Equity
As the bread and butter of startup capital, equity is a common investment vehicle that involves individuals and firms providing money in exchange for an ownership percentage (shares, stocks) in a company. This equity can then be sold by the investors at an exit event when a company goes public (IPO) or gets acquired by a larger company. While equity financing entails the loss of some ownership, raising capital in this fashion can be beneficial for entrepreneurs who do not expect to generate revenue that can be used to repay loans or reinvest into the company. Additionally, investors provide critical resources such as networks and valuable advice. Equity is typically secured from angel investors or venture capital firms.
“Equity is typically secured from angel investors or venture capital firms.”ย
Equity capital is typically raised via numerous “rounds” of financing based on the companyโs development stage and needs. The most common rounds include:
- Seed.ย Seed financing, as the name implies, is the relatively small amount of money a business needs to get started. Usually businesses seeking a seed round are still in the concept stage and need just a small capital to cover expenses until they can start earning revenue. Seed money can also be a helpful tool for attracting future money from bigger investors. Because seed capital is smaller and more of a high-risk investment, it generally will come from friends and family or smaller angel investors.
- Series A.ย Series A refers to the first round of stock offered to investors during early-stage rounds. Typical Series A rounds fall in the range of $2-5M, offer options for 20-40% of the company, and are intended to support a company through the early stages of building a business, from product development to hiring to marketing. Because the Series A round is for more significant cash, investors are usually professional angel investors or VC firms who specialize in this first round of financing.
- Series B.ย Series B refers to second-stage financing. Series B usually happens after the company has already achieved certain business milestones and thus proven its potential viability as a company. This series is also sometimes called a venture round since it is at this point that venture capitalists usually get involved. Venture capitalists donโt just offer a greater capital investment for a given round; thereโs also a greater possibility for going back to this same well for future rounds. Also, experienced venture capitalists can offer the kind of networking opportunities and mentorship that smaller angel investors may not.
- Series C. As companies grow, they might continue to seek additional funds to meet future milestones. Each successive venture round follows alphabetically down the line (e.g. C, D, E…). Venture capital firms and private equity investors support these financing rounds as well as future funding rounds.
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