DEFINITION of A Round Financing
“A” round financing is the first major round of business financing by private equity investors or venture capitalists. In private equity investing, an "A" round, or Series A financing, is usually in the form of convertible preferred stock. An "A" round by external investors generally takes place after the founders have used their seed money to provide a "proof of concept" demonstrating that their business concept is viable and will eventually be profitable.
BREAKING DOWN A Round Financing
When investing in companies, private equity investors typically prefer convertible preferred stock to common stock for the various rounds of financing, such as Series A, Series B etc., because of the special features of the security. Convertible preferred stock has features such as dividend accrual and convertibility into common stock, which may become very profitable. Preferred stock will have a higher degree of rights compared to a common shareholder.
How A Round Financing is Used
“A” round financing typically follows after earlier rounds of financing have supported a startup. Such early rounds might include a friends-and-family round, with money contributed by those with personal connections to the founders. Seed rounds from angels and other early investors may provide backing to a greater degree, but even then the funding often amounts to less than $1 million.
With “A” round financing, the scale of the funding may easily exceed $1 million and allow for more expansion of the startup’s team, further investment in the development of the concept to bring it closer to market and to cover expenses of the growing operation. Attaining receiving “A” round financing may be taken as an early vote of confidence from venture capitalists that the startup’s concept is worth pursuing.
With this level of financing, investors may make greater demands of the founders than earlier backers. This can include relinquishing some control of the company as more shares are granted in the financing round, meeting milestones set by the latest investors, or adopting new strategies that evoke more confidence from the new backers. There may be an expectation of accelerated development of the startup's concept after the “A” round financing is received. The founders may also cite who the backers are in this round in order to attract more business, negotiate with potential partners, recruit talent, and later to pitch other venture capitalists for future financing. The startup’s leadership may be called up to show what they were able to accomplish with the funding received from their “A” round financing.