What is Series A Funding?

You may be curious about series A funding if you own an early-stage business and want to raise additional capital. Businesses may seek this type of funding after completing the seed stage. This article will explain what series A funding is and how it differs from other kinds of growth capital raising. 

Series A Funding: An Overview 

There is no legal definition of series A funding. Nor is there a strict commercial or business definition. Series A funding generally refers to a form of equity financing companies seek early in their growth cycle. Series A funding is often followed by series B, series C, and so on, ideally until the company launches an initial public offering. We can think of series A funding as the first of potentially further institutional equity capital raises. Thus, while your business may have launched one or more equity offerings to your friends, family, and network, series A is the first time you attract big money from investment funds. 

Typically, a group of investors led by a lead investor will provide the company cash in exchange for preference and/or convertible shares in the company. Most series A investors are professional investors. That is, they are typically small to medium-sized investment funds that have a portfolio of other early-stage companies. 

Series A and Other Equity Fundraising 

Many series A investors call themselves venture capital funds. Venture capital and series A funding substantially overlap. Most venture capital firms will invest in any growing business and therefore participate in series B and C funding, which are equity fundraisers for companies further along their growth cycle. 

You may also wonder what the difference is between series A funding and seed funding (also known as angel investing). Seed fund investors tend to entertain companies that are less developed than companies contending for series A funding. Thus, most companies that successfully raise series A funding have likely generated more sales and established a substantial market presence than earlier-stage companies. 

Is Series A Funding Right For My Business?

This means that your business will need more than just a good idea. In fact, it will likely need more than a beta product. Most series A investors expect your business to have an established market position and branding. Your business does not need to turn a profit, but it does need to demonstrate market viability. 

How Do I Find Series A Investors?

Your business typically wants to attract a lead series A investor, sometimes called an anchor investor. You can do this through investor networks, trade shows, and even start-up incubators geared towards mature, early-stage companies. 

If the anchor is broadly interested in your business, they will likely undertake preliminary due diligence. Specifically, they will want to value your business to gauge the size and stake of their potential investment in your company. Once the anchor commits, you will likely find that other investors are keener to join in. 

How is a Series A Investment Structured? 

Series A funding is a kind of equity investment. That is, your investors are buying shares in your company, thereby gaining ownership rights in your business. Most series A funding looks to acquire between 25-50% ownership in the business. The average size of the equity is around £10m. Of this, the anchor may advance half of the cash.  

Preference Shares

There is no legal definition of a preference share. However, preference shares generally refer to any share that gives the preference shareholder the first right to receive dividends from the company’s profits. For series A funding, most preference shares entitle the preference shareholder to a fixed payment amount per share, for instance, £0.10 per share. 

This means that if the company declares a profit, all of the profit must first go to pay the preference shareholders their fixed dividend. If the company does not or cannot declare a profit in a given period (quarterly or biannually), the amount owed during that period will roll over until the next dividend is declared. Businesses may take years to turn a profit. The practical effect is that preference shareholders will receive a massive payout once the business profits. 

Convertible Shares

Convertible shares start off as a loan. That is, the series A investors will loan a sizable sum of money to the company in exchange for the company issuing the investors convertible shares. These shares allow the investors to:

• demand the full repayment of the loan amount at the end of the loan period; or 
• convert the loan into equity (usually preference shares) after a certain time period or event, like a series B fundraise. 

Until the investors request a repayment of the loan amount or convert the loan into equity, the company will make fixed interest payments to the investors. Therefore, preference and convertible shares function similarly in that investors receive interest-like payments on their shares. The difference between the two is that, as a loan, convertible shareholders are contractually obligated to make regular interest payments. Whereas for preference shares, shareholders only receive payments if a dividend is declared. To declare a dividend, the company must turn a profit. Therefore, if there is no profit, preference shareholders will not receive dividends. 

However, regular interest payments under convertible shares mean less cash is available to reinvest in the company. This means convertible share payments might slow growth over the long term. 

Amending the Articles of Association

Your business will likely need to amend its articles of association to reflect the newly issued shares and the rights attached to them. It is not uncommon for a company to completely rewrite its articles following a series A funding. 

Investors on the Board of Directors 

Shareholders do not have much influence on a business’ day-to-day decision-making. Therefore, most series A investors want to appoint at least one director to your company’s board of directors. This appointment may be in an executive capacity, which means they can vote on matters put to the board. Alternatively, the investors may appoint a non-executive director who will not play an active role in the day-to-day administration. However, they will sit at board meetings to advise and report to the investors. 

Key Takeaways 

Series A funding is typically the first institutional equity fundraising a growing company will undertake. Typically, series A funding raises millions of pounds with multiple investors. Businesses eligible for series A funding are typically further along their growth cycle than start-ups and other early-stage companies. Not only will they have a compelling idea with a degree of market viability, but they will also have a track record of market success. Series A investors will typically acquire preference or convertible shares in the company. Additionally, as a condition of the investment, you may need to amend your articles of association. 

If you need help with your business, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us on 0808 196 8584 or visit our membership page.

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