Early financing or “A” round financing is the first major round of business financing by private equity investors or venture capitalists. In private equity investing, an “A” round, or Series A financing, is usually in the form of convertible preferred stock. An “A” round by external investors generally takes place after the founders have used their seed money to provide a “proof of concept” demonstrating that their business concept is a viable – and eventually profitable – one.
When investing in companies, private equity investors typically prefer convertible preferred stock to common stock for the various rounds of financing, such as Series A, Series B etc., because of the special features of the security. Convertible preferred stock have features such as dividend accrual and convertibility into common stock, which may become very profitable. As well, preferred stock will have a higher degree of rights compared to a common shareholder.
How “A” Round Financing is Used
Early financing typically follows after earlier rounds of financing have supported a startup. Such early rounds might include a friends and family round, with money contributed by those with personal connections to the founders. Seed rounds from angels and other early investors may provide backing to a greater degree, but even then the funding often amounts to less than $1 million.
With early financing, the scale of the funding may easily exceed $1 million and allow for more expansion of the startup’s team, further investment in the develop the concept to bring it closer to market, and to cover expenses of the growing operation. Attaining receiving “A” round financing may be taken as an early vote of confidence from venture capitalists that the startup’s concept is worth pursuing.
With this level of financing, investors may make greater demands of the founders than earlier backers. This can include relinquishing some control of the company as more shares are granted in the financing round, meeting milestones set by the latest investors, or adopting new strategies that evoke more confidence from the new backers. There may be an expectation of accelerated development of the startups concept after the “A” round financing is received. The founders may also cite who the backers are in this round in order to attract more business, negotiate with potential partners, recruit talent, and later to pitch other venture capitalists for future financing. The startup’s leadership may be called up to show what they were able to accomplish with the funding received from their “A” round financing.
Series B Financing
Series B financing is the second round of early financing for a business through any type of investment including private equity investors and venture capitalists. Successive rounds of financing or funding a business are consecutively termed Series A, Series B and Series C financing. The Series B round generally takes place when the company has accomplished certain milestones in developing its business.
In a Series B financing round, companies have generally advanced their business, resulting in a higher valuation by this time. Companies can seek various ways to raise funds in a Series B financing round. Investors usually pay a higher price for investing in the company than the Series A investors.
For publicly traded companies, an increased number of shares can be issued on the open market. In early stage funding and specifically in a Series B funding round, equity investors typically prefer to receive convertible preferred stock to common stock because of the special features of preferred stock, such as dividend accrual and anti-dilution, that may not be available in common stock.
Series B Financing Resources
In addition to the public markets, businesses have an increasing number of fundraising resources for which they can obtain capital. In Series B funding, companies often utilize similar previously pursued fundraising channels due to familiarity and reporting convenience.
For startups and small businesses, funding can come from private equity investors and venture capitalists as well crowdfunded equity and credit investments. Direct capital raising from private equity investors and venture capitalists can require some specific investment constraints with limits on capital and percentage capital allowed from each investor.
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