Canada: Tips for Startups – Understanding the Stages of Equity Financing

Last Updated: July 11 2016
Article by Michael E. Reid

Co-authored by Brandon Deans (Temporary Articled Student)

In the earliest stages of a new venture, founders will often seek to bootstrap (i.e., self-finance) operations in order to build value through their own sweat equity. Once bootstrapping is no longer enough to sustain their pre-revenue startup, or the need for financing to grow the business outstrips modest initial revenues or friends and family contributions, it becomes essential for these founders to begin looking for external sources of financing. If conventional bank loans and lines of credit are not desirable or sufficient, then they may consider seeking private investment. For founders unfamiliar with fundraising, it can be very daunting when terms like "angel investing", "venture capital", "series B financing", and "seed round" are being thrown around. Understanding the terminology surrounding the financing process is essential for startup leaders hoping to secure financing, or for individuals in the business world hoping to understand the startup landscape.

What is equity financing? Who participates?

When many people hear terms like "venture capital", they think of television programs like Dragons' Den, in which business founders pitch their ideas to a group of wealthy and successful business personalities. Much like in Dragons' Den, the process of early-stage financing involves investors providing funds to startup companies that have potential for long-term growth. Early-stage equity financing is a great option for startups that are not in a position to seek funding through public capital markets, and wish to avoid being loaded with debt. Investors involved in early-stage equity financing generally take on a relatively high risk due to the youthfulness of the companies they invest in, so they will often seek additional rights, such as a seat on the board of directors, in order to have some say in company decisions.

Equity financing can be provided by a variety of sophisticated parties such as angel investors, venture capital firms (often simply called VCs), private equity firms, and sometimes even investment banks.

While there can certainly be some crossover, angel investors and VCs have some key differentiating features, which inform their investment strategies. Angel investors are generally wealthy individuals with an entrepreneurial or executive history who invest directly in the early stages of a company's development, often investing their own capital. In contrast, VCs are generally larger institutional firms, investing from a fund of pooled assets raised from their own investors. While both angels and VCs will commonly contribute experience, knowledge, and a strong network to the company, angels are frequently attracted at a pre-revenue stage, investing in individuals and ideas that may not have proven commercialization. VCs, on the other hand, often target companies that are emerging from this initial growth stage and have some proven market capability.

A novel method of financing has emerged through crowdfunding. Equity crowdfunding allows a limited number of individuals to purchase a limited amount of private company securities online. This process circumvents the requirement of filing a prospectus, based on startup crowdfunding exemptions available in certain jurisdictions. The main difference between equity crowdfunding and other crowdfunding platforms like Kickstarter is that equity crowdfunding involves the purchase of securities in exchange for equity ownership in the company, as opposed to simply providing donations or pre-orders for products or services.

What are "rounds of financing"?

Capital is generally provided at various stages, or rounds, as this ensures that certain goals are met before further financing is provided. While there is no hard and fast rule that a company has to proceed with their financing in a particular sequence, typically the rounds of equity financing can be viewed as follows: seed/angel round, series A, series B, series C (followed by D, E, etc. as needed), and an exit.

Seed round

The seed round is the earliest round of financing, often provided by the company's founders, friends and family, and angel investors, either together or within their own distinct seed rounds. Additionally, equity crowdfunding is becoming more common as a means of augmenting capital raised at the seed stage. It is less common to see institutional VC investors at this stage. Seed capital is a high-risk investment that is often offered in exchange for an equity stake in the enterprise. Because the seed round is often financed by angel investors, some simply call it the "angel round". The term "angel round" denotes who the round is funded by, whilst "seed round" refers to the stage of the company's development when they are being funded.

Seed capital is the initial capital used to start a business in the idea or conceptual stage. This capital is typically pre-production financing used for product research and development, consumer and marketplace research, operating expenses, and advancement to a stage of operation that will be attractive to investors. Seed capital helps companies get off of the ground and begin building momentum. This funding allows the company to mature for some period of time and become more established, such that VCs will eventually view the investment as lower-risk. In other words, this stage plants and nurtures the seed (i.e., the idea of the startup) so that it matures into a fully grown operating business.

Series A, B, and C Financing (the Institutional Rounds)

These financing rounds generally coincide with growth goals, as the company continues to ramp up operations developed using the seed funding, with a trajectory generally aimed at going public or becoming involved in an acquisition or merger at some point in the future. This is most often the stage at which institutional VCs become interested in funding the startup, because the company has become more established and entered the marketplace, but still has potential for growth. In addition to institutional VC investors, other parties such as angel investors, investment banks, and larger private equity firms may become involved, while equity crowdfunding may continue to play a role in financing.

Between each round, a company may also seek bridge financing. Generally, bridge financing involves a smaller amount of money, often issued as convertible debt, that is used to keep business operations running smoothly between rounds. These rounds are typically labeled as Series A, B, C, etc., as a method of keeping their order clear. While there are rules as to how a Series A is structured versus a Series C, for example, there are still some general commonalities between the rounds.

Series A Financing (Start-up Round)

Series A financing involves early stage startups that need funding for early sales and manufacturing costs, along with marketing and product development requirements. At this stage, the company typically has some customers or users, a realized product, and a need to expand marketing and sales beyond their current customer base. Angel investors may participate in this round, but will likely have less influence than in the seed round, as more traditional VC firms will become involved at this stage.

Series B Financing (Second Round)

In this round, funding is generally sought to further expand market reach, assist in continued development and acquire talent in the startup. As the company grows, more people will need to be employed including IT professionals, sales and advertising experts, and employees filling business development roles. Some companies may also seek to scale up from regional to national platforms or into bigger markets. By the time a company reaches this round, it will already have a solid customer base and the means to service these customers; thus, the goal of this round is to develop a competitive advantage in the marketplace. Series B financing may attract VC firms that are particularly specialized in later-stage financing.

Series C Financing (Third Round)

At this point, the goal is generally to perfect the business model and continue to scale. Common methods of scaling at this stage may involve expansion into other regions or acquisition of other companies using the Series C funding. By the time a company reaches Series C, investment in the startup will be less risky, as there is now a history of success and the company has become a known commodity. For this reason, more investors will come out of the woodwork to invest in the company, including hedge funds, investment banks, and private equity firms. By the end of this stage the company will ideally have reached significant market share. Some companies may continue this process into Series D, E, and so on, while others may begin to position themselves for an initial public offering ("IPO") or a private acquisition. Generally, it is rare to continue much further than Series E, but this is specific to the individual company and its business plan.

The Exit

Typically, an exit will involve a merger, acquisition, or an IPO. The exit stage can provide massive return for founders and investors alike, and serves as a substantial incentive for their initial investment. This stage is not mandatory, however, and some companies will instead remain private and continue to operate as a profitable going concern, returning dividends rather than a lump sum exit.


Bootstrapping and other forms of self-financing can be very important at early stages of development, where founders are protecting their own stake in the company. However, when additional funds and expertise are needed, the process of seeking equity investment begins. Finding not just investors, but the right investors, is a challenging process, and can require a great deal of time and effort on the part of founders. A great deal of due diligence will be required by potential investors before they become interested in investing. Sophisticated investors want to see companies that are well managed, with their legal affairs in order, and with a fully developed business plan. Additionally, the industry-specific expertise that different investors may bring can have its own value, so seeking out a network of individuals and organizations with the relevant industry knowledge and experience is important as well.

The stages of financing do not necessarily fall into air tight components, but rather act as checkpoints during a company's evolution. Sometimes stages will overlap, and some may be skipped completely. Speaking with your legal and financial advisors early on will help you set up the best structure for your growing company.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2016

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Michael E. Reid
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions