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BIZ PLAN WORKSHOP: FINANCING STAGES DEFINITIONS
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Financing Stages Definitions
Early Stage Financing
· Seed Financing is a relatively small amount of capital provided
to an inventor or entrepreneur to prove a concept or qualify for startup capital.
This may involve product development and market research, as well as building
a management team and developing a business plan, if the initial steps are successful.
· Research & Development Financing is a tax advantaged partnership
set up to finance product development for startups, as well as more mature companies.
Investors secure tax write-offs for the investments, as well as a later share
of the profits if the product development is successful.
· Startup Financing is provided to companies completing product
development and initial marketing. Companies may be in the process of organizing
or they may already be in business for one year or less, but have not sold their
product commercially. Usually such firms will have made market studies, assembled
key management, developed a business plan and are ready to do business.
· First Stage Financing is provided to companies that have expended their initial capital (often in developing and market testing of a prototype), and require funds to initiate full-scale manufacturing and sales.
Expansion Financing
· Second Stage Financing is working capital for the initial expansion of a company that is producing and shipping, and has growing accounts receivable and inventories. Although the company has made progress, it may not yet be showing a profit.
· Third Stage or Mezzanine Financing is provided for major expansion
of a company whose sales volume is increasing and that is breaking even or profitable.
These funds are used for further plant expansion, marketing, working capital,
or development of an improved product.
· Bridge Financing is needed at times when a company plans to go public within six months to a year. Often bridge financing is structured so that it can be repaid from the proceeds of a public underwriting. It can also involve restructuring of major shareholder positions through secondary transactions. Restructuring is undertaken if there are early investors who want to reduce or liquidate their positions, or if management has changed and the stockholdings of the former management, their relatives and associates are being bought out to relieve a potential oversupply of stock when public.
Acquisition/Buyout Financing
· Acquisition financing provides funds to finance the acquisition
of another company.
· Management/Leveraged Buyout funds enable an operating management group to acquire a product line or business (which may be at any stage of development) from either a public or private company, often these companies are closely held or family owned. Management/leveraged buyouts usually involve revitalizing an operation, with entrepreneurial management acquiring a significant equity interest.
* Based on Pratt's Guide to Venture Capital Sources.
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