Series A Primer
After successfully raising your seed round, building an MVP, and achieving product-market fit, you will most likely need more capital to hire employees and build a more substantial version of your product. To do this, most startups will try to raise another round of capital from investors, typically called the Series A round. The purpose of this post is to give you a high level overview of a Series A round by discussing the typical amount raised, the investors who make up the round, and the instruments used in the round. This will be the first post in a series that will break down a Series A round.
When it comes to the amount raised in a Series A round, there are no set boundaries. The average amount startups raise in this round is somewhere between $3 million and $7 million. Some startups can raise a lot more than this, and some raise less. One thing is for certain when it comes to the amount you raise, it needs to be enough to get your startup to it’s next defined milestone before you run out of cash and have to raise more money.
Unlike the seed round which is typically comprised of high networth individuals (angels) your Series A round will typically have 1 or more venture capital firms in it. Normally there is one VC firm that will be filling most of the round (dubbed the lead investor) who you will be negotiating the main terms with. It is important to note that this VC firm will almost always take a seat on your board, so it is important that you 1) get along with them, and 2) are choosing them as an investor for more than just their money (industry contacts, experience, etc.).
The Series A round is always raised by selling convertible preferred stock. This is very different from the seed round where you might have raised through either a convertible note or a SAFE. While the stock itself is straightforward, the rights attached to it are not. As we will discuss in another post, the term sheet sent by the lead VC will contain a lot of rights and protections; each of which must be reviewed carefully and negotiated appropriately. Once that is done, then the definitive financing documents are drafted to formalize the deal.
Keep Everything In Perspective
A lot of my clients who have received a term sheet are over the moon with joy. I do not blame them. Raising your Series A is no easy task, but it is not the end of the road. This raise should not be considered an exit, and don’t expect that you will be driving a brand new Tesla to the office after the money hits the bank. Sure you will be getting a bigger or, more likely your first salary, but most of that money will be spent on growing the business. The goal is to reach that next defined milestone, and increase the company’s value to achieve a higher valuation at your next round or acquisition by another company. Closing you Series A does not make anything easier. In fact, you have more work to do and more people depending on you than before. Of course be excited you closed the round, but keep in mind that you still have a job to do.