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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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563:(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.
570:, 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.
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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
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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
508: – 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
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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
329:
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
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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
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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
366:
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
371:
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
298:, 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
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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.
359:, 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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548:"), and sometimes a small amount of institutional capital to launch the company, build a prototype, and discover initial product-market fit.
302:, 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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943:
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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432:, 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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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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101:. 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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529:"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
940:. Volume: 30, Issue: 9 (September 1984), pp. 1051–1066.
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Post-closing. After the closing a few things may occur:
809:"What is the Definition of a Seed Round or an A Round?"
980:
869:"Down Round: Overview, Implications and Alternatives"
159:. Unsourced material may be challenged and removed.
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19:"Series C" redirects here. For other uses, see
724:"Sources for Startup Funding. Venture Capital"
492:Positive and negative covenants by the company
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1468:Private equity and venture capital investors
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308:Follow-on or piggyback investors. Typically
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462:Filing of amended Articles of Incorporation
60:Learn how and when to remove these messages
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1440:Taxation of private equity and hedge funds
1257:Private investment in public equity (PIPE)
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219:Learn how and when to remove this message
117:Learn how and when to remove this message
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840:"Seed is the New A, But What's Next?"
344:Private placement memorandum. A PPM/
157:adding citations to reliable sources
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779:"How Startup Funding Rounds Differ"
759:from the original on 7 October 2021
291:. Introduce companies to investors.
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561:simple agreement for future equity
355:Negotiation of terms. Non-binding
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499:and subsequent public offerings
144:needs additional citations for
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722:H., Valeriia (June 27, 2021).
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1508:List of venture capital firms
903:Spaventa, Drew (2022-08-25).
807:Mark Suster (15 April 2016).
695:Lipman, Frederick D. (1998).
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594:initial public offering (IPO)
348:is generally not used in the
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1245:Business Development Company
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749:"What are Pre-Seed Rounds?"
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341:to secure initial interest.
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324:Stages in a venture round
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506:Liquidation preferences
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1390:Distribution waterfall
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947:. (November 15, 1998).
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489:Guaranteed board seats
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1250:Venture capital trust
472:Rights and privileges
405:Amended and restated
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418:financial statements
153:improve this article
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1445:Undercapitalization
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271:venture capitalists
1380:Capital commitment
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909:The Spaventa Group
905:"What is Pre-IPO?"
400:positive covenants
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151:Please help
146:verification
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107:October 2018
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1312:Foundations
1235:Pledge fund
1027:Secondaries
783:Rocketspace
525:Round names
430:disclosures
357:term sheets
261:, by which
1400:Envy ratio
1307:Endowments
1170:Seed money
1084:Terms and
919:2023-11-06
878:2024-07-09
854:2024-04-26
793:2024-04-26
733:2024-07-09
682:References
676:Cap Tables
552:Seed round
364:good faith
346:prospectus
267:investment
179:newspapers
91:improve it
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1370:Cap table
1275:Investors
1199:Structure
1017:Mezzanine
1005:Leveraged
701:. Prima.
578:downround
424:or stock
257:used for
95:verifying
52:talk page
1543:Category
1420:Leverage
1356:Related
1086:concepts
913:Archived
848:Archived
823:26 April
817:Archived
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763:26 April
757:Archived
728:Tech EMP
661:Series A
615:See also
602:rounds,
568:Series A
535:C Series
531:B Series
296:investor
277:Features
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1430:M&A
1137:Venture
1042:History
1012:Venture
844:Wing.vc
636:Pricing
589:Pre-IPO
426:vesting
294:A lead
282:Parties
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193:scholar
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582:i.e.
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