Venture round - AbsoluteAstronomy.com

A venture round is a type of funding round used for venture capital financing

Venture capital financing

Venture capital financing is a type of financing by venture capital: the type of private equity capital is provided as seed funding to early-stage, high-potential, growth companies and more often after the seed funding round as growth funding round in the interest of generating a return through an...

, by which startup companies

Startup company

A startup company or startup is a company with a limited operating history. These companies, generally newly created, are in a phase of development and research for markets...

obtain investment

Investment

Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...

, generally from venture capitalists and other institutional investors. The availability of venture funding is among the primary stimuli for the development of new companies and technologies.

Parties

Finder
Finder
Finder may refer to:* Finder , a core component of the Apple Macintosh operating system, is the graphical representation of the computer's file system* Finder , a comic book series by Carla Speed McNeil...

s or brokers
Stock broker
A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...

. Introduce companies to investors.
A lead investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...

, 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, due diligence
Due diligence
"Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations...

, and other formalities of the investment. It may also introduce the company to other investors, generally in an informal unpaid capacity.
Co-investors, other major investors who contribute alongside the lead investor
Follow-on or piggyback investors. Typically angel investor
Angel investor
An angel investor or angel is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity...

s, rich individuals, institutions, and others who contribute money but take a passive role in the investment and company management
The company being funded
Law firm
Law firm
A law firm is a business entity formed by one or more lawyers to engage in the practice of law. The primary service rendered by a law firm is to advise clients about their legal rights and responsibilities, and to represent clients in civil or criminal cases, business transactions, and other...

s and accountant
Accountant
An accountant is a practitioner of accountancy or accounting , which is the measurement, disclosure or provision of assurance about financial information that helps managers, investors, tax authorities and others make decisions about allocating resources.The Big Four auditors are the largest...

s are typically retained by all parties to advise, negotiate, and document the transaction

Stages in a venture round

Introduction. Investors and companies seek each other out through formal and informal business networks, personal connections, paid or unpaid finder
Finder
Finder may refer to:* Finder , a core component of the Apple Macintosh operating system, is the graphical representation of the computer's file system* Finder , a comic book series by Carla Speed McNeil...

s, researchers and advisers, and the like. Because there are no public exchanges listing their securities, private companies meet venture capital firms 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 speed-dating for capital, where the investor decides within 10 minutes whether s/he wants a follow-up meeting. Mass High Tech, September 5, 2008.
Offering. The company provides the investment firm a confidential business plan
Business plan
A business plan is a formal statement of a set of business goals, the reasons why they are believed attainable, and the plan for reaching those goals. It may also contain background information about the organization or team attempting to reach those goals....

to secure initial interest
Private placement memorandum. A PPM/prospectus
Prospectus (finance)
In finance, a prospectus is a document that describes a financial security for potential buyers. A prospectus commonly provides investors with material information about mutual funds, stocks, bonds and other investments, such as a description of the company's business, financial statements,...

is generally not used in the Silicon Valley
Silicon Valley
Silicon Valley is a term which refers to the southern part of the San Francisco Bay Area in Northern California in the United States. The region is home to many of the world's largest technology corporations...

model
Negotiation of terms. Non-binding term sheet
Term sheet
A term sheet is a bullet-point document outlining the material terms and conditions of a business agreement. After a term sheet has been "executed", it guides legal counsel in the preparation of a proposed "final agreement"...

s, 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.
Signed term sheet. These are usually non-binding and commit the parties only to good faith
Good faith
In philosophy, the concept of Good faith—Latin bona fides “good faith”, bona fide “in good faith”—denotes sincere, honest intention or belief, regardless of the outcome of an action; the opposed concepts are bad faith, mala fides and perfidy...

attempts to complete the transaction on specified terms, but may also contain some procedural promises of limited (30-60 day) duration like confidentiality
Confidentiality
Confidentiality is an ethical principle associated with several professions . In ethics, and in law and alternative forms of legal resolution such as mediation, some types of communication between a person and one of these professionals are "privileged" and may not be discussed or divulged to...

, exclusivity
Exclusivity
Exclusivity is the title of a number-one R&B single by the late duo Damian Dame. Taken from their self-titled album, the hit song spent two weeks at number-one on the US R&B chart and peaked at number forty-two on the Hot 100. The single also made it to number forty-five on dance charts....

on the part of the company (i.e. the company will not seek funding from other sources), and stand-still provisions (e.g. the company will not undertake any major business changes or enter agreements that would make the transaction infeasible).
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 beyond the scope of the major deal terms.
Definitive documents, the legal papers that document the final transaction. Generally includes:
Stock purchase agreements - the primary contract by which investors exchange money for newly minted shares of preferred stock
Preferred stock
Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument...
Buy-sell agreements, co-sale agreements, right of first refusal, etc. - agreements by which company founders and other owners of common stock
Common stock
Common stock is a form of corporate equity ownership, a type of security. It is called "common" to distinguish it from preferred stock. In the event of bankruptcy, common stock investors receive their funds after preferred stock holders, bondholders, creditors, etc...

agree to limit their individual ability to sell their shares in favor of the new investors
Investor rights agreements - covenants the company makes to the new investors, generally include promises with respect to board
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...

seats, negative covenants not to obtain additional financing, sell the company, or make other specified business and financial decisions without the investors' approval, and positive covenants such as inspection rights and promises to provide ongoing financial disclosures
Amended and restated articles of incorporation
Articles of Incorporation
The Articles of Incorporation are the primary rules governing the management of a corporation in the United States and Canada, and are filed with a state or other regulatory agency.An equivalent term for LLCs in the United States is the Articles of Organization...

- formalize issues like authorization and classes of shares and certain investor protections
Due diligence. Simultaneously with negotiating the definitive agreements, the investors examine the financial statements
Financial statements
A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...

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 employment contracts or stock vesting
Vesting
In law, vesting is to give an immediately secured right of present or future enjoyment. One has a vested right to an asset that cannot be taken away by any third party, even though one may not yet possess the asset. When the right, interest or title to the present or future possession of a legal...

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 disclosures, as well as the existence of certain conditions (subject to enumerated exceptions), as part of the stock purchase agreement.
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.
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 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. However, disputes are rare and few if any deals unravel between final agreement and closing. 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.
Post-closing. After the closing a few things may occur
Conversion of convertible notes. If there are outstanding notes they may convert at or after closing.
securities filing
SEC filing
An SEC filing is a financial statement or other formal document submitted to the U.S. Securities and Exchange Commission . Public companies, certain insiders, and broker-dealers are required to make regular SEC filings. Investors and financial professionals rely on these filings for information...

with relevant state
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...

and/or federal regulators
Filing of amended Articles of Incorporation
Preparation of closing binder - contains documentation of entire transaction

Rights and privileges

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:

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 stock dilution
Stock dilution
Stock dilution is a general term that results from the issue of additional common shares by a company. This increase in common shares of a stock can result from a secondary market offering, employees exercising stock options, or by conversion of convertible bonds, preferred shares or warrants into...

they are issued additional shares (usually by changing the "conversion ratio" used to calculate their liquidation preference). There are various formulas including full ratchet and "weighted average"
guaranteed board seats
positive and negative covenants by the company
registration right - the investors have special rights to demand registration of their stock on public exchanges, and to participate in an initial public offering
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...

and subsequent public offerings
representations and warranties as to the state of the company
Liquidation preferences - 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 and their proportionate share of the surplus, or "non-participating" in which case the preference is a floor.
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 paid. Unpaid dividends are generally forgiven but they may be accumulated and are added to the liquidation preference.

Round names

Venture capital financing rounds typically have names relating to the class of stock being sold:

Seed round where company insiders provide start-up capital
Angel round where early outside investors buy common stock
Series A, Series B, Series C, etc. Generally, the progression and price of stock at these rounds is an indication that a company is progressing as expected. Investors become concerned when a company has raised too much money in too many rounds, considering it a sign of delayed progress.
Series A', B', and so on. Indicate small follow-on rounds that are integrated into the preceding round, generally on the same terms, to raise additional funds.
Series AA, BB, etc. Generally used to denote a new start after a crunchdown or down round, i.e. the company failed to meet its growth objectives and is essentially starting again under the umbrella of a new group of funders.
mezzanine finance rounds, bridge loan
Bridge loan
A bridge loan is a type of short-term loan, typically taken out for a period of 2 weeks to 3 years pending the arrangement of larger or longer-term financing.-Description:A bridge loan is interim financing for an individual or business until...

s, and other debt instruments used to support a company between venture rounds or before its initial public offering
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...

Parties

Stages in a venture round

Rights and privileges

Round names

See also