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Start-Up Equity Options

[vc_row][vc_column][vc_column_text]If you are at the point that you have decided to launch your start-up, you have already confronted your next big challenge: funding it.

This checklist compares several forms of initial financing.

We recognize that start-ups have many options –ranging from credit cards to small business loans, but this checklist focuses on getting investors through selling equity – or “equity like” instruments.

If you are contemplating raising seed capital for your start-up, consider these issues:

 

  • Is speed and simplicity the primary goal? Think about using a convertible note or common stock issuance.
  • Is cost a factor (of course it is!)? Think about using a convertible note instrument.
  • Do you need to incentivize investors? Think about a convertible note, which should include as a standard term, a discount for the conversion of the promissory note into stock.
  • Does the company want to provide that the investors would receive their funds first if there is a distribution (for example, the start-up fails or is sold)? Think about a convertible note or a preferred stock issuance.
  • Can the company sustain a maturity date on the convertible note if no round is raised?
  • Do the investors want to set the price and negotiate the deal instead of waiting for a moment in time down the road? If yes, consider a preferred stock offering, like a “Series Seed” round.
  • Do the founders want certainty on their ownership? Consider a preferred stock financing where ownership is certain at the closing.
  • Are the investors sophisticated investors who have invested in start-ups? Consider either a convertible note or a preferred stock offering.
  • Can the company (and the investors) afford to do a preferred stock round, which requires more documentation and additional filing fees?
  • Is time critical? If it is, simpler is better and consider a convertible note offering- or perhaps the simplest form of start-up capital financing, a common stock offering (which is simple but can be costly).

 

Raising start-up capital requires consideration of several significant issues.  Time, cost, and the level of sophistication of the investor are just a few to be considered.

 


 

Our Disclaimer.  As a law firm, we have to be careful that we not inadvertently create an attorney-client relationship.  So, to be clear, the information provided in this checklist is not intended to and does not constitute legal advice, recommendations, or legal counseling. This information is for your general review and consideration.  Your visit to our website or your use of this checklist does not create an attorney-client relationship.  We do not guarantee or warrant the completeness, accurateness or usefulness of this checklist.  You use the information in this checklist at your own risk.  You should not rely upon the information without seeking the advice of a competent attorney licensed in your jurisdiction.

 

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Contact Us.  If you would like to discuss the information in this checklist, please contact us at (540)443-9272 or jeff@mitchell-firm.com [1].[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column width=”1/1″]

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