Venture Development Stages
As a venture grows, it goes through four main stages:
- the development stage,
- startup stage,
- survival stage and
- rapid-growth stage.
As the venture grows and progresses through these stages, it has more opportunities to raise venture capital. The survival stage is where ventures begin to accrue money from outside sources like angel investors, and is also where venture capital firms begin to invest. This form of financing is called first-round financing or the “Series A round”. Note that these firms and investors won’t invest for a low rate. Instead, they often ask for equity in the company in exchange for investing a certain amount of money. Depending on their percentage equity, these investors may have the power to control certain aspects of the company.
When raising capital, be mindful of investors that desire majority equity in your company. Working with these investors may not be worth it for you in long run even if they provide a large sum of money, since the amount of money they provide may be at the expense of your control of the venture.
Once the company grows from the funding provided by outside investors and venture capital firms, it engages in second-round financing. This especially serves companies in the rapid-growth stage. Once the venture has shown success, commercial banks may start to invest. As the company grows, other investors may help complete the venture’s initial public offering (IPO) as it transitions to a public company.
Different Classes of Companies
Depending on a company’s needs, it may want to transition to different types of business organizations with unique properties. These four organizations are proprietorships, partnerships, limited liability companies (LLCs), and corporations. Proprietorships are owned by a single person and may struggle to gain the necessary funds to grow; often, it’s appropriate for them to then transition to a limited partnership with outside investors or venture capital firms that can help fund the company.
LLCs are often created so that company members are not held liable for the company’s finances or actions. Two primary differences between LLCs and corporations lie within taxes and management. LLCs do not adhere to a rigid management structure, whereas corporations have designated hierarchies – managers, assistant managers, employees, etc. In distinguishing LLCs and corporations, it also helps to distinguish between pass-through and separate entities. Pass-through companies, like LLCs, involve the taxation of both the company and its shareholders, who file on their personal tax return. On the other hand, separate businesses such as corporations do not tax their owners.
The decisions associated with the process of capital formation for your venture involve countless legal ramifications, potential fees, financial documents, and crucial decisions that, when done right, will allow your company to thrive. Contact Issuer Consulting today to receive professional guidance as you grow your venture.