Senior Debt

In corporate finance a senior debt is often issued as a senior note or loan and is a debt that must paid-off before other (junior) debt owed by the corporation in the event of a liquidation.

Senior debt is most often secured by company assets or receivables and is often a credit line that helps the corporation finance inventory, projects, and/or expansion.

In the case where an asset is used as collateral for a junior loan— even if other debts are incurred by the corporation before that loan is established– the collateralized loan will always be paid-off under liquidation before other loans.

As often occurs with financial transactions, there are exceptions to this general rule. One exception of many:

– The federal government can force a corporation to subordinate senior notes/loans in some circumstances.

Subordinated Debt

A subordinated loan is a debt paid-off after senior debts are paid.

Subordinated loans might include:

– Subordinated bonds

– Subordinated debentures, or an

– Unsecured loan.

If the corporation liquidates under bankruptcy or other liquidity event, generally, the senior debt is paid first, then bonds, followed by subordinated (junior debt), and if any assets remain the stockholders are paid last. Obviously subordinated debt is riskier than senior loans/notes and this must be taken into consideration before lending to this company.

The Venture Capital Funding Rounds

Venture capital financing rounds are named to match what each round does.

Seed Round

During the seed round, most funding is provided by either the originators of the company or other company insiders and managers. Often, family and friends invest at this stage because it is difficult to get outside investors at this point unless the idea has significant upside potential for an investor. Note: In addition to common stock, seed round investors often receive stock options.

Angel Investor Round

Early in the business and after the company has proven the business concept, investors who invest in the business receive common stock. Since investing at this stage of business is very risky the investor expects to receive significant return if the business succeeds.

Other facts:

– In addition to common stock these investors often receive stock options.

– Investors at this point are often called Angels because it is said that Angels either protect their investment, or Angels find ways to connect investors with requisite companies that require cash to survive. Either way, there is no limit to Angel investment as a designation; typically, Angels fund investment in the $1-20M range, although some Angel investment has gone as high as $50M dollars with some companies, and higher totals are not unheard of.

Series A, Series B, Series C

Series A, B, and C and so forth are called “alphabet rounds” because of the sequential letters assigned to each round of funding.

Series A (Round 1):

– Series A is considered the first real funding round by equity investors and venture capitalists.

– In this, and all, investment stages investors buy shares of preferred stock for their investment. They do this because:

o Preferred stock is convertible into common stock if the company goes public.

– Private equity investors select preferred stock because of special features such as dividend accumulation and anti-dilution characteristics.

o Preferred stock is the least expensive because the risk is greater than in Series B and C.

– This funding round is very important to a business because may be the first “real money” invested in the company with the funding round generally ranging from $1 to $10 million dollars.

– If the company does not do well with this initial funding then it is doubtful additional funding will be available for future needs.

Series B (Round 2):

– Series B is considered the second real funding round by equity investors and venture capitalists.

– Series B funding is usually provided when the company meets specific milestones outlined by investors or their representatives.

– The Series B funding round usually extends up to $50 million dollars.

– This stock is more expensive per share for investors because the risk has been reduced as the company continues to meet or exceed its goals.

– If the firm continues to meet its goals then further funding rounds are possible.

Series C (Round 3):

– Series C is considered the third real funding round by equity investors and venture capitalists.

– Series C funding is usually provided when the company meets specific milestones beyond those outlined by investors or their representatives in Series B (Round 2).

– This stock is even more expensive per share for investors than either Series B or Series A.

– Typical funding in this round can extend from $50 to $250 million.

– If the firm continues to meet its goals then further rounds of funding.

Further funding rounds are lettered sequentially “D,” “E,” “F,” …

When stock is issued in series “A,” “B,” or “C” it is an indication that the company is on track with expectations.

Mezzanine Financing

Mezzanine financing is funding used to support the private company between venture capital rounds (A, B, C, etc.) or before a public offering and is typically debt capital that gives lenders the rights to convert debt to an ownership interest in the company if the loan is not paid back fully and promptly. Most often these lenders are venture capitalists and/or banks who provide this type of financing without significant due diligence and therefore demand a rate of return which generally exceeds 20 percent.

For a private company to obtain mezzanine financing it must show a track record in the industry, have a solid reputation, feature one or several outstanding products, and possess an excellent business model showing consistent profitability.

Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

Author Bio: Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

Category: Business
Keywords: Finance,Business Funding,Venture Capital,Business