Fundraising Considerations for Late Stage Startups

September 16, 2015

Published in the New Hampshire Business Review, NHBR Tech newsletter, and the New Hampshire High Tech Council newsletter

In its earliest stages of development, a startup company typically relies on funding from its founders, along with friends and family willing to contribute to the emerging business venture.  As the startup grows, it will usually require additional funding and accordingly seeks larger investments through a seed financing round with angel investors or startup incubator programs – often through convertible note or SAFE debt financing arrangements.  As the emerging company continues to scale its business, it will often need substantially more capital than the amount raised during any seed rounds.  At this point, it may seek funding from venture capital funds and other institutional investors through a Series A preferred stock financing round. 

Generally structured as a preferred stock offering, the company’s Series A equity offering will provide investors with certain preferential rights.  The following rights are representative of those commonly extended to preferred stockholders and is not intended to be an exhaustive list of such rights.

  1. Liquidation Preferences.  In the event of a liquidation event, such as a merger or sale of the company, investors with a liquidation preference have the right to receive a return of their capital (or a multiple thereof) before the company distributes any return to holders of common stock.
  2. Dividend Preferences.  Dividends are distributed to preferred stockholders before being issued to holders of common stock. 
  3. Board seat.  In certain cases, preferred stockholders may have the right to a board seat in order to influence and assist the further development of the company. 
  4. Anti-Dilution Protection.  Preferred stockholders will nearly always seek anti-dilution protection to guard against their shares being diluted by the subsequent sale of shares of stock at a price per share less than the price they paid during the Series A round. 
  5. Right of First Offer.  Preferred stockholders often try to negotiate a right of first offer to invest in later rounds to maintain or increase their stake in the company during various rounds of financing. 


Regardless of the rights conferred to investors through the Series A preferred stock offering, it is critical that the startup not lose sight of the big picture and continue to keep its business and corporate house in order.  Perhaps most important for the company is that it properly value itself at the outset of the fundraising process.  A valuation too high can stymie fundraising effort,, while a valuation too low will dilute the equity of founders, employees, and early stage investors.  Compliance with federal and state securities laws is an equally important consideration that should always be on the company’s radar during any debt or equity offerings, whether at the Series A financing round or otherwise.  Raising capital at the Series A stage implicates a host of other legal considerations, including compliance with corporate formalities, upkeep of corporate governance documents, and careful maintenance of the company’s capitalization table. 

Matthew Whitehead is an attorney in the corporate department of McLane, Graf, Raulerson & Middleton Professional Association.   He can be reached at (603) 628-1256 or at