It’s no secret that venture capital is full of confusing terminology and jargon, so much so that sometimes we can’t even tell what it is they’re talking about. So we’re sympathetic with reader Sara who writes in this week wanting to know what this seed capital, Series A, Series F funding thing is all about:
“I keep reading about various start-ups receiving Series A funding,” she writes. “Is that the same thing as seed stage funding? And if a company secures Series A funding, does that mean the next round will automatically be Series B funding?”
Let’s get to it: “series” funding refers to when a start-up issues different classes of stock to investors, with the rule that if the company goes public, it will be converted into common stock. Each class of stock—A, B, C, D, and so forth may have a different set of rules associated with it. A start-up may offer more or less equity in their business and may afford different rights and equity percentages for each “series” round of funding.
Depending on how much equity and stock a company has to offer, a series round of funding may also include several tranches of investment. That’s why many times you’ll read that a company has received $500,000 in Series A investment, even though it’s the second or third round of recent funding from an investor. The start-up will continue taking investment in a particular “series” of funding until 1) it needs no more or 2) until all the convertible stock it would like to offer has been swapped for capital. Subsequent rounds of funding—Series B, C, D, etc.—often happen once a start-up has hit certain benchmarks, many of which are tied to sales volume and revenues. Many times the rules—and equity—percentages change dramatically depending on the round of funding. For instance, if a start-ups has become dramatically more profitable than it was during the last round of funding, they may ask for more money per stock, and may offer investors fewer rights with said stock.
Lastly, Series A funding is not necessarily the same thing as seed capital. While some start-ups may initially offer Series A stock to investors, many instead seek smaller chunks of seed capital which do not require the exchange of stock.