Understanding the Life Cycle of a Company

Charles Dunstone’s Carphone Warehouse started in 1989 with a personal investment of £6,000, later generating over £10million in revenue in 2013. Yet, its name has now disappeared from our highstreets after Dixons Carphone changed the name of its subsidiaries to Currys in October 2021. How and why do companies evolve like this? What is the life cycle of a company and what opportunities are presented to law firms?


Almost all successful companies use ‘external’ help to grow their business. This ‘external’ funding can be separated into different groups, known as “funding rounds”. These funding rounds can be roughly split between: Pre-Seed / Seed / Series A /Series B and Series C. Under these funding rounds investors can inject money into a business in exchange for partial ownership, or equity- with the hope one day of a lucrative IPO or M&A transaction. However, each stage will require the company seeking investment to undergo various valuations - considering risk, financial performance, management and market dominance. A key distinction between the funding rounds is the different intensities required for these valuations.


The Funding Rounds


Pre-Seed Funding

  • Generally investors at this stage are the owners of the company themselves. At this stage the company essentially sets itself up by creating its business unique selling point.

  • Opportunities for lawyers here include pro-bono activity.

Seed Funding

  • Typically considered the first official funding round. A common source of funding here derives from "Angel Investors". Angel investors tend to take on more risk in exchange for an equity stake, meaning (if successful) a considerable return.

  • Anywhere between $10,000 and $2 million can be raised in order to finance product development, embark on market research and the hiring of a team to complete this.

  • Our sponsor Allen & Overy's FUSE programme allows Allen & Overy to stay at the forefront of legal tech innovation as well as harnessing future client relationships by supporting start-ups around this stage of development.

Series A Funding

  • Only those companies with a successful business model, consistent revenue streams and consumer bases arrive at Series A funding. Investors here will no longer be looking for ideas but a proven ability to generate greater revenue after using additional funds for product expansion.

  • Considering in 2020 the average valuation of a Series A round was $15.6 million a key role for solicitors would be due diligence. Think - What information would an investor, typically "Venture Capital" firms at this stage, require from their lawyers at this due diligence stage?

Series B Funding

  • This stage of funding typically marks the end of 'development'. The Series B funding is often used to build the company's ability to meet new demand levels as it expands its market reach.

  • The average amount raised at a Series B funding round is $33 million.

Series C Funding

  • Companies who make it this far are considerably successful and require funds to enter new markets, create new products or even to acquire other companies to consolidate their business. On average, a company at this round is valued at $118 million although this value can be much greater.

  • Investors at this stage usually include investment banks, hedge funds and increasingly private equity houses. These investors are willing to invest in a company if it has been able to demonstrate strong financial performance, however involvement in the company will depend upon the specific investor. For example, a private equity house will most likely seek a controlling stake in the company, in order to manage the company for 5-10 years, before embarking on an IPO or sale to another private owner.

After a company either completes an IPO or M&A transaction, it will comply with any negotiated terms which may be found in various documents such as investor rights agreements or loan agreements. To expand your knowledge on the role of lawyers throughout a company's life cycle please refer to the further reading below.


Further Reading

https://ukgraduates.shearman.com/opportunities/student-insights/student-insights-finance/

https://www.investopedia.com/articles/personal-finance/102015/series-b-c-funding-what-it-all-means-and-how-it-works.asp

https://www.priorilegal.com/financing/series-a-financing