The Five Financing Stages of a Company’s Development

Every business is born as a startup and goes through identifiable stages of development. During the development period, and particularly when the company seeks financing, its owners and managers face a thicket of legal issues and questions involving corporate law, securities law, and contract law. Typically there are several stages involved in a company’s development.

The Five Financing Stages of a Company’s Development

Professional investors typically divide a company’s development into five financing stages:

  1. startup stage,
  2. development or second-round,
  3. expansion or third-round,
  4. growth or fourth-round, and
  5. public offering.

Most small businesses fall into one of the first four categories. A startup company has at least one individual involved, an idea, and possibly a business plan to implement the idea. A business, even one with some capital and employees, is considered a startup until evidence proves that the idea will work. That evidence can be a working prototype or an economic or marketing study that supports the idea.

At this point, a company enters the development stage, with the goal of developing and marketing the product or service and generating revenue. Once the company has generated revenue, it is an expansion-stage company. A company in the expansion stage has revenue and is usually no more than a year away from breaking even. When a company is above the break-even point and earning a profit, but needs capital to support additional sales and profit, it is classified as a growth company. These four stages of a company’s development are sub phases of the first three life-cycle phases, where they are related to cash flow, profit, and financial sources and uses.

FINANCIAL MANAGEMENT: As the company passes through these stages, you face a new set of legal issues and complexities at each stage. At the startup stage, you must plan a legal structure for the company and address the legal issues associated with its initial financing. These range from the type of securities to offer to whether new investors will be entitled to representation on the board of directors. By the time the company has become a growth company, you must deal with legal issues ranging from minimizing taxes on the company’s profits to whether to seek additional funding through a venture capital investment.