What are the most effective deal structures for Series A financing?

1 Common deal structures

There are two common types of deal structures for Series A financing: equity and convertible securities. Equity deals involve issuing new shares of your startup to investors in exchange for capital, while convertible securities are debt instruments that can be converted into equity at a later date or event. Equity deals are more straightforward and transparent, but they can also result in higher dilution and lower valuation for founders. Convertible securities, on the other hand, can defer valuation and dilution issues, but they can also create uncertainty and complexity for both parties.

2 Equity deal terms

If you opt for an equity deal, you will need to negotiate several key terms with your investors, such as the pre-money valuation, the investment amount, the post-money valuation, the share price, the ownership percentage, and the option pool. The pre-money valuation is the value of your startup before the investment, while the post-money valuation is the value after the investment. The share price is the amount that each share is worth, and the ownership percentage is the stake that each party will have in your startup. The option pool is the amount of shares reserved for future employees and advisors, which is usually deducted from the pre-money valuation.

3 Convertible security terms

If you choose a convertible security deal, you will need to agree on several key terms with your investors, such as the principal amount, the interest rate, the maturity date, the conversion trigger, the conversion discount, the valuation cap, and the pro rata rights. The principal amount is the amount of money that you borrow, while the interest rate is the annual percentage that accrues on the principal. The maturity date is the deadline for repaying the principal and interest, unless the conversion trigger is met. The conversion trigger is the event that causes the debt to convert into equity, such as a qualified financing round or an exit. The conversion discount is the percentage that the share price is reduced for the debt holders, while the valuation cap is the maximum valuation that is used to calculate the share price. The pro rata rights are the rights to maintain or increase the ownership percentage in future rounds.

5 Pros and cons of convertible securities

Convertible securities also have some pros and cons for startups. On the positive side, convertible securities can defer valuation and dilution issues, speed up the fundraising process, and provide more flexibility and optionality for founders. On the negative side, convertible securities can create uncertainty and complexity for both parties, increase your debt burden, and potentially result in higher dilution and lower valuation in the future. You may also face more challenges and conflicts with your investors, who may have different expectations and preferences for the conversion terms.

6 How to choose the best deal structure

There is no one-size-fits-all answer to choosing the best deal structure for Series A financing. It depends on various factors, such as your startup's stage, traction, growth potential, capital needs, risk profile, and market conditions. It also depends on your investors' profile, appetite, reputation, and relationship with you. Ultimately, you need to weigh the trade-offs and benefits of each deal structure, and find the one that best suits your goals and vision for your startup. You also need to consult with your advisors, lawyers, and mentors, and do your due diligence on your investors and their terms.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?