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.
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