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closing, and generally depend on the goodwill of the parties and their attorneys. To reduce cost and speed up transactions, formalities common in other industries such as escrow of funds, signed original documents, and notarization, are rarely required. This creates some opportunity for incomplete and erroneous paperwork. Some transactions have "rolling closings" or multiple closing dates for different investors. Others are "tranched," meaning the investors only give part of the funds at a time, with the remainder disbursed over time subject to the company meeting specified milestones.
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574:(SAFE) that can be converted at a discount to preferred shares at the first priced round. A Seed round is often used to demonstrate market traction in preparation for the Series A. Although in the past seed rounds were mainly reserved for pre-revenue companies, as of 2019 two-thirds of companies raising seed rounds already had revenues.
581:, with each subsequent round using the next letter in the chain (e.g. B, C, D). Generally, the progression and price of stock at these rounds is an indication that a company is progressing as expected. Investors may become concerned when a company has raised too much money in too many rounds, considering it a sign of delayed progress.
341:
and other private equity investors in several ways, including warm referrals from the investors' trusted sources and other business contacts; investor conferences and symposia; and summits where companies pitch directly to investor groups in face-to-face meetings, including a variant known as "Speed
Venturing", which is akin to
449:
Closing occurs when the investors provide the funding and the company provides stock certificates to the investors. Ideally this would be simultaneous, and contemporaneous with the final agreement. However, conventions in the venture community are fairly lax with respect to timing and formality of
519: – in any liquidation event such as a merger or acquisition, the investors get their money back, often with interest and/or at a multiple, before common stock is paid any funds from liquidation. The preference may be "participating", in which case the investors get their preference
381:
Definitive transaction documents. A drawn-out (usually 2–4 weeks) process of negotiating and drafting a series of contracts and other legal papers used to implement the transaction. In theory, these simply follow the terms of the term sheet. In practice they contain many important details that are
340:
Introduction. Investors and companies seek each other out through formal and informal business networks, personal connections, paid or unpaid finders, researchers and advisers, and the like. Because there are no public exchanges listing their securities, private companies meet venture capital firms
595:
the company failed to meet its growth objectives and is essentially starting again under the umbrella of a new group of funders. Increasingly, however, Series AA Preferred Stock investment rounds are becoming used more widely along with convertible note financings or other "lightweight" preferred
526:
Dividends – dividend amounts are usually stated but not mandatory on the part of the company, except that the investors will get their dividends before any dividends may be declared for common stock. Most venture-backed start-ups are initially unprofitable so dividends are rarely
377:
attempts to complete the transaction on specified terms, but may also contain some procedural promises of limited (30- to 60-day) duration like confidentiality, exclusivity on the part of the company (i.e. the company will not seek funding from other sources), and stand-still provisions (e.g. the
382:
beyond the scope of the major deal terms. Definitive transaction documents are not required in all situations. Specifically where the parties have entered into a separate agreement that does not require that the parties execute all such documents.
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round is a late-stage equity round for a private company to raise funds in advance of its listing on a public exchange. This allows both individual and institutional investors to invest in such late-stage, VC-backed private companies prior to its
309:, typically the best known or most aggressive venture capital firm that is participating in the investment, or the one contributing the largest amount of cash. The lead investor typically oversees most of the negotiation, legal work,
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stock financings, such as "Series Seed" or "Series AA" preferred stock, to support less capital-intensive business growth, as their simplicity and generally lower legal costs can be attractive to early investors and founders.
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Final agreement occurs when the parties execute all of the transaction documents. This is generally when the funding is announced and the deal considered complete, although there are often rumors and leaks.
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is generally the first formal equity round with an institutional lead. The series seed can be priced, meaning investors purchase preferred stock at a valuation set by the lead investor, or take the form of
439:
schedules for key executives. At the end of the process the company offers representations and warranties to the investors concerning the accuracy and sufficiency of the company's
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Series A', B', and so on. Indicate small follow-on or bridge funding rounds that are integrated into the preceding round, generally on the same terms, to raise additional funds.
370:, letters of intent, and the like are exchanged back and forth as negotiation documents. Once the parties agree on terms, they sign the term sheet as an expression of commitment.
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Anti-dilution protection – if the company ever sells a significant amount of stock at a price lower than the investor paid, then to protect investors against
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Venture investors obtain special privileges that are not granted to holders of common stock. These are embodied in the various transaction documents. Common rights include:
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seats, negative covenants not to obtain additional financing, sell the company, or make other specified business and financial decisions without the investors' approval, and
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and books and records of the company, and all aspects of its operations. They may require that certain matters be corrected before agreeing to the transaction, e.g. new
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Registration right – the investors have special rights to demand registration of their stock on public exchanges, and to participate in an
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and other institutional investors. The availability of venture funding is among the primary stimuli for the development of new companies and technologies.
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Buy-sell agreements, co-sale agreements, right of first refusal, etc. – agreements by which company founders and other owners of
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559:"), and sometimes a small amount of institutional capital to launch the company, build a prototype, and discover initial product-market fit.
313:, and other formalities of the investment. It may also introduce the company to other investors, generally in an informal unpaid capacity.
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Investor rights agreements – covenants the company makes to the new investors, generally include promises with respect to
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954:
Frederick D. Lipman (1998). "Financing Your
Business with Venture Capital: Strategies to Grow Your Enterprise with Outside Investors".
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they are issued additional shares (usually by changing the "conversion ratio" used to calculate their liquidation preference).
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Stock purchase agreements – the primary contract by which investors exchange money for newly minted shares of
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443:, as well as the existence of certain conditions (subject to enumerated exceptions), as part of the stock purchase agreement.
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paid. Unpaid dividends are generally forgiven but they may be accumulated and are added to the liquidation preference.
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company will not undertake any major business changes or enter agreements that would make the transaction infeasible).
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A pre-seed or angel round is the earliest infusion of capital by founders, supporters, high net worth individuals ("
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Law firms and accountants are typically retained by all parties to advise, negotiate, and document the transaction.
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their proportionate share of the surplus, or "non-participating" in which case the preference is a floor.
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Ruhnka, Tyzoon T. Tyebjee, Albert V. Bruno (1984). "A Model of
Venture Capitalist Investment Activity".
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Financing Your
Business with Venture Capital: Strategies to Grow Your Enterprise with Outside Investors
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Conversion of convertible notes. If there are outstanding notes they may convert at or after closing.
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Due diligence. Simultaneously with negotiating the definitive agreements, the investors examine the
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Venture capital financing rounds typically have names relating to the class of stock being sold:
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for capital, where the investor decides within 10 minutes whether s/he wants a follow-up meeting.
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Definitive documents, the legal papers that document the final transaction. Generally includes:
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Preparation of closing binder – contains documentation of entire transaction
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agree to limit their individual ability to sell their shares in favor of the new investors
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Signed term sheet. These are usually non-binding and commit the parties only to
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such as inspection rights and promises to provide ongoing financial disclosures
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Series AA, BB, etc. Once used to denote a new start after a crunchdown or
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112:. Statements consisting only of original research should be removed.
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Offering. The company provides the investment firm a confidential
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540:"Series B" and "Series C" redirect here. For other uses, see
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Representations and warranties as to the state of the company
951:. Volume: 30, Issue: 9 (September 1984), pp. 1051–1066.
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Post-closing. After the closing a few things may occur:
820:"What is the Definition of a Seed Round or an A Round?"
991:
880:"Down Round: Overview, Implications and Alternatives"
170:. Unsourced material may be challenged and removed.
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30:"Series C" redirects here. For other uses, see
735:"Sources for Startup Funding. Venture Capital"
503:Positive and negative covenants by the company
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1479:Private equity and venture capital investors
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319:Follow-on or piggyback investors. Typically
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473:Filing of amended Articles of Incorporation
71:Learn how and when to remove these messages
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1451:Taxation of private equity and hedge funds
1268:Private investment in public equity (PIPE)
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248:Learn how and when to remove this message
230:Learn how and when to remove this message
128:Learn how and when to remove this message
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851:"Seed is the New A, But What's Next?"
355:Private placement memorandum. A PPM/
168:adding citations to reliable sources
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790:"How Startup Funding Rounds Differ"
770:from the original on 7 October 2021
302:. Introduce companies to investors.
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830:from the original on 7 August 2017
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572:simple agreement for future equity
366:Negotiation of terms. Non-binding
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510:and subsequent public offerings
155:needs additional citations for
60:or discuss these issues on the
1251:Publicly traded private equity
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733:H., Valeriia (June 27, 2021).
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323:, high-net worth individuals,
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1519:List of venture capital firms
914:Spaventa, Drew (2022-08-25).
818:Mark Suster (15 April 2016).
706:Lipman, Frederick D. (1998).
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605:initial public offering (IPO)
359:is generally not used in the
1499:List of private equity firms
1256:Business Development Company
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760:"What are Pre-Seed Rounds?"
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352:to secure initial interest.
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108:the claims made and adding
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1133:Leveraged recapitalization
758:Rob Go (26 January 2016).
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335:Stages in a venture round
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824:Both Sides of the Table
657:Revenue based financing
619:initial public offering
517:Liquidation preferences
508:initial public offering
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1401:Distribution waterfall
1353:Sovereign wealth funds
958:. (November 15, 1998).
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500:Guaranteed board seats
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1261:Venture capital trust
483:Rights and privileges
416:Amended and restated
27:Type of funding round
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1217:Private equity firms
1166:Post-money valuation
1043:Equity co-investment
662:Securities offerings
433:employment contracts
429:financial statements
164:improve this article
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1456:Undercapitalization
1308:Insurance companies
1226:Limited partnership
1171:Pre-money valuation
642:Market segmentation
282:venture capitalists
1391:Capital commitment
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1128:Buy–sell agreement
949:Management science
920:The Spaventa Group
916:"What is Pre-IPO?"
411:positive covenants
93:possibly contains
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162:Please help
157:verification
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1323:Foundations
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1038:Secondaries
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536:Round names
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272:, by which
1411:Envy ratio
1318:Endowments
1181:Seed money
1095:Terms and
930:2023-11-06
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865:2024-04-26
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693:References
687:Cap Tables
563:Seed round
375:good faith
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278:investment
190:newspapers
102:improve it
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1210:Structure
1028:Mezzanine
1016:Leveraged
712:. Prima.
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924:Archived
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307:investor
288:Features
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855:Wing.vc
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305:A lead
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