A Brief Guide to the Stages of Venture Capital Financing for New York and New Jersey Business Owners

By Urbanrenewal (Own work) [Public domain], via Wikimedia CommonsSmall business owners and entrepreneurs in New Jersey and New York have a wide range of options for financing their businesses. Venture capital (VC) financing is a rather well-known method of financing a startup business. While it accounts for only a small percentage of total business financing, venture capital has gained prominence in recent years because of its role in the technology sector in California’s Silicon Valley region and other areas of the country. Even if your company is not able to catch the interest of any VC firms, the VC process still offers useful ideas for business financing in general.

What is venture capital?

The term “venture capital” generally refers to private equity invested in startup businesses that demonstrate a high potential for growth and a return on investment. A VC firm manages a VC fund, which provides the capital to invest in promising business ventures.

Stage 1: Seed Financing

All businesses, to some extent, begin as an idea. In some cases, an individual or new business venture may be able to convince an angel investor or VC firm that their idea, which could involve a product or service, has a high potential for growth and is a worthwhile investment. Since an investment at such an early stage carries a high degree of risk, VC firms often require a “feasibility study” showing that the idea is both technologically and economically feasible.

Stage 2: Startup, or “Series A” Financing

If a venture has developed its product or service and can demonstrate that it is ready to launch business operations, it may be able to obtain startup financing. The VC firm will receive equity in the company in the form of shares, and it will typically receive one or more seats on the board of directors. This gives it a voice in the operation and strategy of the company.

This stage is often known as the “Series A” round of financing. This term has no specific statutory or regulatory significance. Since this is often the first time the company has granted ownership interests to outside investors—meaning investors other than the founders and their friends and family members—it is a useful shorthand for describing these interests. Series A investors may receive preferred stock with provisions that protect them against dilution by future issuances of stock.

Stage 3: Second-Stage, or “Series B” Financing

Once the business venture demonstrates ongoing viability and growth, it may be able to obtain additional VC financing. This round of financing may be what enables the company to enter the marketplace and face its competitors for the first time. Ownership interests granted to investors at this stage may be called “Series B” stock.

Stage 4: Additional Financing

Depending on the business venture’s goals, it may seek additional rounds of VC financing. These could be described as “Series C” and onward.

A business venture may also seek a loan from a VC firm in order to finance an expansion, or to provide capital to help prepare for an acquisition or a public offering of stock. This is commonly known as bridge financing.

Stage 5: Acquisition or Initial Public Offering

Since the goal of a VC firm is to obtain a return on its investment, many VC-financed companies have a “payday” in mind. This could involve the acquisition of the company by a larger company, such as the acquisition of smaller tech startups by companies like Google or Facebook. It might also involve an initial public offering (IPO), in which the company offers its stock for sale on public securities exchanges.

Business transactions attorney Samuel C. Berger offers a variety of fixed-fee legal-service packages for New York and New Jersey business owners and entrepreneurs. To schedule a confidential consultation to see how we can help you and your business, contact us today online or at (212) 380-8117.

More Blog Posts:

Types of Funding for New York and New Jersey Startups and Small Businesses, New York & New Jersey Business Lawyer Blog, July 2, 2015

Initial Public Offerings by Small Businesses Are Surging, Possibly Due to JOBS Act, New York & New Jersey Business Lawyer Blog, November 6, 2014

New Jersey Assembly Passes Bill Creating Small Business Loan Program, New York & New Jersey Business Lawyer Blog, December 13, 2011

Photo credit: By Urbanrenewal (Own work) [Public domain], via Wikimedia Commons.