early stage financings

Early stage financings may take the form of a ‘friends and family’ funding round, a seed funding round with finance being provided from business angels (See: Angel Finance) or other high net worth individuals or a first institutional funding round, with funds perhaps coming from a venture capital house. The deal documentation in early stage financings frequently contains some of the hallmarks associated with private equity transactions (See: Private Equity and Fund Formations) (such as drag-along and tag-along rights, liquidation preferences, investor director rights etc) and may envisage the Investors receiving a separate class of shares to the founders with preferential rights (such as the right to receive dividends at a set rate).

In an early stage financing the company will have either developed its product, or a prototype, and will often be seeking funding in order to take the product to market. The investors in this round of funding will focus their attention on the company’s business plan, and how the funds raised are to be utilised by the founders. As a company seeking an early stage financing will often be pre-revenue, investors will seek to impose financial restrictions on the way the company is run post-investment (such as a restriction on capital expenditure, a limit on the salaries paid to the founders etc).

To discuss this topic in more detail, please contact Mark Hodac.