Corporate & Securities Law

Preferred Stock: Where ?F? in a Class Can Equal Success

By Ryan Roberts

If you pay any attention to TechCrunch or Venturebeat, you’ll see stories titled “Startup Raises $X Million in Y-round Financing.” When the “Y” in story is a large number, do not assume that the startup company is tanking. Instead, the startup could be gaining momentum and approaching positive cash flow…but just needs one more round to get over the top.

Rounds of financing are tied to classes of preferred stock. You can name the preferred stock rounds whatever you like, but the norm is to follow the alphabet. For example:

1st round = Series A
2nd round = Series B
3rd round = Series C
26th round = Series Z

If a startup raises its rounds of financing at increasingly higher company valuations, each new class of preferred stock will represent an increase in price. This means that value is being created and progress is being realized at the startup. Thus, a startup may be going through a sixth-round financing (or Series F) simply because the startup needs more time or money than it anticipated.

Full post as published by The Startup Lawyer on November 28, 2008 (boomark / email).