In its earliest stages of development, a startup company typically relies on funding from its founders, along with friends and family willing to contribute to the emerging business venture. As the startup grows, it will usually require additional funding and accordingly seeks larger investments through a seed financing round with angel investors or startup incubator programs – often through convertible note or simple agreement for future equity (SAFE) debt financing arrangements.
As the emerging company continues to scale its business, it will often need substantially more capital than the amount raised during any seed rounds. At this point, it may seek funding from venture capital funds and other institutional investors through a Series A preferred stock financing round.
Generally structured as a preferred stock offering, the company’s Series A equity offering will provide investors with certain preferential rights.
These rights are representative of those commonly extended to preferred stockholders and are not intended to be an exhaustive list of such rights:
1. Liquidation preferences: In the event of a liquidation event, such as a merger or sale of the company, investors with a liquidation preference have the right to receive a return of their capital (or a multiple thereof) before the company distributes any return to holders of common stock.
2. Dividend preferences: Dividends are distributed to preferred stockholders before being issued to holders of common stock.
3. Board seat: In certain cases, preferred stockholders may have the right to a