Various Stages of Start Up Loans:
Seed capital is the funding required to get a new business started. This initial funding, which usually comes from the business owner(s) and perhaps friends and family, supports preliminary activities such as market research, product research and development (R&D) and business plan development.
Angel Investor Funding
An angel investor or angel (also known as a business angel, informal investor, angel founder, private investor, or seed investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors invest online through equity crowd funding or organize themselves into angel groups or angel networks to share research and pool their investment capital, as well as to provide advice to their portfolio companies
Venture Capital Financing
- Venture capital (VC) funding is typically used by companies that are already distributing/selling their product or service, even though they may not be profitable yet.
- If the company is not profitable, the venture capital financing is often used to offset the negative cash flow.
- There can be multiple rounds of VC funding and each is typically given a letter of the alphabet (A followed by B followed by C, etc.)
- The different VC rounds reflect different valuations (e.g. if the company is prospering, the Series B round will value company stock higher than Series A, and then Series C will have a higher stock price than Series B).
- If a company is not prospering, it can still get subsequent Series-rounds of financing, but the valuation will be lower than the previous series: this is known as a “down round.”
- These rounds may also include “strategic investors:” investors who participate in the round and also offer value such as marketing or technology assistance.
- In the Series A, B, C, etc. rounds of financing, money is typically received in exchange for preferred stock (as opposed to the common stock that insiders/seed capital sources (and perhaps even angel investors) receive).
- Mezzanine Financing & Bridge Loans
At this point, companies may be eyeing the following types of opportunities that require additional funds:
- An IPO (initial public offering)
- An Acquisition of a Competitor
- A Management Buyout
- To do so, they can tap into mezzanine financing or “bridge” financing.
Mezzanine financing is often used 6 to 12 months before an IPO and then the IPO’s proceeds are used by the company to pay back the mezzanine financing investor.