Overview of Series Funding
Following the seed or startup funds stage of financing, startup ventures seek to raise funds through specific rounds of financing. A financing round will have a target amount of money to raise at a given valuation. Sometimes the early round is structured as debt (rather than equity) situation. The startup will issue convertible notes that are debt instruments that may be later converted into shares issued during the following round of financing. In any event, the initial round of pure equity financing is known as series A financing.
Series A Financing
The series A financing round is a formal process. It requires securing commitment from investors until a target funding amount is achieving. Investors may be individuals, funds (such as venture capitalist), or financial institutions. Generally, the series A investors will be super-angels, angel-groups, or low-level venture capital funds. The funding amount may be exclusive as most investors understand that they will be required to provide follow-on funding to maintain their equity position against dilution in later rounds. Once the amount is achieved, the round closes and the funding transaction begins. The series A financing is generally in the range of $1 – 10 million (depending on the value of the business). At this stage founders may sell anywhere from 10 – 50% of there company ownership. This stage of financing is generally very expensive to the founders, but is critical to meeting the early growth objectives of the business. This is generally the scale-up stage of the business lifecycle. The funds generally supply the necessary working capital until another planned financing round or, in rare cases, the company is self-sustaining with revenue.
Series A Preferred Shares
As part of the series A financing, the investors will demand a preferred class of stock. The preferred stock will generally have conversion rights, participation rights, and a liquidation preference. These characteristics are discussed further in our Business Capital Structure Series. Additionally, the terms of financing and issuance of the series A shares will be subject to the all of the steps characteristic of a venture capital investment. This may include negotiation of a term sheet, due diligence, and staged or incremental closings (see our Equity Funding Process series for more detail). The series A, as the name implies, is in anticipation of future rounds of financing as the company grows. Subsequent rounds are conveniently named series B, C, D, etc.
- Note: There is a recent phenomenon in Series A rounds that allow the investor to convert her shares upon the issuance of a future rounds into the preferred shares issued in that round. This is a protection to the investor that allows her to avail herself of the benefits afforded future investors. It also has protections against losses in a future down round.