Navigating the world of early stage seed and funding rounds can be a complex task for high-growth business owners. While the process may appear straightforward, there are many factors to consider. Start-up and early stage companies raise capital by selling equity to investors on the private markets. These companies typically go through a series of funding rounds, labeled A, B, C, and so on, with each round raising more money than the last. However, each investment comes with its own terms and conditions.
According to Deloitte partner James Toomey, the first stage is the seed stage, which provides early stage growth funding when the business is still small and pre-profit. This stage typically involves raising a few million euros from sources such as angel investors, friends and family, or self-funding. Angel investors have become increasingly important in helping businesses get off the ground. Enterprise Ireland often contributes capital in the seed round, and many companies go through multiple seed stages while trying to gain traction in the market and develop their products.
Tom Early, head of funding and scaling solutions at Enterprise Ireland, explains some of the complications that can arise after the seed stage. In the past, companies would go through A, B, C, and D rounds after the seed round. However, investors now aim to secure the top position in the stack or waterfall, which determines how proceeds are distributed in a sale event. For example, if an investor has preference shares in the A round, they will have certain participation and redemption rights. If the company is sold for €20 million and the investor has a 10% stake, they will receive €1 million off the top and 10% of what remains.
However, things can become more complicated in subsequent funding rounds. Investors may seek preference over others, leading to negotiations and potential disagreements. The term sheet, which outlines the rights of the investor in a sale or when other investors come in, plays a crucial role in determining these rights. The term sheet covers economic aspects, such as share price and percentage of ownership, as well as control mechanisms. Shareholders typically want as much control as possible, but entrepreneurs need to push back on this. Understanding and negotiating term sheets is essential for both investors and founders.
Toomey emphasizes the complexity of the process, noting that there is a hierarchy of shares that needs to be established and that both investors and founders must understand shareholder rights. Smaller businesses may face challenges in accessing advice, but there are state supports available from organizations like Enterprise Ireland.
Toomey also highlights that the funding process is ongoing for scaling businesses. Once a certain scale is reached, companies may consider taking in private-equity investment to de-risk their investments. This could be followed by larger private-equity rounds, an exit to a trade player, or even an IPO. The process continues for quite some time, with companies always focusing on the runway of capital and planning for the next chunk of funding.
Throughout the process, it is crucial for companies to engage with investors effectively. Early advises companies to seek advice from experienced professionals and ensure they have the right support and guidance. Enterprise Ireland’s main goal is to see companies grow and succeed internationally, and they offer assistance to companies in preparing for the funding process.
In conclusion, navigating the world of seed and funding rounds requires careful consideration of terms and conditions, negotiation skills, and understanding of shareholder rights. Seeking advice and support from experienced professionals can greatly benefit companies looking to raise capital and grow internationally.