Series A

How Series A works

A Series A converts a company from a founders-and-common cap table into a company with an institutional capital structure. Three things happen at once: a price is set, a new class of stock is created, and a set of contractual rights is granted.

The pricing arithmetic, written in words, is that the price per share equals the pre-money valuation divided by the fully diluted share count immediately before the round, and the investors' resulting ownership equals the amount invested divided by the post-money valuation.

Price per share = Pre-money valuation / Fully diluted pre-money shares

Post-money valuation = Pre-money valuation + Amount raised

The NVCA model term sheet defines the price per share as the Original Purchase Price and states that it is determined on the basis of a fully diluted pre-money valuation, and that the pre-money valuation includes an unallocated and uncommitted employee option pool representing a stated percentage of the fully diluted post-money capitalization. That parenthetical is the single most consequential sentence in the economics section, because it means the option pool is funded by the pre-round holders.

The model term sheet also contemplates that the amount raised line may include amounts from the conversion of SAFEs and principal and interest on bridge notes. Anything raised on an instrument before the Series A generally lands on the cap table at this moment.

The rights that arrive with the round

• Liquidation preference. The NVCA model term sheet offers three alternatives: non-participating preferred, which pays a stated multiple of the Original Purchase Price or the as-converted amount if greater; full participating preferred; and participation capped at a stated aggregate multiple.
• Protective provisions. Under the model terms, the company may not, without written consent of a defined group of holders, liquidate, amend the charter adversely, create a senior or pari passu security, pay dividends ahead of the preferred, or create debt above a stated threshold.
• Board composition. The model term sheet contemplates a director designated by the lead investor, a director designated by the remaining investors, a common stockholder representative, the chief executive officer, and one or more mutually acceptable independents.
• Anti-dilution. The model term sheet sets out a broad-based weighted average formula and a list of customary exceptions, including shares issued to employees under a board-approved plan.
• Pro rata rights. Major Investors receive a right, based on as-converted percentage ownership, to participate in subsequent issuances.
• Information rights. Under the model terms, Major Investors receive annual and quarterly financial statements and an operating budget delivered thirty days before fiscal year end.

Worked example

Suppose the same company above is offered a second term sheet: $12M at a $36M pre-money, but with a 15 percent post-money option pool instead of 10 percent. The headline valuation is higher. Compare the two on founder ownership rather than on the headline.

Offer one: $10M at $30M pre-money, 10 percent pool. Post-money is $40M. Investors take 25 percent, pool is 10 percent, founders retain 65 percent. Founder value on paper is 0.65 times $40M, or $26M.

Offer two: $12M at $36M pre-money, 15 percent pool. Post-money is $48M. Investors take $12M divided by $48M, or 25 percent. Pool is 15 percent. Founders retain 100 percent minus 25 percent minus 15 percent, or 60 percent. Founder value on paper is 0.60 times $48M, or $28.8M.

Offer two still wins on paper value, but the gap is $2.8M rather than the $6M the headline valuations suggest, and the founders gave up five more points of the company. Now run the same comparison at a $60M acquisition with a 1x non-participating preference on each.

Offer one: preference is $10M; converting gives 25 percent of $60M, or $15M. Investors convert. Founders receive 0.65 times $60M, or $39M.

Offer two: preference is $12M; converting gives 25 percent of $60M, or $15M. Investors convert. Founders receive 0.60 times $60M, or $36M.

The higher-valuation term sheet is worth less to the founders at this exit. All figures are hypothetical.

Where it shows up

The term sheet is the first document. The NVCA model term sheet is explicit that it is not a commitment to invest and that no legally binding obligations are created until definitive agreements are executed, with one carve-out: the model provides that the no-shop and confidentiality provisions are binding whether or not the financing is consummated. The no-shop clause commits the company and the founders, for a stated number of days, not to solicit or encourage any competing proposal relating to the sale or issuance of capital stock.

The certificate of incorporation carries the economics that survive the closing: the class of Series A Preferred, its liquidation preference, its conversion price, its voting rights, and its protective provisions. The stock purchase agreement carries representations and warranties and, under the model terms, the provision that the company pays the financing's legal and administrative costs, including capped fees of investor counsel.

The investors' rights agreement carries registration rights, information rights, and the pro rata right to participate in future rounds. The voting agreement carries board election mechanics and, where used, the drag-along. The right of first refusal and co-sale agreement governs transfers of founder stock.

After closing, a Series A sold in reliance on Regulation D is reported to the Securities and Exchange Commission on Form D, which names the issuer, the exemption relied upon, the total offering amount, and the amount sold.

Common mistakes

• Negotiating the pre-money number and conceding the option pool. Under the model term sheet convention the pool sits inside the pre-money, so a larger pool is a lower effective price. Ask what hires the pool actually funds over the next twelve to eighteen months.
• Signing the term sheet before reading the no-shop. Once the exclusivity period starts, the company has contractually given up its ability to run a competitive process, and the model documents make that provision binding even though the investment obligation is not.
• Assuming a participating preference is unusual enough that it will not appear. The NVCA model term sheet lists full participation and capped participation as drafting alternatives, which means they are in the standard form and have to be negotiated out, not assumed away.
• Ignoring pay-to-play. The model term sheet includes an optional provision requiring all preferred holders to buy their pro rata share in a subsequent round or convert to common and lose the corresponding rights, including a board seat.
• Treating fully diluted as if it meant outstanding. Options, warrants, and the unallocated pool all count in the denominator that sets price per share.

Related terms

A Series A usually follows a seed-round funded on a safe or a convertible-note, and precedes a series-b-funding round. Its price is set through pre-money-valuation and post-money-valuation, its downside behavior through liquidation-preference and preferred-stock, and its future ownership through anti-dilution, option-pool, dilution, and pro-rata-rights. The negotiation itself happens on a term-sheet and is modelled on a cap-table.

Frequently asked questions

What does Series A mean?

Series A means the first priced round of preferred stock a company sells to institutional investors, named for the series designation given to that class of stock in the certificate of incorporation. There is no legal size threshold and no regulatory definition. The name simply marks the first priced institutional round in a sequence, with later rounds labelled Series B, Series C, and so on.

How is Series A different from a seed round?

Most seed rounds today are funded on convertible instruments such as a post-money SAFE, which defer the pricing decision. A Series A prices the company, creates a class of preferred stock, and installs governance: a board seat, protective provisions, and information rights. Seeds can also be priced, in which case the difference is one of size and governance rather than structure.

What is a typical Series A valuation?

Valuations move with the market cycle and vary widely by sector and geography, so a remembered figure is usually wrong by the time it is repeated. The PitchBook-NVCA Venture Monitor publishes deal size and valuation data by stage each quarter and is the standard source venture investors cite for current numbers.

Do Series A investors always take a board seat?

Typically the lead does. The NVCA model term sheet's board composition clause names a director designated by the lead investor as one of the seats, and its voting rights clause provides that the preferred, voting as a separate class, elects a stated number of preferred directors so long as a threshold number of shares remains outstanding.

What is the option pool shuffle?

It is the practice of sizing a new employee option pool as a percentage of the post-money capitalization while funding it out of the pre-money valuation, which the NVCA model term sheet treats as the drafting convention. The effect is that the pool dilutes existing holders only, so a larger requested pool lowers the effective price per share without changing the headline pre-money number.

Can a company raise a Series A without revenue?

Yes. There is no revenue requirement anywhere in the legal structure; the round is a negotiated sale of preferred stock. Whether investors will price a pre-revenue company depends on the sector, since capital-intensive fields with long development cycles are routinely financed on milestones rather than revenue.