Silicon Valley: S01 E06, 07 & 08 - The last three episodes of season 1, i.e. episodes 6, 7, and 8, introduce us to the concepts of seed funding, series A financing, and series B financing, terms which find usage throughout the series.
Seed funding, series A financing (or series A funding or even a series A round), and series B financing are stages in the fundraising process of a startup. There are no set rules for naming the stages of funding. Typically, the fundraising process starts with the FFF round, i.e. the friends and family round, and then follows an alphabetical order starting with ‘A’.
Listed below are a few stages in the fundraising process in the order in which they are typically undertaken:
FFF
Angel
Pre Seed
Seed
Pre Series A
Series A
Pre Series B
Series B
Do the terms of investment change with the round of fundraising? To a certain extent, yes. Ultimately, the terms and your ability to negotiate those terms are subjective. It effectively boils down to: (a) timing of the investment, (b) the quantum of investment, and (c) percentage shareholding of the incoming investor.
For example, your first investor enjoys an advantage during negotiations and may push for certain investor rights, as the first cheque is always the most important. This first investor may be investing a small amount, but may end up receiving all investor rights. However, in the next round of funding, you may have more leverage to negotiate and may enjoy an advantage in deciding what rights to grant to the incoming investor.
As discussed above, the term of the investment and the rights granted to the incoming investor depend on three factors.
1. Timing of the investment
As illustrated above, timing of the fundraise has a direct impact on your ability to negotiate terms, which in turn influences the kind of rights you grant your investors.
For example, consider a scenario where there is an urgent need to raise funds as you are running out of cash. At such a point in time, just getting money in the bank is critical. Founders, in such situations, are willing to compromise so as to cut down negotiation time.
The flip side of the coin offers a better negotiation platform to the founders. Once the founders have gained traction and proved their worth, they are in a better position to negotiate and push for the certain terms they may desire (remember, the investor is still the one with the money!).
2. Quantum of investment
One also needs to consider the distribution of rights to the investors based on the quantum of their investment.
Let us consider a fundraise of USD 2 million. Now, in this USD 2 million round, investor 1 is investing USD 1 million and four other investors are investing USD 250,000 each. While you may grant the first investor all the rights, you will try to negotiate minimal rights for the other four investors.
3. Percentage shareholding
The stake of the investor on the cap table also matters. For example, an investor holding 2% may not get the same rights as an investor holding 15%.
There are no rules per se and one has to assess the situation and keep in mind the above 3 criteria before fundraising!