What Is A Round Financing?
The term A round financing refers to funding that a startup receives from angel investors or venture capitalists. Startups raise funds in a series of stages. The A round is normally the second stage of financing that a startup receives after the seed round and is also the first major funding round in the venture capital stage. In many cases, investors who provide A round financing typically receive convertible preferred stock.
Key Takeaways
- A round financing is funding that a startup receives from private equity investors or venture capitalists.
- It is normally the second stage of financing after seed capital and the first major funding round in the venture capital stage.
- Money received is generally used to hire new talent and fund research and development.
- A round investors generally put up money in exchange for an equity stake in the company.
How A Round Financing Works
Startups are new, young companies that are in the initial phase of business. In order to get their companies off the ground, the founders need to raise capital. The first round of financing typically comes from people close to the founders including friends, family members, other acquaintances, and even themselves.
This funding is known as seed capital or seed money. Seed capital often amounts to less than $1 million and helps the founders develop a business plan to take to private investors so they can obtain the next rounds of financing. In effect, seed capital is a proof of concept, demonstrating that the business idea is viable and will eventually be profitable.
With the pitch deck in hand, the startup's founders can then approach private investors for more money. Sources for these stages of financing include angel investors and venture capital firms. As mentioned above, the second stage of financing, after the seed round, is called the A round. Some people may refer to it as Series A financing or Series A investment.
Money received during this stage of financing helps the company grow. In most cases, the entity's key personnel use this funding to hire new talent, and fund research and development (R&D) for a product or service. A company that receives A round financing may not be profitable but does generate revenue. This stage is key to the company's future success and helps it attract new investors in other funding rounds in the future.
Investors put up money in the A round stage in exchange for an equity stake in the company. This normally comes in the form of preferred stock—shares that give owners priority over others but don't provide them with voting rights. The scale of the funding may easily exceed $1 million and allow for more expansion of the startup’s team, further investment in the development of the concept to bring it closer to market, and cover expenses of the growing operation.
Securing A round financing may be taken as an early vote of confidence from venture capitalists that the startup’s concept is worth pursuing.
Special Considerations
Investors who provide A round financing may make greater demands of a company's founders than earlier backers. This may entail relinquishing some control of the company as more shares are granted in the financing round, meeting milestones set by the latest investors, or adopting new strategies that evoke more confidence from the new backers.
There may be an expectation of accelerated development after a company secures the A round financing.
There may be an expectation of accelerated development of the startup's concept after the A round financing. The founders may also cite who the backers are in this round in order to attract more business, negotiate with potential partners, recruit talent, and later pitch other venture capitalists for future financing. The startup’s leadership may be called up to show what they were able to accomplish with the funding received from their A round financing.
