How Much Capital Should a Seed Fund Reserve for Follow-On Investments?
Carta's 2025 private-market review shows that later financing rounds continue to affect ownership through dilution. Dilution remained real even as it declined in 2025. Seed funds need a reserve plan if they want to maintain ownership in companies that raise later rounds.
Carta reported median dilution across seed through Series C rounds of about 16% in 2025.
Reserves Must Match the Follow-On Plan
There is no single reserve percentage that works for every seed fund. The reserve has to match the fund's first-cheque plan, target ownership, expected round sizes, and willingness to stop supporting weaker companies. In the $100 million example, a 40% reserve leaves $60 million for six $10 million first cheques and $40 million for later rounds. That is a workable starting point, not proof that the fund can support every company. Four $10 million follow-ons would use the entire reserve. If six companies all need the same amount, the manager must either invest less, choose among them, or find another source of capital.
Reserve Policy Changes the Fund
| Reserve | Initial capital | Initial companies at $10M each | Main advantage | Main risk |
|---|---|---|---|---|
| 30% | $70M | 7 | More first investments | Less room to protect ownership later |
| 40% | $60M | 6 | A middle ground between first cheques and follow-ons | The reserve still cannot support every company equally |
| 60% | $40M | 4 | More capital for later winners | The opening portfolio becomes very concentrated |
The table also shows why a reserve is not a separate decision. Increasing the reserve reduces the number or size of first cheques. A manager cannot claim the benefits of a wide first portfolio and a large reserve without showing where the extra capital comes from.
Do Not Divide the Reserve Equally
Equal reserves look tidy in a spreadsheet, but companies do not develop at the same speed. Some will earn the right to raise a larger round at a higher price. Others will need a bridge because the original plan was missed. Those two cases should not receive the same automatic response.
A useful process sets gates before the money is needed. The manager can look at customer retention, revenue quality, hiring progress, cash burn, the size and terms of the next round, and whether an outside investor is willing to lead. The answer should also include opportunity cost: what the fund cannot back if it follows on.
Model the Capital Needed to Keep Ownership
Pro-rata support becomes more expensive as round sizes grow. If a fund owns 10% and the company raises $100 million in a new primary round, maintaining 10% may require roughly $10 million, subject to the exact pre- and post-money structure. Two such rounds can use half of a $40 million reserve. The model should therefore separate a base reserve from extra capital for the best companies. It should also show a case in which later rounds are larger than expected or arrive sooner. A reserve that works only under the original plan is not much protection.
What LPs Should Ask
- How many companies can receive full pro-rata support? The answer should be a number, not "as needed."
- Ask for examples of both support and refusal.
- Can reserves move between companies? Fixed company buckets can trap capital behind weak positions.
- Test the reserve against a harder financing market.
- How is ownership valued? More ownership is useful only when the price and company outlook still make sense.
The best reserve plan protects the fund's share of its strongest companies without turning every missed plan into another cheque.
Common Reserve Ranges
Putting the figures together shows why. A $100 million seed fund with a 40% reserve holds $40 million for follow-ons and has $60 million for initial checks. A 60% reserve flips the strategy toward follow-on concentration.
Carta reported that median dilution across seed through Series C rounds was about 16% in 2025, so a fund that never follows on should expect ownership to decline through later financings.
Reserve by Evidence, Not Hope
If a $100 million fund makes 6 initial investments and reserves $40 million, it cannot give every company a $10 million follow-on. It can fully support only 4 companies at that size, so reserve capital has to concentrate behind the strongest evidence.
Reserve policy changes how much capital is available for initial checks versus follow-on support. Illustrative $100M seed fund.
Seed Fund Reserve Allocation
A higher reserve ratio protects follow-on capacity but reduces initial deployment.
View allocation data and assumptions
| Reserve ratio | Initial capital | Follow-on reserve |
|---|---|---|
| 30% | $70M | $30M |
| 40% | $60M | $40M |
| 60% | $40M | $60M |
Match Reserves to the Number of Winners
The important point is to see which input drives the outcome: ownership, price, dilution, reserve capacity, exit value, or timing. A company-level result only matters to LPs after fees, carry, expenses, follow-ons, and the rest of the portfolio are included.
Frequently Asked Questions
Is a 50% reserve too high?
Not always: It may make sense for a manager with strong pro rata rights and a concentrated follow-on strategy. It may be too high if it prevents enough initial diversification.
Should every company get follow-on support?
No: Follow-on capital should be earned through progress, financing quality, careful valuation work, and fund-level opportunity cost.