For small and medium-sized enterprises, private enterprises, and start-up enterprises, financing has always been an important matter in the development of the enterprise and must be paid attention to at all times. So what about equity financing? What about the A, B, C, and D roun

For small and medium-sized enterprises, private enterprises, and start-up enterprises, financing has always been an important matter in the development of the enterprise, and it must be paid attention to at all times.

So what about equity financing? What about the A, B, C, and D rounds of equity financing?

We often hear that companies have received financing, including seed rounds, angel rounds, Series A, Series B... What do these mean? Don't worry, you will understand everything after reading this article.

Corporate financing, to put it bluntly, is how companies obtain positive cash flow . Because with money, you can be a wealthy person and "buy, buy, buy", buying equipment, land, resources, talents, users and even competitors.

As we all know, debt financing (also called bond financing) refers to borrowing money from banks or non-bank financial institutions, or issuing bonds, etc. to bring in funds. Debt financing requires the payment of principal and interest, which can bring leverage income , but it will increase the company's debt ratio;

Equity financing does not require repayment of principal, but there is no leverage income brought by debt financing, and the introduction of new shareholders may result in the loss of part of the company's control.

Therefore, when debt financing does not provide money, many companies choose equity financing. Furthermore, financing in the private equity field also looks at companies with unicorn potential in a different light and pursues them relentlessly.

There are mainly three types of investors for equity financing of enterprises: angel investors (Angel), VC (Venture Capital, venture capital) and PE (Private Equity, private equity funds ). If there is an opportunity to go public in the future, we will contact them. Go to Investment Banking (Investment Banking, IB, investment bank)

Generally speaking, financing rounds are divided into seed rounds, angel rounds, A rounds, B rounds, C rounds, D rounds, E rounds, etc., but depending on the actual situation, some The project will also carry out PreA round, A+ round, and C+ round financing.

1. Seed round - team, idea, product;

Financiers in the seed stage are usually in an initial state with only an idea and a team, but no specific product. Investors are usually friends and family, or entrepreneurs pay out of their own pockets. Of course, there are also many seed-stage investors.

If your financing project has a team and an idea, and it will enter final implementation immediately, then you can start seed round financing. In the seed round, the risk of project failure is extremely high. When it comes to the angel round, it is required to run an MVP (minimum viable product). Seed rounds generally range from RMB 500,000 to RMB 2 million, making it difficult for institutions to get involved. Generally, individual angels and incubator foundations focus on this area.

2. Angel wheel - the product is visible and the business model is clear;

Projects in the angel stage usually have an initial team, a mature product is online, and a preliminary business plan for the product; there is seed data or a growth rate that can show the data growth trend. , retention, repurchase and other proofs.

has also accumulated some core users, and its business model is still in the stage of verification. Then it is most appropriate to find angel investors or institutions and start angel round financing. The financing amount is about 3 million to 5 million.

3.Pre A round - has a certain scale and is at the forefront of the market;

Pre A round is a mezzanine round. Financiers can decide whether to finance based on the maturity of their own projects. If the overall data of the project in the early stage has reached a certain scale but has not yet occupied the forefront of the market, then PreA round financing can be carried out.

At the same time, pre-A round or A+ round financing means that you have not begun to take shape, but the money is burned out, so first come to the pre-A round to help; or after the A round is completed, there will be big names I thought you were good and wanted to invest in your business, but you had no new business progress and your valuation had basically remained unchanged, so we decided to invest in an A+ round.

4. Round A - a business model supported by products and data, leading position in the industry, beginning to take shape;

generally A is the first round, and it is very important for companies to raise funds in the first round. For projects that have mature products, complete and detailed business and profit models, and have a certain status and reputation in the industry, even if they may be losing money at this stage, you can choose professional venture capital institution for Series A financing.

At this stage, it is no longer possible for financiers to rely solely on ideas to raise funds. Instead, they must have users, including daily active users, monthly active users, their own business models, and mature products that can compete with competing products. Have a certain market position.

5.B round - proven business model, new business and new field expansion, relatively strong competitive advantage;

After a round of burning money, the project has made great progress, and the business model and profit model have been improved It is well verified that some have already started to make profits.

At this time, financiers may need financial support to launch new businesses and expand into new areas, so it is appropriate to persuade the previous round of venture capital institutions to follow the investment, or to find new venture capital institutions to join, or to attract private equity investment institutions (PE ) to join and start a new round of Series B financing.

6.C round - proven business model, new business and new field expansion;

If the financier’s project is very mature at this time and can basically sit in the top three in the industry and is preparing for listing, then It is suitable for Series C financing.

At this time, in addition to further expanding new businesses, it can also lay a solid foundation for completing the business closed loop and preparing for listing.

7. D round, E round, F round financing - to put it simply, it is actually an upgraded version of C round.

C and D rounds generally use money for continuous expansion, including another competitor burning each other’s money. For the same model in the same segment, it is generally impossible for a third party to obtain financing after Series C, with a maximum of two. In addition, some companies that have achieved better income or even break even after Series B do not necessarily need new financing from Series C and beyond. Series C and D rounds are generally in the hundreds of millions of RMB.

Round E, Round F, Round G... The difference in each round is to compare with who has more money. Generally, only giant projects that need to continue to burn money require rounds D and later, and most of them are financial investment giants.

Generally speaking, angel investors mainly invest before the A round; VC mainly invests in the ABCD round, which generally requires more than 5 times of growth; and PE mainly invests in mature companies before listing, waiting to make money from the stock market.

It is difficult to say at which stage of enterprise development it was introduced, whether it was an angel, a VC or a PE. Many companies only introduce it before going public. At that time, the company is already very mature, and they only introduce it once. Some companies introduce it more, or they introduce it in the early stage.

The time sequence of financing rounds also reflects the development of the company from the side, and what stage it is at. Looking at the amount of each financing can also tell how the company is developing. The ABCD round is just a name.

Of course, in market competition, the company that succeeds in financing first will gain an absolute advantage over its competitors (talent war, price war, market share), which is also the biggest purpose of financing.

Conclusion: The major premise of corporate financing: understand what "financing" is, what the process is, what you should do at each stage, and what you should pay attention to when financing.In short, financing cannot be for the sake of financing. Financing must serve the development of healthy enterprises!

10 legal issues that must be paid attention to in corporate equity financing:

Whether a company needs to carry out equity financing depends on the company's own development situation, the company's industry prospects, its own team, financial status, standardization and other factors. Is it worth doing equity financing? One thing is that it is a good time for corporate equity financing when a company is on the rise, and it is not a good time to think of financing when it is in trouble.

Corporate valuation is a key term for introducing investment, and it is also this issue that causes most negotiations to break down. If an enterprise only needs financial support for its development, some domestic enterprises adopt the bidding model when financing, and the one with the highest price will get it. Now it seems that most of them will not end well. Most of the institutions that are willing to pay high prices have little resources, so they just bet through . and other clauses are used to restrict enterprises. Once they encounter performance decline and other unfavorable conditions, enterprises will have to pay the price for introducing institutions at high prices. If institutions are initially introduced as strategic investments, the valuation will be based on a reasonable and win-win idea, and the introduced institutions and enterprises will The chances of sharing joys and sorrows are greatly increased.

Before the capital party decides to enter a company, it is most important to outline a core corporate competitiveness based on the business strategy provided by the management. This core competitiveness and the commercial operation and realization of this core competitiveness It determines whether the enterprise can enhance its value in the future. After outlining the core competitiveness, Private Equity will work with the company's board of directors and management to formulate an effective and feasible implementation plan. In fact, each company will have its own business strategy development plan.

However, capital parties can often provide some suggestions to the company from different perspectives. The most important ones are the setting of company management system and equity structure. The rationality of the equity structure determines the rationality of future benefit distribution. If you cannot see that the legal protection provided by an equity structure will obtain sufficient returns in the future, you may withdraw or go back to a structure that you can control.

In addition to the above two key points, equity financing should also pay attention to the following ten aspects (taking PE as an example):

01. Private equity financing has entered the stage

There are about 3,000 Chinese companies listed at home and abroad in total, but There are nearly 10 million companies in China, and the average lifespan of private companies is only 2.9 years. The probability of a company going from startup to listing is very small. There is also a "Valley of Death" law in business management. Most entrepreneurial projects die within the first three years, and companies slowly climb out of the Valley of Death after three years after their establishment. Therefore, private equity investment funds should be very strict in selecting projects.

The distinction between venture capital/venture capital companies and PE funds has become increasingly blurred. Except for a few funds that do specialize in early-stage projects with an investment amount of no more than 10 million yuan, the single threshold for private equity transactions that most funds are interested in is Competition among private equity trading funds with an amount of more than RMB 20 million and more than US$10 million will be fierce. Therefore, if a company only needs financing at the level of one million yuan and does not need to seek equity investment from funds, it would be better to seek personal loans, personal angel investments , bank loans, high-interest loans, etc.

Service-oriented enterprise is more suitable for the first round of equity financing when it has grown to about 100 people, has an annual income of more than 10 million yuan, and has a meager profit or is close to a breakeven state; after the annual after-tax net profit of a manufacturing enterprise exceeds 5 million yuan, it is more suitable Arrange first round equity financing. These nodes are related to the valuation of the company during financing. If the company has not grown to this stage, the valuation of the company will not rise during private financing, and the foundation will lose interest in investment because the transaction size is too small.

Of course, not all companies are willing to do private equity at this stage, but the benefits of private equity are obvious: most companies rely on self-accumulation of profits to expand their business very slowly, and for asset-light service companies, due to Lack of collateral assets makes it difficult to obtain bank loans. After companies absorb private equity investment, their operating capabilities often experience a qualitative leap. Many companies have gone public as a result, and entrepreneurs' wealth has been magnified from net assets to stock market value (the price-to-earnings ratio of small and medium-sized private enterprises in China's stock market is as high as more than 40 times, and the price-to-book ratio is between 5 and 10 times). The wealth appreciation effect is amazing. As long as there is an opportunity, most private entrepreneurs in China are still willing to accept private equity investment.

02. Contact between private equity investment funds and enterprises

In China, most private equity transaction negotiations are initiated by the recommendation of private equity investment or fund friends and the promotion of intermediaries.

The cyclical characteristics of China's economy are very obvious. Under different economic cycles, the phenomenon of companies seeking funds and funds chasing companies always cycle over and over again. Generally speaking, during the economic boom stage, a good company is often pursued by multiple funds at the same time, especially in the fields of new energy, medicine, environmental protection, education, chain stores, etc. As long as the company is willing to do private equity and the quality of the company is not too bad, the funds will often Hear the wind and move.

Under China's current national conditions, professional investment consultants and practicing lawyers play an important role in the contact between enterprises and private equity investment funds. Private equity funds attach great importance to the recommendations and opinions of investment consultants and lawyers. For companies recommended by investment consultants and lawyers, the fund will generally at least visit them for inspection. This is because investment consultants and lawyers often have a better understanding of a company's operating characteristics and legal risks, and private equity funds often seek relevant opinions when judging a company's economic prospects.

03. Reasons for the breakdown of private equity financing negotiations

In China, the success rate of private equity transaction negotiations is not high. With the company and the intended investment fund signing a confidentiality agreement as the starting point for the two parties to start contact, less than 20% of the transaction can be finally negotiated. Of course, there are many reasons for the breakdown of negotiations, and the more common ones are as follows:

First, entrepreneurs are too emotional, and their judgment on the intrinsic valuation of the enterprise is not objective enough, and is too high the fair market price . Entrepreneurs are often entrepreneurs who have deep feelings for their companies. They like to read the biographies of famous people such as Jack Ma and others. They always feel that their companies are also very great. At the same time, there are now funds coming to discuss private equity, which is further verified. The power of the company, therefore, will not allow others to share the equity of the company without a ridiculously high price. However, the investment of funds follows strict value rules. Especially after the baptism of the financial crisis, the valuation of enterprises is not as impetuous as entrepreneurs. If the gap between the two parties in corporate value judgment is too large, it will be difficult to negotiate a deal.

Second, the industry has policy risks, the business relies on a few specific connections, the technology is too advanced, or the business model is too complex. Some companies rely on the government and monopoly state-owned enterprises to set up policy barriers to gain business; some companies have particularly advanced technologies, such as the recently very popular thin film battery photovoltaic integrated project, biomass energy or amino acid biomedicine. Project; Some companies' business models require several twists and turns before they can figure out what business to do, and they are all kinds of strange. Great businesses are always simple. Funds tend to choose simple businesses that stand out from market competition. It doesn’t matter if the industry is a bit more traditional. Some people invest in restaurants, hotels, English training, and even health massages, but people stay away from companies that are too difficult to understand and too mysterious.

Third, the timing of corporate financing is wrong. The companies are too short of money and scare the funds. The fund will always be the icing on the cake, but will not provide help when the time is right.Many domestic private enterprises never thought of doing private equity when life was good, and they only thought of private equity when they couldn't get out of the way. Funds are not fools. The results of due diligence on whether a company's cash flow is in embarrassment will come out immediately. Corporate funds with too ugly financial reports often do not have the courage to invest.

Fourth, after the company takes the money, it has to enter a new industry or new field. Some entrepreneurs have been very successful in their main business, but suddenly they want to enter a new field that they have never played before, so they use private equity to find money to play these projects. This kind of gameplay is not easy to succeed. The fund hopes that entrepreneurs will be focused, and the fund is afraid of entrepreneurs who are too active. The first thing private equity funds examine is the business owner.

04. Signing a confidentiality agreement is just the starting point

Generally speaking, after finding the right way, it is not difficult for companies to contact funds for inspection. After one or two rounds, the fund often requires the company to sign a confidentiality agreement and provide further financial data.

The signing of the confidentiality agreement only shows that the fund is willing to spend time to seriously examine this project. It is the first step in the long march of private equity, which is not something worth celebrating in itself. At this stage, unless the entrepreneur himself cannot judge what materials should be submitted and asks a professional financing consultant to help judge, the company will only provide general materials, which will make it difficult to proceed.

In most cases, the signed confidentiality agreement is mainly based on the version of the fund. In terms of grasping the benefits of the confidentiality agreement, the following points are generally adhered to:

First, the confidentiality period of confidential materials is generally at least 3 years;

Second, All corporate documents submitted by an enterprise marked with the word "trade secret" should be included in the scope of confidentiality, but confidential information does not include information in the public domain;

Third, the scope of confidential personnel is often extended to the fund's consultants (including the lawyers hired by it) ), employees and affiliates.

05. Should the company hire a full-time financing financial consultant?

There are both positive and negative reviews of corporate financing financial consultants (FA). FA is not a frivolous person. The service commission for companies to hire financing consultants is generally 3 to 5% of the private equity transaction amount. Some financing consultants are more interested in the company's equity.

The most critical role of a financing consultant is valuation. However, most domestic financing consultants feel more like "matchmaking agencies" and are less professional. In particular, the financial forecasts made by financing consultants are often scorned by funds. Nevertheless, if the company feels that it is relatively new to the capital market, hiring a more famous financing consultant will indeed help improve the success rate of private placement, and the financing commission paid by the company is still worthwhile.

06, About paying commissions

When companies are looking forward to private equity success, private equity investors often imply or express that they want to pay commissions to people who have contributed to the project. Most companies are confused.

Private equity transactions are like marriage. It takes fate to get to know each other at the beginning, but to be able to hold hands in the end requires overcoming numerous difficulties and dangers. Since the industry practice is that funds as investors generally do not pay any commissions, if the transaction does not hire a financial advisor, the company will pay a 2-3% thank you remuneration to the person or company who made a greater contribution to the transaction after the transaction is successful. It is reasonable, but you should pay attention to the following two points:

First, you must absolutely avoid paying the staff of the counterparty-the investment manager of the fund. This will be characterized as "commercial bribery" and is a high-voltage line that cannot be touched;

Third Second, it is recommended to write commission terms into the investment agreement or at least let investors know about it. Commission is a large amount of money, and the wool comes from the sheep. If the company pays this amount without the investor's consent, it theoretically damages the interests of the investors.

07, About financing consultants

The professionalism and complexity of private equity transactions exceed the knowledge and capabilities of more than 95% of private entrepreneurs. If an entrepreneur negotiates financing matters with private equity investment funds without hiring a financing consultant, unless the entrepreneur is an investment banker, it would be extremely irresponsible to the company and all shareholders.

Generally speaking, companies should ask financing and legal advisors to intervene before and after signing a confidentiality agreement. A common approach is to turn to the company's perennial financing consultant for help. However, there are too few qualified private equity transaction financing consultants in China. The possibility that your own perennial financing consultant happens to be able to do private equity transactions is very low. Therefore, it is recommended to hire a professional and senior financing consultant in this area. Provide guidance. Private equity transactions are financial businesses. Therefore, powerful companies should choose private equity consultants from among the top ten law firms leading in financial legal services in China.

08. About due diligence

Due diligence is a process in which a company discloses its financial background to a fund. Standardized foundations do three types of due diligence:

1. Industry/technical due diligence: Find some other companies operating in the same industry and ask about the general situation; If the upstream and downstream of the company, and even its competitive partners, agree, then the fund will naturally have investment confidence; technical due diligence is more common in investments in new materials, new energy, and biomedical high-tech industries.

2, Financial due diligence : Companies are required to provide detailed financial statements, and sometimes accountants are dispatched to audit the authenticity of the financial data.

3. Legal due diligence: Fund lawyers issue investigation checklists to enterprises, requiring them to provide information on establishment registration, qualification licensing, governance structure, labor and employees, external investment, internal risk control, intellectual property, assets, financial taxation, business contracts, guarantees, insurance, Provide original documents on various aspects such as environmental protection and litigation situations. In order to cooperate more effectively with legal due diligence, companies generally have corporate lawyers complete the questionnaires under the guidance of financing consultants.

09. Regarding the basis for corporate valuation

The valuation of a company is the core of private equity transactions. After the valuation of the company is determined, the amount of financing and the proportion of investors' shares can be calculated based on the valuation. Corporate valuation negotiations play a milestone role in private equity transaction negotiations. This threshold has been crossed. As long as the fund is not too ruthless, such as asking for redemption rights or betting, the transaction can always be completed.

Generally speaking, how a company is valued is the result of the game between the two parties in private equity transaction negotiations. Although there are some objective standards, it is essentially a subjective judgment. For companies, the higher the valuation, the better. Unless the company is confident that it will go public directly after the completion of this round of private placement, a round of private placement financing with a high valuation will be quite detrimental to the company's next round of private placement. Many companies get stuck after completing a round of private placement. The main reason is that the previous round of private placement raised the price too high. The company is subject to the anti-dilution provisions of and cannot lower the price for subsequent transactions, so it has to freeze.

valuation methods: price-earnings ratio method and horizontal comparison method.

1. Price-earnings ratio method: For companies that are already profitable, you can refer to the price-earnings ratio of listed companies in the same industry and then make a discount. This is the mainstream valuation method. The price-to-earnings ratio method is sometimes unfair to enterprises, because before absorbing private equity investment, private enterprises are unwilling to release profits on their books due to tax planning needs, and intentionally use various financial means (such as raising expenses) to reduce the tax payable of the enterprise. income. In this case, other correction methods must be adopted for the company's valuation.

Before 2009, the price-to-earnings ratio was generally between 5 and 10. This year, it has improved by leaps and bounds, with the price-to-earnings ratio rising to around 15. The current average price-to-earnings ratio of China's stock market is 16.9, which is basically the same as the price-to-earnings ratio of the private equity market. This is relatively risky for private equity. This is the main basis for CEOs of private equity funds to pay attention to risks.(Note, most PE investments in 2014 were less than 10 times)

2. Horizontal comparison method: Compare the current operating status of the company horizontally with the valuation of companies of similar scale that have been privately raised in the same industry, and refer to the valuations of other private equity transactions. , suitable for companies that are not yet profitable.

10. Signing the investment letter of intent does not mean that it is done.

After both parties reach an agreement on the corporate valuation and financing amount, they can sign the investment letter of intent, summarize the negotiation results, and prepare for the next stage of detailed investigation and investment agreement negotiation. .

A term sheet is actually just a general legal document that states that except for confidentiality and exclusive lock-up period terms, the rest is non-binding. Signing the investment letter of intent is to give the negotiating company a reassurance that it will stop looking for Prince Charming and concentrate on exclusive negotiations with the fund at least during the exclusive lock-in period (usually 2 months). After the term sheet is signed, the fund may still overturn the transaction at any time for various reasons. There are many cases where the term sheet was signed but the deal ultimately aborted.

The level of detail in the investment letter of intent drafted by different private equity funds is also very different. Some fund companies are very close to the terms of the contract. The nature of the invested equity (whether there is priority in voting, dividends, liquidation), investor anti-dilution Rights, preemptive subscription of new equity, co-sale rights, information and inspection rights, management lock-in, board seat allocation, special powers of investor directors, performance betting, etc. are all agreed upon. Although these agreements have no legal effect at this time, it will not be easy for companies to overturn these clauses when signing formal investment agreements in the future.