Buzz Words

Joseph W. Bartlett, Founder of VC

One way the venture capital fraternity maintains its hold on the sector is, like any other guild, the use of specialized language or jargon or "buzz words". Someone adept in the language is, by definition, a true player in the VC arena should be treated with due respect accordingly.

Tthe following exposition focuses on the various rounds of financing an emerging growth company is likely to undergo in its trip from the embryo to the IPO. These rounds are described variously as the "founder's round," the "seed round," the "Rolodex round," the "Series A Round" (also known as the "first professional" or "first venture round") and the later "Series B", "C," "D," etc., rounds, which are also sometimes described as "mezzanine" or "bridge rounds." Finally, if things do not go according to plan, the Series B, C, etc., could be a "down round," sometimes known as the "salvage round."

The best way to describe these various pieces of nomenclature is to separate them by stages, starting with the garage or laboratory stage, when the enterprise is just getting underway and some form of minimal or notional financing is required.

It is important to note that there are no hard and fast rules but there are parameters. These parameters equal characteristics generally true of each round that the veteran players simply assume, until someone tells them differently. The most common parameters of each round are as follows:

Financing Round



Founders Round

The genesis of a company, where the founders begin to formulate the concept for a viable business.

  • Common stock (no vesting);
  • No side agreements (i.e. stockholders, stock purchase, registration rights, etc.);
  • Inside board;
  • Informal documentation, if any. As a consequence, important items of intellectual property often remain to be assigned to the corporation;
  • Minimum capital... the founder's credit card;
  • Valuation irrelevant... the founders, if more than one, split up the equity between them in accordance with their estimate of past and future contributions;
  • No business plans (vs. some language masquerading as a business plan);
  • No CFO, no accountant
  • No formal financial systems.
Friends and Family Round

Company is in need of financing to cover start-up expenses.

  • Same, generally, as the Founders Round except that some cash is being contributed, which implies a formal valuation.

Angel Round

High net worth individuals invest cash in exchange for equity in the company.

  • Common stock
  • Board seat (un-guaranteed) for one or more angels (no formal agreement, however);
  • Advisory board;
  • $500,000 (+/-) in capital subscribed; pre-money valuation is
  • Employment contract for CEO;
  • Some formal lawyering;
  • On-line accounting system (Quick Books, Microsoft Money etc.)
  • Written business plan and maybe a placement memorandum of sorts, to which no one pays much attention... the investor presentation is largely oral.

Series A Round

The first professional round, with money coming from an organized investment vehicle.

It is called Series "A" for the type of stock most commonly issued: Series A preferred.

  • Convertible or participating preferred;
  • Series of agreements favoring the Series A (board seat guaranteed, anti-dilution protection, vetoes over important actions, pre-emptive rights, control of employee option plan, registration rights, etc.)
  • Up to $5,000,000 in capital; pre-money valuation is north of $10,000,000 (+/-);
  • Formal lawyering;
  • Big Five accounting firm;
  • IP audit and clean up (i.e., patents and copyright assigned to the Company);
  • NDAs and non-competes;
  • Formal business plan and budgets;
  • Presentations at trade shows and conferences.

Series B, C, D, etc. round

Subsequent financings from organized venture funds.

  • Similar to Series A round.
  • Terms vary depending on investors, market climate, etc.

Down Round

A round of funding that is sought at a lower valuation than previous rounds.

A lower valuation funding can have serious consequences for the original investors.

  • Highly dilutive to non participating investors;
  • The investors are firmly in the majority and control the board;
  • Reverse vesting imposed on the founders' shares;
  • Participating preferred or convertible debt, redeemable at the holder's option at some multiple of the purchase price;
  • Warrant coverage up to 100% (doubling the dilution);
  • Free stock for existing VCs due to anti dilution protection.

Mezzanine Round

Refers to the stage of venture financing for a company immediately prior to its IPO.

  • Mezzanine level financing can take the structure of preferred stock, convertible bonds or subordinated debt.
  • Investors entering in this round have lower risk of loss than those investors who have invested in an earlier round.


The Initial Public Offering

  • Equity in the company is offered to the public through an underwriter (investment bank). Proceeds of the sale, less 7% investment banking fee, go to the company.
  • Stock is tradable at a stock exchange (ex: NYSE) or Over The Counter (OTC) (ex: Nasdaq)
  • Company must file and report pursuant to SEC rules and regulations
  • Stock price determined by the markets.