Familiarizing yourself with words used by founders and investors about Series B+ companies will help you chat more comfortably with people in the space. This doc is sourced from Embroker.
Funding rounds proceed alphabetically, so after Series A, startups can move on to Series B, Series C, and so on to as many rounds as they want. Although these investments are bigger than previous rounds, it also becomes increasingly harder to gain investors’ interests.
Here are additional terms you will encounter as you go through additional series rounds.
Companies may go for Series B funding if they’ve already developed a solid product and user base and they want more capital to scale up. This round is harder than Series A funding since investors will be looking at your company’s growth rate and performance.
The average amount raised in Series B is $33 million.
By the time a company hits Series C, they’ve already reached a certain level of success, and they’re looking to develop new products, expand to new markets, or even acquire other companies.
Series C brings new investors to the table, including private equity firms, hedge funds, and late-stage VCs. They’ll also provide more capital with the expectation of higher returns.
The average Series C round brings in $50 million capital at a valuation between $100 and $120 million.
A drag-along right is a provision in an agreement that allows a majority shareholder to force a minority shareholder to join in the sale or merger of the company.
A term sheet is a formal but non-binding document between startup founders and investors. A term sheet outlines the terms and conditions for investments and serves as the template for legally binding documents.
Dividends are regular payments made by a company to its shareholders from its profits or reserves.
Securities are tradable financial instruments that have monetary value and come in two categories — equities and debts. There are also hybrid securities that combine elements of both.
A cap table is a spreadsheet or table that lists your company’s securities (stocks, convertible notes, etc.) and who owns them.
Unlike the mythical creature, unicorns exist in the business world but are still uncommon. It refers to privately held startups valued at over $1 billion. Notable unicorns include Uber, Airbnb, and Robinhood.
Equity dilution occurs when the ownership percentage for existing shareholders goes down as the company issues new shares.
A hedge fund is a pooled investment set up by a hedge fund manager which is designed to make returns using different investment strategies. They’re limited to higher net-worth individuals and are often set up as limited partnerships.
This is when a company raises a pre-money valuation that’s lower than the post-money valuation in the previous funding round.
The lead investor usually organizes the funding round and invests the most capital in that round.
A stock option is a contract that gives the buyer the right, but not the obligation, to buy or sell a stock at a predetermined price and within a specific time period.
There are two stock options — calls and puts. A stock call option grants the buyer the right to buy stock, which increases in value with the stock price rises. A put option grants the buyer the right to sell a stock short, which increases in value when the stock price decreases.
This is when the valuation is the same as the previous round of funding.
Mezzanine financing is a financing method that mixes debt and equity financing, often taking the form of convertible debt or preferred stocks. Mezzanine loans typically have higher interest rates.
Bridge financing is a small funding round to tide over a startup until it reaches the next round of funding, with the expectation of repayment. Startups can raise bridge funding through debt or equity financing.
This is a right that can be given to an investor to allow them to maintain their level of percentage ownership in a company during subsequent funding rounds.
The founders of Fly Buy decided to proceed to Series B funding, which turned out to be a flat round, raising only $7 million. To secure more capital to expand their delivery zones, they decided to go for mezzanine financing. The bank provided them a $10 million loan with an 8% interest rate, which can be converted to equity stake if Fly Buy can’t repay the loan.
Over the next five years, Fly Buy advanced until Series D funding, expanded to five other cities, and saw substantial growth in their subscriber base. Eventually, they decided it was time to go public.