Thoughts on reducing space between fundraises

I am evaluating a startup that raised a pre-series B in form of convertible note and then are planning to raise B1 and immediately after B2 rounds. Wondering what are your thoughts breaking up series B round in so many pieces, wanting to raise one after the other with increasing valuation.
  • Scott Armanini: what’s their explanation?
  • Lem Lin: Agree with @Scott Armanini. I’d understand it if the convertible notes would convert as a B-2 (to explicitly reflect the discounted price they would convert at) and the new capital would be treated as B-1 (or vice-versa), and they’re collectively the Series B. If instead, it’s a valuation step-up between the B-1 and B-2, then there needs to be an explanation why the Series B-2 is not considered a Series C.
  • Otilia Barbuta: thanks! From your experience, overall, why would a startup decide to raise B1 and B2 vs C or A1 and A2 vs B?
  • Lem Lin: I’ve usually seen an alphanumeric share class when either 1) a note converts into the round or 2) if there’s an extension of a previous financing round (same price per share), but they could also represent different liquidation preferences, which should be detailed in the documents.
  • Lee Carter: The real reason most founders do this is that once your round is raised, especially if it’s led by a well-known VC, it creates FOMO and you get a bunch of late to the party funds wishing they had invested. Then the entrepreneur thinks “I should take this money while I can, but the first investors need to feel good about taking on more dilution so let’s raise the price slightly”