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For budding entrepreneurs, funding is crucial to turning ideas business into successful enterprises. With seasoned founders, funding rounds help develop new products or enter new markets. Securing external financing can be complex, especially for first-time entrepreneurs. However, with determination and a robust business plan, you can secure the necessary capital. This article explains the funding stages and provides legal insights on what to expect and do throughout the process.
What are Startup Funding Stages?
During each funding stage (also known as a ‘funding round’), you will aim to secure more capital to develop your startup. Each stage will require you to pitch your ideas to potential investors. Understanding the different funding stages can help you to tailor your pitch and approach investors accordingly. The stages include:
- pre-seed funding;
- seed funding; and
- series A to C.
1. Pre-Seed Stage
The pre-seed stage is the earliest funding stage and involves small amounts of finance. The goal during this stage is to turn your business idea into a minimum viable product (MVP). You can skip this stage and seek seed funding if, for example, you do not require external financing to develop your business idea or create a prototype.
If you require pre-seed financing, you might seek funds from parties such as:
- early-stage angel investors;
- a startup accelerator;
- crowd funders; or
- pre-seed venture capital firms.
Alternatively, you can use personal savings or contributions from your friends and family rather than seek funding from other early-stage investors.
At this early stage, you should consider setting up your business’s legal structure (for example, by forming a limited company). Deciding on a formal structure will give your business a solid foundation for future funding rounds.
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2. Seed Funding Stage
Seed funding aims to raise capital to support your startup’s growth. At this stage, your startup will be operational but still relatively small. You will have evidence of a market and an MVP. You might use these funds to fund early product development, recruitment or market research.
Investors may offer seed funding in exchange for equity or convertible debt. You should be aware of the implications of the funding you receive, and, like with pre-seed financing, you should ensure that your investment agreements are clear, legally sound, and protect your interests.
As you develop your concept, you must consider protecting your intellectual property, including trade marks and patents. Registering your intellectual property protects your branding and innovations and better positions your startup to seek further funding.
LegalVision’s Startup Manual is essential reading material for any startup founder looking to launch and grow a successful startup.
3. Series A to C Funding
Series A to C are the later stages of startup funding. Progressing from one stage to another typically leads to obtaining funds from various sources, and new investors may have different objectives and requirements. You must manage your relationships with investors carefully, maintaining clear communication with all stakeholders.
The following table describes the fundamentals of each later round of startup funding, series A to C.
Series | Explanation |
Series A | Series A funding aims to enable you to scale your business, optimising its offering and expanding its market. Your startup will be performing well, and you will have a solid customer base. You might obtain series A funding from venture capital firms, crowdfunds, or angel investors. These later series of funding often require you to provide equity in exchange for funds and will necessitate negotiating a term sheet. A term sheet is a document that outlines significant aspects of the investment deal. |
Series B | Series B funding will enable you to scale your business further, enter new markets, and enhance profitability. By this stage, your startup will be an established business, and you will be looking to invest significant amounts in its infrastructure and recruiting talent. Series B and beyond typically involve substantial investments from venture capitalists and private equity firms. |
Series C | At this stage, you will have a large, established business. It will have a considerable track record of growth and potentially an international customer base. You might use this funding to reorient your business’s goals or expand its offering. |
At every stage, external investors will conduct due diligence. This process will involve thorough scrutiny of your startup and aspects such as its:
- operations;
- business model;
- financial records;
- performance; and
- governance.
The intensity of the due diligence process will increase as you progress through each stage. Therefore, it is best to ensure your documentation and records are in order throughout your startup’s development. Doing so will ensure transparency with potential investors and ease your preparation for each stage.
Key Takeaways
Securing funding is essential for launching and growing a startup. Each funding stage – pre-seed, seed, and series A to C – comes with unique opportunities, challenges, and legal considerations. Understanding these stages helps you manage investor relationships effectively.
Beyond series C, you might proceed to series D or go public via an IPO, raising substantial capital.
Legal compliance is crucial at every stage, including formalising investment agreements, protecting intellectual property, and preparing for due diligence. Seeking legal advice ensures a solid foundation for your startup.
If you would like legal advice about funding your startup and the stages this process involves, 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 today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
What are startup funding stages?
Startup funding stages are phases where you aim to secure capital to develop your startup. These stages include pre-seed, seed, and series A to C funding.
What is due diligence?
Due diligence is a thorough scrutiny process conducted by external investors to evaluate your startup’s operations, business model, financial records, performance, and governance. The intensity of this process increases with each funding stage.
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