Ensuring that a company has adequate funds is an important and continuous process, and it is unlikely that one round of fundraising will be sufficient to grow and expand a business sufficiently. As such, many companies will need to carry out multiple rounds of fundraising and each round of investments will be different.
Types of investors
When a business is just starting out, it may rely on funds from its founders, their family and friends, and also ‘angel investors’. Angel investors are individuals who choose to invest their own money in start-up businesses, receiving in return a share of the company equity or convertible debt. The risk involved in such investments is typically higher as the business is considered to be in its infancy.
Small venture capital firms may also choose to invest in the start-up business. These firms are similar to angel investors, except that they operate as a firm or group, and would typically invest a larger sum of money in the business. Risk would still be relatively high for these investors, but they will be willing to invest if they believe in the long-term economic returns they can enjoy.
Over time, as the investee’s business stabilises and shows more potential, the investee company may have more ambitious expansion and business development goals. Continuous and larger funding is required and the company would then need to find more investors who are capable of pumping in more money. At this point in time, the company can begin holding formal rounds of fundraising.
This first formal round of fundraising would typically be termed as “Series A”, and the subsequent rounds as “Series B”, “Series C” and so forth.
What happens in each series funding?
Each round or series seeks to achieve a certain goal for the company, for example, funding research and development or business scaling. Typically, the company will set a monetary goal or cap for each series (e.g. $3 million), ensuring that the amount raised meets but does not exceed the cap. Most companies will engage in either equity funding or debt funding.
At each series, the investee company will offer investment opportunities at a specific price, i.e. shares at a certain valuation. As the rounds progress, shares will become more expensive as the company would have grown and become more mature and lucrative. As such, it is arguable that it may be more economical for investors to invest their money during earlier rounds of fundraising, although the risk is usually higher.
The agreement between the investor and investee company will also comprise a set of conditions detailing the benefits the investor might enjoy, such as voting rights or ability to weigh in on company decisions.
Investors within a series typically receive the same terms and conditions in their contracts, and would also be entitled to purchase shares at the same price. The conditions of these contracts, however, will differ from series to series, with investors from earlier rounds usually enjoying more benefits than those from later rounds. For example, an investor from Series A may have the right to veto on company decisions, while an investor from Series B may not. This is just a general rule and does not apply across board to all investors and investees. For instance, an investee in a subsequent round of investment may receive better rights than a series A investor by reason of his reputation, connections and the larger sum of investment.
Avoiding conflicts between series
It is of utmost importance that the terms of the contracts between the different series do not conflict with each other. For instance, if a series A investor is granted a first right of refusal when the investee company decides to issue further shares, the same right cannot be granted to a series B investor.
To avoid such conflicts and contradictions, it is crucial for business owners to be familiar with the terms of the contracts at each series, and to keep track of them. The terms should also be negotiated carefully, and be stated explicitly and clearly in the legal contract.
In summary, series funding can be a powerful tool for a company to acquire the funds it needs for growth and development. With careful planning, business owners can set and meet short-term and long-term goals, eventually achieving public status for their companies.
Have a question on series funding?
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This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.