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Is the equity a company gives in Round A of VC funding different from other rounds (B, C, etc)?

Answers

Topic Expert
Kent Thomas
Title: Founder
Company: Advanced CFO Solutions
(Founder, Advanced CFO Solutions) |

The answer to your questions depends on what you mean. Are you talking about the type of instrument, the terms or the amount of equity? Basically, however, the answer is "yes" to all of the above. The typical series A round usually indicates early stage which means higher risk and the amount of equity required by investors will be higher with more onerous terms (typically defined by the preferences inherent in the Preferred Stock Purchase Agreement). Later stage financing rounds can be common stock or vanilla preferred stock with few preferences. The preferences and terms are dictated by the level of risk that the investor perceives in the company, its products and management team. It is important for founders to understand all of the preferences and terms that are proposed by investors because they can cost you millions in an exit if you don't understand how they are applied in a "liquidation event" vs. an IPO, for example. Be sure to get good advisors before you sign the term sheet and listen to them!

Peter Skalla
Title: CFO
Company: CFOwise
LinkedIn Profile
(CFO, CFOwise) |

Think of this in terms of pre-money valuation. A typical pattern is a $1 mil. Series A round with a $4 million pre-money valuation. This results in $1 mil./($4 mil + $1 mil) = 20% dilution. The company makes significant progress and does a $4 mil. Series B round at a $16 pre-money valuation. Result is $4/$20=20% dilution again. The percentage of the company you give up in each round will often be consistent, though that is driven more by capital needs of the business. The important thing is that the company hit mile stones and increase the pre-money valuation through the rounds. So-called "down rounds" happen, particularly in a difficult economy, but are a pretty clear signal something is wrong.

Kent is quite correct that the preferred terms are really important. I have a contrasting observation that seed and series A terms are often fairly company-friendly and become more strict when VC or PE firms enter the picture. It makes sense for angels and early stage funds to provide easier terms as you can set unfavorable precedence in the early rounds that create disadvantage or even impede later rounds.

Encourage you to pick up a copy of "Venture Deals" or visit AskTheVC.com by the same authors if you want to understand this topic more thoroughly.

Topic Expert
Doug Thompson
Title: Director of Revenue
Company: Castlight Health
(Director of Revenue, Castlight Health) |

Yes, Venture Deals is a complete guide, check it out.
For very early stage there is also convertible debt, where the seed funders agree to convert to equity later at a discount to the price set by the Series A. So you don't have to work out all the terms/pricing at that stage.

Topic Expert
Joan Varrone
Title: CFO
Company: Cloud Cruiser
LinkedIn Profile
(CFO, Cloud Cruiser) |

In addition to above the A round is typically pre revenue, B is when you are about to launch and the funds are needed to fill out distribution channel, C is for growth once you have your product and distribution established. Also A rounds may not include VC's but B onward is where you raise institutional money. Terms of the subsequent rounds based on how well the company is doing. One last comment is that people get hung up on the Pre Money valuation. The real issue is the percent of the company sold for the money being raised along with the size of your option pool. Once you know these three things the pre money valuation is a fall out.

Kirk Westbrook
Title: VP - Tech Banking Group
Company: US Bank
(VP - Tech Banking Group, US Bank) |

Preferred stock is the vehicle used for VC investment. Alpha designations typically reflect serial rounds, though there are occassions that companies raise using A1, A2 for example. With that being said, rights afforded each round are negotiated and provide most favorable terms to that round's investors. If it is an identical group of the same investors before, there may not be any changes. However, most times there are. Its typcially liquidity preferences of who gets paid first and how much that is the area of focus. As mentioned above, there are many resoruces that give general information on what are the most common preferred rights requested and these fluctuate some with market dynamics. Some law firms track VC investments and the rights provided on a quarterly basis. Ask the law firm you are dealing with and they should be able to provide you with some expectations for the round you are raising. As Peter mentioned, it is very important to make sure you have a relatively "market" deal, as any unusual terms may prevent the Company from raising money in the future. Or at least severly limit the population of potential investors, which can significantly impair the valutation of the prospective round.

Topic Expert
Kim Kovacs
Title: Executive Vice President
Company: Solium
(Executive Vice President, Solium) |

There can be significant differences and I concur with the other respondents that the things to watch for are liquidation preferences as well as other rights later stage investors may want. Keep in mind that every dollar of equity raised dilutes the founder's shares so be careful and prudent. Another thing to consider is having everyone's interests aligned when you want to exit. If the liquidation preference is much sweeter for your Series B or C than it is for A, you may not get the consents you need for that critical decision. I would also recommend getting software to track your equity instead of relying on your attorney or spreadsheets. Modeling exit scenarios can be very tricky with added preferences or conversion rights and trust me, your investors will rely on you and your representation of the captable for their decision making.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Extending primarily on Kirk's comment:
To me and the companies I deal with Series-X means "VC", from boutique to institutional, and it means Preferred. A typically starts when there is revenue to be ramped...but that is in the areas that I'm playing right now. In other areas, there are other metrics (Users, FDA approvals, etc.). The point is, there is some metric that is worth ramping that has got some traction.

Moving from A to B to C signals that there has been a change in terms, in value, in investor group, in market situation, or company situation (usually more than one on the list, potentially all).
Moving from A to A-1 to A-2 means not a lot has changed, and it is minor enough that the board wants to signal that fact.

One set of differences I see are in what the investors are worrying about in terms of the cap table.
Series A, you're usually trying to simplify things. You likely have a dozen or so friends and family, some personal debt, maybe a few Angels. The Series A team will want to clean that up...make it common if possible, or make it go away if it is convertible.
Series B+, and the investors are more likely to be worrying about alignment (ref Kim above). They are not as risk-friendly as A, in that they are paying potentially a significant premium to catch you closer to liquidity. Chances are, they care about liquidity, in the grand scheme of things, more than A did at the time A closed. So, they'll want to get rid of stuff like Founder's Preferred and other structures that make a D and onward palatable to a Founder, but which to the investor smells like a path to a Zombie (aka walking-dead). This is specific feedback I've gotten; I don't believe the logic regarding Founder's Preferred holds up, but...hey, its *their* money!

Terms, valuation, types of shares....that depends on the state of the company, the market, etc. And, ref Peter v. Kent, it can be all over the map.

Cheers,

Keith

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