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Updated August 29, 2023You’re reading an excerpt of Angel Investing: Start to Finish, a book by Joe Wallin and Pete Baltaxe. It is the most comprehensive practical and legal guide available, written to help investors and entrepreneurs avoid making expensive mistakes. Purchase the book to support the authors and the ad-free Holloway reading experience. You get instant digital access, commentary and future updates, and a high-quality PDF download.
A fixed price financing (or fixed price round or priced round) is a type of financing where the investors buy a fixed number of shares at a set price (in a common stock or preferred stock round), as opposed to rounds in which the number of shares and the price of those shares will be determined later (such as convertible note or convertible equity rounds). The most common type of fixed price round are preferred stock deals, which often represent rounds larger than convertible rounds, greater than $500K for example, which justifies the legal cost of documenting the round.
By definition, in a fixed price financing a price must be set or fixed for the security being sold (preferred stock, or less frequently, common stock) by the company. There are a number of factors that come into play when determining the price, and some of those factors are a function of negotiation. In order to provide a full understanding of how this works, in Part IV we’ll dig into pre-money valuation, post-money valuation, stock option pools, and dilution generally.
We talked about some of the advantages of convertible notes in the prior section. Convertible rounds are built on the assumption that the company will raise another round in the future that will fix the price of the non-priced round. But if no subsequent round is planned, then a non-priced round is not a good fit, and a fixed price financing is called for.
Investors may prefer fixed price financing over convertible debt so they can lock in the valuation of the company earlier (while it is presumably lower) and receive the rights and preferences associated with preferred stock. Some investors are also wary of convertible debt or convertible equity rounds because they don’t want to have to wait to become a shareholder, or because they believe (or they believe founders believe) that convertible debt creates a conflict of interest between the founders and the investors.
If a company raises capital through one or more convertible debt or convertible equity rounds, eventually they will want to do a preferred stock financing to convert that debt to shares (equity). Convertible securities typically need a qualifying (minimum size) priced round to convert into stock. Angels really like preferred stock financings because, as you will see below, they are able to attach a wide variety of preferences to the stock—that is, privileges and control provisions for the preferred stockholder.
founderEntrepreneurs have a mixed perspective on preferred stock, depending on the particulars of the preferences. On the plus side, raising a preferred stock round means they are raising a significant amount of money, and that is likely what they need to keep going and growing.
The downsides for the entrepreneur are:
The benefits of the preferences that accrue to investors in a preferred stock round come generally at the expense of the entrepreneur and the pre-existing stockholders. Convertible note and convertible equity holders usually convert into the same class of stock (the preferred) that is creating the qualified financing and triggering the conversion. (The most common exception to this is when the convertible debt or equity is converted into a subclass of the preferred stock to avoid the problem of the liquidation overhang.)