Its no secret – now is the best time to start a new business. With low corporate filing fees, fewer compliance hurdles, and amazing year-round climate, it’s no wonder why more and more people are turning that dream into a reality here in beautiful South Florida. But what happens after you start the business? What options does a young entrepreneur have for raising money and what do all the fancy financial terms mean? Keep reading to find out.
Funding 101: The difference between Seed Round and Series A funding
In the business and technology sectors, lots of people dream big. Only a few make those dreams come true. Sometimes the difference between those who “make it” and those who don’t is a matter of luck. Sometimes it has to do with a willingness to take risks. Sometimes, it’s simply a matter of knowing where to start and following through. In the hyper-competitive world of business in South Florida, this is especially important when it comes to funding. Here’s what you need to know about two of the most common funding mechanisms available to startups.
Seed round funding
If you have an idea for a startup and you’re determined to make it a reality, you’ve probably heard of seed round funding. But what is it, exactly?
This term is used to describe a cycle of related investments in which no more than 15 investors “seed” a new company. The total investments can typically range anywhere from $50,000 to $2 million, and are generally used for:
- Preliminary market research; and/or
- Initial product development.
In return for their investments, contributors usually obtain a convertible note, equity, or preferred stock options in the new venture. Because each of these debt/equity instruments is complicated, we won’t need to address them here. Suffice to say that early-stage investors, sometimes referred to as “angel investors,” will often take risks on new businesses, however the potential for future profits should be apparent from the outset.
When investors invest at the “seed round” level, it allows the founders greater flexibility and time to lay the foundation for business success. Specifically, this type of funding gives business owners more time to:
- Tweak your business model.
- Identify and connect with key business partners.
- Make any other adjustments as warranted by shifts in the market and similar circumstances
Because seed funding can make or break your startup, it is crucial that you consult qualified legal and financial professionals before accepting any offers. Our business lawyers can easily assess your needs and any seed funding offers as you receive them. We can also provide guidance regarding your best options.
Series A funding
Series A funding is a term used to describe contributions made by a select group of so-called angel investors or venture capitalists (VCs). These investors generally contribute anywhere from $2 million to $10 million and get a specific type of equity in return. As you may have guessed, this type of funding is named for Series A Preferred shares, and is the type of equity most VCs are banking on getting. The implication here is that these investors will be the first group to get preferred shares. Acquisition of these shares carries a number of perks including the right to convert preferred stock for common stock in the future. Investors who receive preferred stock may also be able to secure veto powers, board seats and more.
The advantages for the startup are:
- Potential for faster growth with larger partnerships and more cash.
- Greater prestige, and enhanced name recognition.
Due to the complexity of the legal paperwork associated with this sort of funding, it is essential to seek legal advice and assistance. Our legal team has the knowledge and experiences needed to draft relevant documents, including but not limited to the term sheet, amended and restated articles of incorporations, preferred stock investment agreements, and investors’ rights agreements.
What Should You Do Next?
If you are interested in learning more or speaking with an attorney at Capital Partners Law, there are plenty of ways to get in touch:
- Call us toll-free at (833) 7-CAPLAW.
- Find your nearest office and call to schedule a free consultation.
- Complete our New Client Request Form online. (No obligation – an attorney will review your information and contact you to discuss your needs).
- Schedule a Free Initial Phone Consultation online now.
- Schedule a Free Initial Video Consultation online now.
This article is for informational purposes only. It does not create an attorney-client relationship with any reader nor should it be construed as legal advice. If you need legal advice, please contact our firm.