'd do.

There's a finite amount of time in an investor's day, and somewhere around 20% ownership of a company is, for whatever reason, considered the magic number where it's worth it to spend that much time with them (through assistance, board meetings, etc).