How does a company raise money?
This lesson covers concepts such as equity, different types of investors, investment rounds, etc.
What is equity?
In simple terms equity is ownership.
A more complicated definition is ownership value after subtracting all liabilities and debt. For example, if you own a house worth $100,000 with mortgage liabilities of $25,000, your equity would be $75,000.
In an investor sense, equity can be cash, monetary value, or a percentage of the company.
Different types of investors
When a company first starts, they need capital to build their product, rent an office, etc. This is where investors come in and fund their business in exchange for equity.
Three main types of investors are Angel investors, Venture capitalists, and Private equity firms. Angel investors are early round investors that invest in the very beginning stages of a startup/company. Friends and family can also be included as an angel investor. Venture capitalist firms are companies that provide funding in exchange for equity in a company. Private equity firms look to acquire large stakes of a company.
Here is a general roadmap of investor rounds:
- Pre-seed: Funded by friends, family, angel investors
- Seed round: More angel investors, early stage venture capitalists (VCs)
- Series A: Expand to VC firms
- Series B: More VC firms + growth stage investors
- Series C: Even more funding from VC firms
- Either more series rounds or IPO (Initial public offering)