Standard startup news stories are full of headlines like, “Acme, Inc. Raises $1M Series Seed Round” and “Unicorn, Inc. Raises $8 Million in Series A Round.” Titles like these make it seem obvious that a $1 million round is of course a Series Seed round, when in fact it could just as easily have been called a Series A round. How are rounds named? Let’s dive into naming conventions for equity financing investment rounds that most people frequently use.
Where to Start
The Series A round is often described as the company’s first round of institutional venture financing. Typically the documents used to do this round are heavier with regard to the number of terms and sheer volume of pages, and are generally more involved than Series Seed documents. Some companies might be ready to do a Series A right out of the gate without ever doing a Series Seed.
But if a company isn’t ready for a Series A—if a company doesn’t want to deal with the robust set of documents that come with it—then it might opt for a Series Seed first. A Series Seed is still a priced round, just like a Series A, but a Series Seed is usually a chopped down version of the Series A financing documents.
Stick with Alphabetical Order
Ultimately, it’s the order, not the amount of money, that determines whether it’s a Series A, Series B, or Series C financing (or beyond). In other words, if you raised $40M in your first financing, it would still be a Series A financing—even though $40M was the average amount of money raised in a Series C financing by SaaS companies in 2017.
It’s worth noting that one single financing round may have more than one series of preferred stock. In your Series A round, you could have Series A-1 and Series A-2 preferred stock, in addition to Series A preferred stock, based on the conversion of a SAFE (or other convertible instrument) from a previous fundraise. This Series A-1 and Series A-2 are often called “shadow preferred” and usually share the same rights/obligations as the Series A, but have a price that matches the original investment that was made via the SAFE.
Technically, Anything Goes
That being said, although the conventions above usually win out for how to name things, at the end of the day it’s all semantics—you can call the stock class whatever you want. You could even call it Series Butterfly if you wanted. There’s nothing that requires you to name stock classes Series A versus Series Seed versus Series Butterfly. But Series A and Series Seed are the industry norms that startups and startup counsel usually follow.
Don’t Go it Alone
Ultimately, you won’t be on your own to decide whether your first equity financing will be a Series Seed or Series A. The lead angel or venture capital investor will likely have a preference. Your lawyer will also have opinions. At the end of the day, your lawyer will be your trusted legal advisor in this exercise, and they will likely have already helped hundreds of companies make the right choice.
And remember, although you could name it Series Butterfly, conventions exist for a reason—they help future investors get a handle on your cap table from the moment they read that you are doing a Series C and not a Series Seed. The clearer things are, the less you’ll waste time explaining them to future investors.