Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups

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Investment Rounds and Their Forms

Common Stock, Convertible Notes, or Preferred Stock?

TO MAKE SENSE of the different ways in which startup investments technically get from the investors' bank account into that of the company, it is helpful to understand the role that investment money plays in a new venture. Let's take a step back to remind ourselves of the process by which a new business grows.

Our story begins when the founders of a young company realize they need more money if they're going to grow their business. To raise this money, they decide to launch an investment round—a set of one or more investments made in a particular company, by one or more investors on essentially similar terms at essentially the same time.

An investment round can take many forms. So if the brother of the founder lends her $25,000 to get her company off the ground with the understanding that the loan will eventually convert into an ownership interest, that would be a round. And if a year or so later, a group of professional angel investors get together and each put in $50,000 to buy another piece of the company, that, too, would be a round. And if the company did really well, and after another year a large venture capital fund came along and invested $2 million for preferred stock, that would be a round as well.

In the parlance of the business, the first round would be a Friends and Family round, the second a Seed or Angel round, and the third a Series A round. The Series terminology comes from ...