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Funding rounds; what you need, when and why

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The initial funding rounds of a start-up are often referred to as seed funding. At this stage, investors invest in the founder, the idea, and the company’s potential. That money is usually used for product development and market research. Unfortunately, many start-ups don’t make it to the next round of funding.


If your start-up develops past the seed funding stage, you might be ready for Series A financing. Series A is an equity-based funding round.


Giving your equity funding rounds names such as Series A or Series B is common practice. It is important to keep your rounds named in sequence to organise each set of investors in the order they invested in your company. Each series may have different rights.


Document icon  Contents

  1. What is an equity funding round?
  2. What is a Series A funding round?
  3. What happens during a Series A funding round?
  4. What document do you need for a Series A funding round


What is an equity funding round?

Equity funding (sometimes referred to as equity financing) is precisely what the name says – in return for providing funds to a start-up, the investor receives equity (i.e. in exchange for the invested money, the investor gets a percentage ownership in your start-up. The percentage is based on shares. How many shares are based on the invested amount and the start-up’s valuation.


Offering equity has its benefits to the founders as well, especially in the early stages – no obligation to repay the funds like you would with a loan and in any event, debt is pretty hard to get for a new startup. However, investors expect a return on investment. They take a risk by investing in your start-up, but they want rewards when the company is sold and probably dividends along the way. If investors are now part of your start-up; some would want a say in appointing board members and how you run your company.


An equity funding round is more formal than raising funds through convertibles. It also involves a lot more time and cost. Key differences include:


  • Shares, typically preferred shares, are issued upon receipt of investment.
  • You must agree on a valuation of the start-up at the time of investment.
  • Investors will immediately receive rights such as board seat, share transfer and issuance rights and reserved matters.


What is a Series A funding round?

Series A is the subsequent funding round after your initial seed funding round. You might need more money to continue developing the business and to employ more people. You might proceed to Series B, C and so on if you need to raise more money.


To be successful in your Series A funding, you should consider a few crucial issues.


  • Is your business ready for Series A, i.e., do you have what Series A investors are looking for? Consider revenue, business model, market fit, customer acquisition, and your management team.
  • Timing – is it the right time in the market? How long will Series A funding take?
  • Do you want to target specific investors? What is the best way to approach them?
  • Your pitch must be compelling – do your market research and get input from other investors.
  • Your business valuation must be realistic and defensible.


What happens during a Series A funding round?

A Series A funding round is more formal than initial seed funding through convertibles. The company needs a formal valuation, and investors will do due diligence before deciding whether to invest in your start-up. Founders are often expected to produce one or more of a business plan, budget, use of funds and financial forecasts/models. Investors will want to see the progress since any intial seed funding and evaluate how well the company is managed. They would be interested in potential future profits. Ultimately, investors are interested in liquidity.


Typically, Series A funding involves a lot more money, so investors want substance before committing to investing.


What document do you need for a Series A funding round?

Business Plan

Your business plan is your marketing tool to get investors to invest in your business. Your business plan must convince investors that this is a great business opportunity. It must introduce your team and business strategy and show the potential for return on investment. Your business plan must include at least the following:


  • Business details

– Name, address, structure, contact details


  • Business concept

– What are you developing?

– Target market

– What need are you addressing?

– Progress to date

– Strategy to achieve goals

– How do you generate revenue?


  • History

– When did you begin?

– Previous investors


  • Market/customer analysis

– Why would people pay for your product/services?

– Size of your market

– Address potential challenges

– Customer demographics


  • Competitors

– Who is the competition? And why?

– Do you have an edge?


  • Operations

– Management team

– Process to reach customers

– Business targets


  •  Finances

– Set out a complete finance plan

– Projections

– Detail use of funds

– When and how can investors “cash in”

– Exit plan


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A calculator for exploring the impact of SAFEs on current ownership.



Term Sheet

A term sheet sets out the key terms of the investment in simplified language. It is also sometimes referred to as a letter of intent (LOI). It includes the business and finance terms and could include terms regarding exclusivity, costs, confidentiality and dispute resolution. A term sheet is used to negotiate the key terms of the investment deal. Generally, the term sheet is not legally binding.


Essentially, it is the basis on which the final investment agreement will be based.


It will include the following:

  • Company valuation
  • Investment amounts
  • Types of shares to be issued
  • Share options
  • Investor rights, e.g., board seats, reserved matters, liquidation preference and anti-dilution protection


Once you and your investors agree on final terms, you will proceed to finalise legally binding documents, such as the subscription agreement, the shareholders’ agreement, and article of association.


Subscription Agreement

A subscription agreement is an agreement between the company and the new shareholder (subscriber) defining the terms of the investment in the start-up. The focus is on the purchase price of the shares. It is commonly used in Series A rounds.


Essentially, it sets out the agreed number of shares, the price per share the company is offering, and the investor’s agreement to buy those shares at the stipulated price.


The subscription agreement should specify the following:

  • The company details
  • Investor details
  • The number of shares the start-up is issuing
  • Conditions, such as vesting schedules
  • Class of shares
  • Price per share
  • When will shares be issued
  • Warranties


Shareholders Agreements

A shareholders agreement sets out the shareholders’ rights and obligations. It is intended to protect shareholders’ rights. The shareholders’ agreement also sets out how the company should be operated. Investors in a start-up want to have a say in the governance and management of the start-up.


Shareholders’ agreements should include the following:


  • Reserved matter rights – effectively investor vetoes over certain key decisions of the company
  • Drag-along rights
  • Safeguards for minority shareholders’ rights, e.g., tag-along rights
  • Restrictions on the transfer of shares, e.g., right of first refusal, “lock-up” clauses
  • Pre-emptive rights to maintain ownership percentage, e.g., anti-dilution protection
  • Exit and liquidation event details, e.g., sale of the company, liquidation preference
  • Non-compete clauses
  • Size and composition of the board
  • Frequency of meetings and quorum
  • Despite resolution methods


Articles of Association

Articles of association is an agreement between the company’s shareholders. It is a constitutional document of the company it sets out the administrative structure and corporate governance of the company. This overlaps somewhat with a shareholders’ agreement, but the articles are a statutory document required by law and filed with the relevant company authority (such as a registrar or companies house). It is easier to enforce rights in the articles before the authorities compared to the shareholders’ agreement (which is a private contract requiring court or arbitration proceedings which then must be enforced separately and often across jurisdictions). On the other hand, shareholders; agreement scan include more sophisticated and lengthier provisions and are kept confidential. Articles of a startup will typically be ‘aligned” with the shareholders agreement (i.e. removing any direct conflicts or inconsistencies) but would not mirror exactly the shareholders’ agreement.


Some refer to the articles of association as the company’s “user manual” – how it is managed. It sets out the way the company is run on a daily basis and defines the company’s purpose. The articles of association bind all shareholders. Directors must comply with the articles of association to fulfil their obligations towards the shareholders. Articles of association may have different names in different jurisdictions (e.g., bylaws, charter, memorandum of association).



Raising equity is an essential part of growing and developing your startup. It is also a time-consuming and costly process. It is critical that you fully understand the process and the legal requirements. You should obtain legal advice on the documents required for each round of equity funding and the requirements for each.


Our platform helps you get to yes quicker, with its automated cap table and unlimited doc generation. To learn more about Clara’s fundraising tools, click here.


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