Start-up founders mainly work on two things: building their product and funding. It's challenging for founders to focus on both of these things at the same time, because finding funding takes a lot of time and energy. It is beneficial for founders to understand the funding life cycle of a startup before seeking out funds.
Stage One: Founders, Family & Friends
Founders, family and friends usually cover the initial costs of the company's incorporation and operation. The amount of each party's investment depends on each individual's financial situation, and it is usually between $10,000 and $100,000. Overall, these rounds tend to gather $250,000 or so, enough to support the company to kick off their new business.
At this stage, founders usually discuss common stock issuance, equity split, vesting schedules, and come to an agreement. Family and friends usually use convertible notes in exchange for their ownership in the company.
Stage Two: Angel Investment
Once a company has built up its product, launched it, and proved its potential for commercial value on the market, it's a sign that the company is growing well and more funds will be needed to expand the business.
Although the family and friends round can be considered an angel round, there are some professional angel investors out there and they may be ready to invest before other professional VC firms. Angel investments are usually up to $1M, and are used to support the company for 12-18 months. Angel investors also like to use convertible notes.
If the company is selected by an accelerator, it will receive funds from the accelerator, usually an amount between $20,000 to $300,000. The accelerator will typically request 5-10% of the shares of the company.
Stage Three: Series Seed or Series A
When the company is raising a Series Seed or Series A round, it means the company is growing fast and has achieved some success, and its potential has attracted professional VC firms. Here, Series Seed and Series A are collectively referred as Series A.
Series A investors invest several million dollars and demand 15% - 30% of the ownership of the company, usually in the form of the preferred stock. The Series A investors will also impose an employee option pool, which is usually 5% - 15% of the company's shares. In order to gain some level of control, Series A investors may secure a board seat and negotiate their protective rights. At this stage, if the company has issued convertible notes to some earlier investors, this event will trigger the conversion feature of the convertible notes, and more preferred stocks will be issued to these early investors. As a result, founders' shares will be further diluted.
Stage Four: Series B
Series B is still considered an early-stage venture round. Similar to the Series A round, the Series B round is also used to expand the business to a higher level.
Stage Five: Series C and Beyond
Although the fundraising rounds go on and on, Series C and beyond is usually considered a late-stage round. At this stage, the company may have already performed impressively and generated a large amount of revenue. It is either on the way to being acquired by another large company or set to IPO. Companies at this stage will attract large VC firms, private equity firms, hedge funds or investment banks, and the investment amount is usually larger than the previous rounds. Due to the complexity of the deal and engagement of multiple players, some terms in the late-stage rounds are different from the early-stage rounds. Investors at this stage may ask for more protections and benefits.
Stage Six: Exit
The exit for a company that is successful could be an M&A or IPO. If the company is acquired by a large company, the founders and investors can sell their shares at an agreed-on price. Alternatively, the company could go public, and the founders and investors could sell their shares in a public trading platform.