Key Take-Aways:

• Funding rounds take place when businesses raise money from investors

• Funding rounds occur in a series and are labeled Seed Stage, Series, A, B, C, etc., and IPO

• Each funding round differs in the types of shares being sold, the types of investors involved, and the overall goal of the funding

Ever since the Obama Administration passed the JOBS Act in 2012 and the SEC lifted the ban on general solicitation for some companies raising investments, we’ve seen a lot of news stories about companies raising significant capital in some type of funding round.

If you’re a business owner, you might be unsure what this means. Basically, a funding round is any time you raise money from one or more investors. They are labeled A, B, C, etc. because they happen in a series.

Each funding round entails something slightly different. The type of shares being sold (common stock, preferred sales) and the way in which investors will receive returns usually depend on what stage of funding a business is in.

If you’re part of a company that is looking for ways to fund your growth and you’re interested in learning what all of these different funding rounds entail, this post is for you!

Keep in mind, this is not legal or tax advice, and you should always consult an attorney before acting upon this information. 

Let’s break down each funding round!

Seed/Angel Round

The first funding round is known as the Seed or Angel funding round, and it typically occurs at the initial stage or once the company’s founder has a prototype and some indication of demand.

During this round, you are still in the beginning stages of launching a startup and you need investment capital to support your business operations until you are able to generate your own cash flow.

Seed or Angel rounds often include funds from Angel investors that specialize in funding early-stage companies. 

Angel investors are often prior entrepreneurs or high-net-worth individuals who can afford to invest in high-risk companies, so they can play a crucial role at this stage. Family and friends may also take part in this funding round.

Seed or Angel rounds may involve crowdfunding and are usually for startups looking to raise less than $1 million (typically $25K – $500K per angel investor).

Because this funding round occurs at such an early stage, investors usually put in relatively small amounts of money and there are fewer regulations.

Investors receive equity or convertible notes (which give them a discount on shares during the next funding round), and since there is a lot of risk involved in investing at this stage, they are anticipating a higher return in the long run.

If your startup is at this stage, you may turn to an equity crowdfunding platform like WeFunder or Republic to connect with investors from the crowd. To learn a step-by-step process for attracting investors and navigating the world of equity crowdfunding, check out our FREE equity crowdfunding course!

Recent Seed Stage Funding: Tenant, Inc

Series A

The Series A funding round is a critical stage for a new company, and it generally occurs when a business is looking to raise between $2 – 10 million.

Like the previous round, these are typically higher risk / higher reward investments because the company is likely to still be in the startup or product development stage.

During the Series A round, a company issues its first series of stock after common stock options (offered to founders, employees, etc.) are released.

These deals tend to be more traditional and involve early-stage venture capitalists (VCs), who can provide more funding.

Since venture capitalists are investing other people’s money in several companies, they usually look for companies with a more established track record, so they don’t typically appear until Series A funding has begun.

Series A funding sets the precedent for later rounds. At this stage, companies need to consider what kinds of partners they want on their board. It is highly recommended to obtain a corporate attorney who can help with all of the details and paperwork that are required to put together an agreeable term sheet.

Recent Series A Funding: Clinetic

Series B

The Series B funding round is the second round of financing by private equity investors and venture capitalists.

At this stage, the company is expected to have a higher valuation, and investing usually carries a higher cost.

Series B investments are focused on customer deployment and expansion, and investors expect to see growth in revenue, userbase, or product success, as these are signs that the company is at a stage of reduced risk.

Series B investments typically range from $10 – 30 million, but this can vary depending on the company.

Recent Series B Funding: Lula

Series C

Once a company has had proven success in the market and wants to move on to the acquisition phase, Series C funding rounds are held to encourage rapid growth.

Large-scale investment groups such as hedge funds, investment banks, and private equity firms may join in on this funding round.

Series C investments tend to be much larger than the prior three, usually around $30 million.

Recent Series C Funding: Horizon3.ai

IPO

IPO stands for Initial Public Offering, and it’s the stage that occurs when a company sells stock to the public for the first time.

During IPOs, debt or equity may be offered on a public stock exchange. In the US, companies are required to file with the SEC to hold IPOs.

Holding an IPO can introduce you to thousands of new shareholders, but they involve strict rules and regulations, and you’ll be required to provide quarterly financial reports to the SEC.

In recent times, many companies such as Uber and Snapchat have chosen to stay private well into their successful period rather than rushing into an IPO.

Recent IPOs: NeurAxis

Conclusion

If you are considering raising money from investors to help grow your business, you need to start by determining how much money you need at your current stage. This will help you decide which funding round you are in.

Keep in mind that during each round, you’ll have a chance to change your terms sheet, so the terms you set for your early investments don’t need to stay the same forever.

Starting with a relatively small funding round now can help you establish yourself in the market and acquire better terms for your next raise.

Running too many funding rounds (say, reaching Series E) can give the impression that a company isn’t being run properly, which is why it’s so important to make this decision strategically.

Each funding round that your company announces communicates a powerful message to investors and the public regarding the stage your company is in, so you should always approach funding rounds with deliberation and consideration.

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