How Does Funding Before IPO Status Happen?

Do you know how companies do funding before IPO status? Keep reading to find out a bit about this.

When the JOBS Act got passed, and especially after the SEC lifted their ban on general solicitation in regards to particular companies raising investments, there have been many news stories about how some businesses have raised specific amounts of money in some kind of funding round. These funding rounds are typically any time that a company raises money. It can be from one investor or multiple investors, and the rounds are often labeled by letters of the alphabet since they happen in sequence, and each funding round is usually a bit different. The kinds of funding rounds might also be contingent upon what kinds of shares are getting sold, be it preferred shares or common stock, as well as how investors are going to eventually get their money back.

It often starts off with what’s known as a seed or angel round of funding that typically happens around an early idea or when a founder has both a prototype and indications of actual demand. In this stage, a company is just looking for resources to start and support business operations before there is sufficient cash flow. It might include family and friends, angel investors who deal with early-stage businesses, and even crowdfunding.

Series A funding is when venture capitalists might start pitching in. Angel investors don’t usually go more than $1 million total, so this is often in a range of $2 up to $10 million. A series A round is when the first shares of stock are usually issued following common stock options given to employees and founders.

A round of series B funding brings venture capitalists back to the table, but private equity investors join the party too. Customer growth and deployment are emphasized here, as investors demand product success, or growth in users and revenue. The company value is higher, and the risk is lower. A series B investment range might be from $10 up to $30 million.

If there is a series C funding round, it’s done to encourage the rapid growth of a company. The core is no longer an idea or dream, but something that is market-worthy. Investments are upwards of $30 million in pursuit of scaling up or even developing new things, getting more market share, or even acquiring other businesses.

An actual IPO or initial public offering is the time that a business starts selling shares of its stock to the public. That might be equity or debt on a public stock exchange, and it means filing paperwork with the SEC. There can be funding rounds of D and after, but typically, too many rounds make investors nervous about the path that a company is on. An IPO brings in many new shareholders, but the company has to finance the IPO, follow stringent rules, offer quarterly financial reports, and assume lack of control over who winds up investing in the company.

Now that you’ve read this, you know a little bit about how companies do funding before IPO status.