What Is “Series A” Financing?
Simply put, “Series A” is the next step a privately-held company’s owner will take to raise money AFTER they have offered investment to family and friends (the “Family and Friends” round) and angel investors (the “Seed Round”). Series A financing is typically used to ensure the continued growth of a company. The common goals in the Series A round include: (i) reaching aggressive milestones in product development, (ii) attracting additional talent with novel ideas and (iii) ensuring a healthy runway for the company in order to position itself to attract additional investment in the future.
The term “runway” refers to the gap between capital rounds, both in terms of time and operating capital. For example, a startup company might refer to having 12 months of “runway” between seed funding and Series A financing. This will mean that a company’s startup (seed) investors anticipate it will take the company 12 months to develop a proof of concept sufficient to make the company attractive for Series A financing. While the Series A round will typically involve venture capital firms, more modest Series A rounds (less than $5M) may attract private capital from high net worth individuals.
Series A financing is one of the natural next steps in the capital-raising process for a startup company. The Series A round comes after the seed funding that helped to launch the company in the first place. Similar to seed funding, Series A financing is a type of equity-based financing, which means that a company may seek capital from investors by selling the company’s preferred shares. To pursue Series A financing, a company will typically pursue and achieve several of the following critical benchmarks:
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- A team with the necessary skills to create the company’s product
- A proof of concept and viable business model that the company’s underlying product or service will function as intended
- Financial wherewithal (i.e., survival) so that future investors have confidence in the future of the company
Documenting the Series A Financing
Series A financing will follow a predictable formula beginning with a highly negotiated Indication of Interest or Term Sheet that sets forth in reasonable detail the agreement between the company and the Series A investor group. Once the framework of the Series A offering is memorialized, the parties will turn to the lawyers to draft a basket of documents, beginning with (i) an Amended and Restated Articles (or Certificate) of Incorporation, (ii) Series A Stock Purchase Agreement and (iii) a number of related disclosure schedules offered by the company looking to raise the Series A round.
In our next article, we will provide an overview and explanation of the legal documents necessary to execute a successful Series A round and the issues and challenges involved with each.
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