A venture round is a type of

funding round A securities offering (or funding round or investment round) is a discrete round of investment, by which a business or other enterprise raises money to fund operations, expansion, a capital (economics), capital project, an acquisition, or some oth ...

used for venture capital financing, by which

startup companies A startup or start-up is a company or project undertaken by an Entrepreneurship, entrepreneur to seek, develop, and validate a scalable business model. While entrepreneurship includes all new businesses including self-employment and businesses tha ...

obtain

investment Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

, generally from

venture capital Venture capital (VC) is a form of private equity financing provided by firms or funds to start-up company, startup, early-stage, and emerging companies, that have been deemed to have high growth potential or that have demonstrated high growth in ...

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

Features

Parties

*Founders or stakeholders. Introduce companies to investors. *A lead

investor An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital the investor usually purchases some species of pr ...

, 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 is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care. Due diligence ...

, 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 An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an individual who provides capital to a business or businesses, including startups, usually in exchange for convertible de ...

s, high-net worth individuals,

family offices A family office is a privately held company that handles investment management and wealth management for a wealthy family, generally one with at least $50–100 million in investable assets, with the goal being to effectively grow and transfer w ...

, institutional investors, and others who contribute money but take a passive role in the investment and company management. *Law firms and accountants 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 finders, 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 Speed dating is a formalized matchmaking process with the purpose of encouraging eligible singles to meet new potential partners in a very short period of time, so that interested pairs can continue meeting each other after the event. Organiz ...

for capital, where the investor decides within 10 minutes whether s/he wants a follow-up meeting. *Offering. The company provides the investment firm a confidential

business plan A business plan is a formal written document containing the goals of a business, the methods for attaining those goals, and the time-frame for the achievement of the goals. It also describes the nature of the business, background information on ...

to secure initial interest. *Private placement memorandum. A PPM/ prospectus is generally not used in the

Silicon Valley Silicon Valley is a region in Northern California that is a global center for high technology and innovation. Located in the southern part of the San Francisco Bay Area, it corresponds roughly to the geographical area of the Santa Clara Valley ...

model. *Negotiation of terms. Non-binding

term sheet Term may refer to: Language *Terminology, context-specific nouns or compound words **Technical term (or ''term of art''), used by specialists in a field ***Scientific terminology, used by scientists *Term (argumentation), part of an argument in d ...

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 In human interactions, good faith () is a sincere intention to be fair, open, and honest, regardless of the outcome of the interaction. Some Latin phrases have lost their literal meaning over centuries, but that is not the case with , which i ...

attempts to complete the transaction on specified terms, but may also contain some procedural promises of limited (30- to 60-day) duration like confidentiality, exclusivity 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 transaction documents are not required in all situations. Specifically where the parties have entered into a separate agreement that does not require that the parties execute all such documents. *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 (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt ins ...

:*Buy-sell agreements, co-sale agreements, right of first refusal, etc. agreements by which company founders and other owners of

common stock Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other C ...

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 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 Article often refers to: * Article (grammar), a grammatical element used to indicate definiteness or indefiniteness * Article (publishing), a piece of nonfictional prose that is an independent part of a publication Article(s) may also refer to: ...

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 (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...

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 In law, vesting is the point in time when the rights and interests arising from legal ownership of a property are acquired by some person. Vesting creates an immediately secured right of present or future deployment. One has a vested right to a ...

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. 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. :*

SEC filing The SEC filing is a financial statement or other formal document submitted to the U.S. Securities and Exchange Commission (SEC). Public companies, certain insiders, and broker-dealers are required to make regular SEC filings. Investors and fina ...

with relevant

state State most commonly refers to: * State (polity), a centralized political organization that regulates law and society within a territory **Sovereign state, a sovereign polity in international law, commonly referred to as a country **Nation state, a ...

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, also known as equity dilution, is the decrease in existing shareholders' ownership percentage of a company as a result of the company issuing new equity. New equity increases the total shares outstanding which has a dilutive ef ...

they are issued additional shares (usually by changing the "conversion ratio" used to calculate their liquidation preference). :*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 An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investm ...

and subsequent public offerings :*Representations and warranties as to the state of the company :*

Liquidation preference A liquidation preference is one of the primary economic terms of a venture finance investment in a private company. The term describes how various investors' claims on dividends or on other distributions are queued and covered. Liquidation prefere ...

s 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: *A pre-seed or angel round is the earliest infusion of capital by founders, supporters, high net worth individuals ("

s"), and sometimes a small amount of institutional capital to launch the company, build a prototype, and discover initial product-market fit. *

Seed round Seed money, also known as seed funding or seed capital, is a form of securities offering in which an investor puts capital in a startup company in exchange for an equity stake or convertible note stake in the company. The term ''seed'' suggest ...

is generally the first formal equity round with an institutional lead. The series seed can be priced, meaning investors purchase preferred stock at a valuation set by the lead investor, or take the form of convertible note or

simple agreement for future equity A simple agreement for future equity (SAFE) is an agreement between an investor and a company that provides rights to the investor for future equity in the company similar to a warrant, except without determining a specific price per share at the ...

that can be converted at a discount to preferred shares at the first priced round. A Seed round is often used to demonstrate market traction in preparation for the Series A. Although in the past seed rounds were mainly reserved for pre-revenue companies, as of 2019 two-thirds of companies raising seed rounds already had revenues. * A priced equity round is often called

Series A A series A is the name typically given to a company's first significant round of venture capital financing. It can be followed by the word round, investment or financing. The name refers to the class of preferred stock sold to investors in exchan ...

, with each subsequent round using the next letter in the chain (e.g. B, C, D). Generally, the progression and price of stock at these rounds is an indication that a company is progressing as expected. Investors may 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 or bridge funding rounds that are integrated into the preceding round, generally on the same terms, to raise additional funds. *Series AA, BB, etc. Once used to denote a new start after a crunchdown or downround, ''i.e.'' the company failed to meet its growth objectives and is essentially starting again under the umbrella of a new group of funders. Increasingly, however, Series AA Preferred Stock investment rounds are becoming used more widely along with convertible note financings or other "lightweight" preferred stock financings, such as "Series Seed" or "Series AA" preferred stock, to support less capital-intensive business growth, as their simplicity and generally lower legal costs can be attractive to early investors and founders. * Pre-IPO round is a late-stage equity round for a private company to raise funds in advance of its listing on a public exchange. This allows both individual and institutional investors to invest in such late-stage, VC-backed private companies prior to its initial public offering (IPO). * Mezzanine finance rounds,

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. It is usually called a bridging loan in the United Kingdom, also known as a "caveat loan ...

s, and other debt instruments used to support a company between venture rounds or before its

Option pool shuffle

Option pool shuffle relates to the allocation of

shares In financial markets, a share (sometimes referred to as stock or equity) is a unit of equity ownership in the capital stock of a corporation. It can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Sha ...

to a

(VC) investor at the point of investment, when also creating an Employee Share Option Pool at the same time. There are two different approaches to determine the number of shares to allocate to each

, the VC Friendly Approach and the Founder Friendly Approach.

The VC Friendly approach

The VC Friendly approach, which may also be called a pre-money pool, gives the VC a greater share of the company. The Share Options are allocated first, and then the VC is allocated its shares. The impact is the VC share allocation dilutes the Share Option Pool and the VC ends up with a greater percentage of the company

The Founder Friendly approach

The Founder Friendly approach, which may also be called a post-money pool, gives the VC a smaller share of the company. The VC are allocated their shares first. The impact is that the VC is diluted by the new Share Option Pool and the VC ends up with a smaller percentage of the company

Example

A company has 90,000 shares, and wants to (i) allocate 18,000 shares to a VC and (ii) create an Employee Share Option Pool (ESOP) of 10%. The VC Friendly approach: :1. The ESOP is created first – allocating 10% of the Company. So the ESOP gets 10,000 shares (10,000 / 100,000) :2. The VC is allocated its shares – 18,000 shares. The VC ends up with 15.25% of the company (18,000 / 118,000) :3. The ESOP ends up with 8.47% of the company (10,000/118,000) The Founder Friendly approach: :1. The VC is allocated its shares – 18,000 shares. :2. The ESOP is created. There are now 108,000 shares outstanding, so the ESOP gets 12,000 shares, and has 10% of the company (12,000 / 120,000) :3. The VC ends up with 15% of the company. 0.25% less than the VC Friendly Approach Ironically, the founders (existing

shareholder A shareholder (in the United States often referred to as stockholder) of corporate stock refers to an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the ...

s) will end up with a smaller shareholding under the Founder Friendly Approach than the VC Friendly Approach, as more new shares will have been issued.