Follow-On Funding

Follow-On Funding refers to investments that occur after an investor’s initial investment in a company. In contrast to stage financings, which are fundings that are made over time in agreed upon amounts as a company meets previously agreed-upon milestones, follow-on fundings do not result from preexisting agreements by an investor to provide funding at a later time. Rather, they refer to an investor voluntarily participating in a later round of funding, the terms and conditions of which are negotiated at the time of investment.

Follow-on fundings often include new investors who provide most of the investment. Sometimes follow-on fundings are provided entirely by a company’s existing investors. An investor’s ability to participate in later rounds of funding can be important to a company’s success in raising funds. Often, new venture capital investors expect existing venture capital investors to participate as evidence of the existing (insider) investor’s confidence in the company. A venture investor’s unwillingness to participate in a later round of financing can dampen the enthusiasm of outside investors which, in turn, can result in lower valuations or the inability to raise funds on reasonable terms. Consequently, an investor’s financial ability to participate in later rounds of funding should be considered an important factor when investigating possible investors for a company.

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