Series A

What is a Series A?

Series A (first institutional funding round) denotes the first larger equity round of a startup: professional investors who invest other people's money receive new shares in return for their payment. At this point the company has shown that customers buy its product, and it uses the capital to turn this into a business that grows predictably. The Series A follows the seed phase, in which a viable business model is sought with smaller amounts, and precedes the Series B. The terms Series A round, Series A financing and Series A funding are also in use.

The designation comes from the US market, where each round creates its own series of preferred shares (Series A preferred stock). The German GmbH (German limited liability company) has no share series. The round is implemented through a capital increase in which the investors take over new shares. Their preferential rights are set out in the shareholders' agreement and in part in the articles of association; the shares are often called Series A shares there. The parties involved are the lead investor who leads the round, further investors on the same terms (co-investors) and the founders. The existing shareholders must also take part, often business angels, that is, private individuals with their own capital, and investors from the seed phase. The basis is a term sheet, implemented in the participation agreement and the shareholders' agreement.

Maturity and key figures for a Series A

Series A investors do not expect a mature company. They do, however, require evidence that a product has found a market willing to pay (product-market fit) and that customers can be won repeatably. Which key figures are used for this depends on the business model:

• Software with recurring revenue: level and growth of annual recurring revenue (ARR), customer retention on a revenue basis (net revenue retention), churn and gross margin, that is, the share of revenue that remains after direct costs.
• Marketplaces and platforms: transaction volume mediated, share of returning users on both sides of the market and the development of the take rate.
• Technology with long development cycles: technical maturity, paying pilot customers, letters of intent from buyers and a credible path to series production.

Alongside the level of the figures, their quality counts. First it is checked whether growth comes from a repeatable sales channel or from individual large customers and the founders' personal contacts. Further questions are whether customer cohorts, that is, the groups of customers won in a period, remain stable and whether the costs of customer acquisition stand in a sustainable relationship to customer value. There are no fixed thresholds; the requirements shift with market conditions and differ considerably between industries.

Use of funds and size of a Series A

The capital of a Series A finances the transition from founder-driven sales to an organisation that generates growth predictably. It flows mainly into sales, marketing and product development, into a first management level below the founders and into a finance function with monthly reporting. The round is often sized so that it covers the financing need for about two years and lasts until the milestones that support a Series B.

Round sizes vary with industry, capital intensity and market conditions. In the German-speaking market they often lie between EUR 3 million and EUR 15 million. The boundaries with the seed round and the Series B are fluid; what determines the classification is the maturity of the company, not the amount alone. The valuation results less from an earnings-value calculation than from growth, market size, comparable transactions and competition among investors.

Investors and documentation

Types of investor

The round is usually led by a venture capital firm specialised in early growth phases. It sets the terms, steers the review and takes a substantial part of the amount. Other funds, equity units of industrial companies (corporate venture capital), family offices and public investment companies also take part. The existing shareholders invest alongside to the extent that they exercise their subscription rights, that is, their right to take part proportionately in the new round.

Usual documentation

The Series A is often the first round with complete contract documentation to market standard. Earlier convertible loans convert in this round, and the shareholders' agreement is restated. The usual scope includes:

• a capital increase with takeover of new shares, whose nominal value is usually EUR 1, and payment of the remaining amount into the capital reserve
• a simple, usually non-participating liquidation preference (priority for investors in the distribution of sale proceeds) and weighted-average anti-dilution protection, which compensates the investors if a later round takes place at a lower price
• consent rights for important management measures and often an advisory board with a seat for the lead investor
• vesting and leaver provisions for the founders' shares, that is, their gradual earning and the consequences of early departure, with a new term in some cases where vesting is far advanced
• an employee stock option plan (ESOP), in Germany usually in virtual form (VSOP), whose pool is often created or topped up before the round
• rules for the sale of shares (tag-along right, drag-along obligation, pre-emption rights) and information rights

Focus of the review

The review by the investors (due diligence) is more extensive in a Series A than in the seed phase, but is directed more at the viability of the business model than at individual risks:

• Market and customers: conversations with reference customers, cohort analyses, sales funnel and competitive environment.
• Finance: revenue quality, burn rate (the monthly cash outflow), past planning accuracy and the assumptions of the financial model.
• Legal: an unbroken chain of the lists of shareholders filed with the commercial register since incorporation, transfer of rights in software and trademarks to the company, employment and consultant contracts, earlier commitments of shares.
• Technology and team: architecture, scalability and security of the product, and the question of whether the founding team can lead the next growth stage.

Worked example: calculating the capital requirement of a Series A

A software company that sells to business customers is preparing a Series A with EUR 2 million of ARR. It has liquid funds of EUR 1.5 million, and its expenses exceed income by EUR 125,000 a month (net cash outflow). The plan for the next 24 months provides for building up sales and the product team.

• Runway (range of liquid funds) before the round: EUR 1.5 million / EUR 125,000 = 12 months
• Planned cash outflow over 24 months at an average of EUR 275,000 a month: 24 × EUR 275,000 = EUR 6.6 million
• Reserve for delays, about three months at the planned end level of EUR 300,000: EUR 0.9 million
• Capital requirement: 6.6 + 0.9 minus EUR 1.5 million of existing funds = EUR 6.0 million
• Percentage of the new investors at a pre-money valuation of EUR 18 million: 6 / (18 + 6) = 25%; the post-money valuation is EUR 24 million
• Milestone for the Series B: if its pre-money valuation is to reach one and a half times today's post-money valuation, that is, 1.5 × 24 = EUR 36 million, and investors then apply six times ARR, ARR must rise within 24 months from EUR 2 million to 36 / 6 = EUR 6 million.

The calculation follows the logic by which investors assess the round size: the amount must last to a point at which the key figures support a higher valuation. A round sized too tightly forces follow-on financing before that point is reached; a round sized too generously dilutes the existing shareholders without a corresponding counter-value.

Distinctions: seed round, Series A, Series B and Series C

• Seed round: finances the search for a viable business model, often through business angels or via convertible loans, with smaller amounts and leaner documentation.
• Series B: finances the scaling of an already proven model. The focus is on the efficiency of growth and the resilience of the organisation, no longer on proof of market acceptance.
• Series C: a late growth round for companies with an established market position, often to prepare acquisitions, a sale or a stock market flotation.
• Bridge financing: a convertible loan or a small capital increase with which a company bridges the time to the Series A, usually without a new valuation.

Common mistakes

• Scaling before proof. If capital is directed into building sales before a repeatable sales channel has been shown, cash outflow rises without corresponding growth.
• Starting the process too late. If approaching investors begins with less than twelve months of runway, there is no room for negotiation and alternatives, because the process takes several months until the money arrives.
• Existing shareholders involved late. Subscription rights, consent rights and conversion rights of earlier funders affect the round; anyone who informs these parties only before authentication risks delays in the resolutions.
• Valuation without a follow-on perspective. A valuation that cannot be exceeded by key figures by the next round makes the Series B harder and can trigger the investors' anti-dilution protection.
• Disorderly shareholder relationships. Undocumented commitments of shares, missing transfers of rights or deviations between the ownership overview (cap table) and the list of shareholders prolong the review.

Frequently asked questions

How long does a Series A take?

Often six to eight months from preparation to receipt of funds. A few weeks go on the financial model, the investor presentation (pitch deck) and the data room, the organised collection of documents for the review; the larger part goes on investor conversations, term sheet, review, authentication and registration.

How much capital is raised in a Series A?

In the German-speaking market often EUR 3 million to EUR 15 million, and more for capital-intensive business models. The amount is sized on the financing need up to the Series B milestones.

What share do existing shareholders give up in a Series A?

In practice often 15% to 25% on a fully diluted basis, depending on round size and valuation. In addition, an employee pool created or topped up before the round dilutes.

Must an advisory board be formed after a Series A?

Not legally. The German One-Third Participation Act (Drittelbeteiligungsgesetz) requires a supervisory board in a GmbH only from more than 500 employees. An optional advisory board is nevertheless frequently agreed in Series A rounds, because it gives the investors an orderly say without removing the responsibilities of the shareholders' meeting.

What happens to existing convertible loans?

They usually convert into shares in the Series A, mostly with a discount on the price per share or at a valuation cap. The conversion shares are often included in the basis before the round and then dilute only the existing shareholders.

Is a Series A possible without a venture capital investor?

Yes. Family offices, strategic investors or groups of business angels can also lead a round of this size. The term describes the financing stage, not the type of investor.

The Roemer Capital view

Series A mandates at Roemer Capital begin with a stocktake of the four pillars of runway, KPIs, unit economics and governance. In the Series A, it becomes apparent for the first time in front of institutional investors whether a company is investor-ready, that is, structurally able to grow disproportionately with external capital.

Specifically, Roemer Capital checks whether runway at the start of the process is 12 to 18 months and whether the financial model covers three years with a base case, a cautious case and an optimistic case. The data room must be ready within 24 hours. Roemer Capital derives the round size from the Series B milestones, not from the desired valuation. It plans six to eight months for the whole round.