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| *Ostroff, Fair and Company>>>Other - Business & Finance |
What's the difference between "Series A", "Series B", etc funding? |
What's the difference between "Series A", "Series B", etc funding? Series A, B, etc, generally are used to denote various series of shares or stock. Stock's rights, preferences and privileges are specific to the articles of incorporation in which they are set forth, but generally a corporation uses different series in the following situation: Most startups may raise several rounds of funding to fund ongoing investment. The investors typically do not want common stock but preferred stock. Now the earliest investors will likely get the best valuation, so the next round of investor will not get the same preferred stock but a different preferred stock with a different valuation. Therefore, the first round of funding you call the Series A round and the investors get Series A shares. The 2nd round of funding is called the Series B round and the investors get Series B shares. Here's a mathematical example. I start a company with 100 shares. Investor A comes in and offers me $1,000,000 at a pre-money valuation of $1,000,000 but he wants the assurance that if i go broke before i the founder gets anything he gets his million back. So I say yes. This is my Series A Round. I issue 100 shares of Series A Stock (which is convertible into common) at $10,000 per share and which has a liquidation preference of $10,000 per share. So my cap structure is now 100 shares common, 100 shares Series A Preferred. A year later I need more capital. Series B investor comes and says that due to my growth he is willing to give me a pre-money valuation of $4 million and wants to invest $2 million. Therefore the company will issue him 100 shares of Series B Preferred Stock at $20,000 per share with a liquidation preference of $20,000 per share and at the end of the day, I will have a capital structure of 100 common, 100 series A and 100 series B. What are the benefits of this? For me the company, I have gained valuable start up capital but at the cost of going from a 100% owner to a 33% owner. For the Series A investor, they have gone from a 50% owner to a 33% owner but they still are guaranteed (subject to B's preference) of the return of their original investment and they now have a third party who indicates that they are willing to buy shares at twice the price they paid for them. For the Series B investor, they have paid a lot for the shares, but they came in relatively late so they could see the company develop and they have a liquidation preference that protects their full investment. Search using www.yahoo.com/search! |
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