Accredited investors
Friends and Family
Taking funds from a strategic investor
Difference between angels and VCs
Deciphering what VCs are looking for
Bank loans
Venture debt
Crowdfunding
Foreign investors
Accredited investors
Whether investors need to be accredited is a complex question. The answer really depends on the facts and circumstances. For example, the information below assumes that the company is privately held and does not otherwise wish to engage in a public offering like an IPO. So you need to get good legal advice to determine the best answer for you.
Friends and Family
You’ve got a great idea and you’ve put together a great team. All you need now is the seed capital to launch your venture. Do you ask your friends and family to become your first investors? It’s a question with no easy answer and any decision you make will come with a host of both personal and legal ramifications.
Taking funds from a strategic investor
Your startup has gotten some traction and you’ve attracted the attention of some of the big players in your space. So much so that they’ve approached you about potentially investing in the company. While you’re flattered, you will need to carefully consider the pros and cons of taking money from a strategic investor as their investment may come with more strings attached than you and your company may like.
Difference between angels and VCs
An angel investor or angel is a typically an affluent individual who provides capital for a business startup, usually in exchange for convertible debt or preferred stock. Some angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital, as well as to provide advice to their portfolio companies.
Deciphering what VCs are looking for
Fundamentally, when investing in early-stage companies, investors are looking for a solid management team, a good return on their investment and the opportunity to realize that return within a reasonable period of time. A solid management team is essential. In early-stage investments, VCs invest in people as much (if not more) than they invest in ideas or markets. It is critical that you be able to demonstrate that you have assembled a management team comprised of people with relevant experience and expertise who, above all, have the drive and determination needed to weather the many ups and downs of building a successful venture.
Bank loans
Banks generally don’t loan money to an unfunded startup without a credit history and without assets to offer as collateral. Similarly, bank loans for more mature private companies often contain financial covenants that restrict access to capital when the financial condition of the company deteriorates, which is exactly when the funds could be most helpful.
Venture debt
Venture debt is a form of debt financing typically provided by certain lenders to venture-backed companies that lack the assets or cash flow for traditional bank debt financing. Venture debt is generally structured as a term loan that is paid down over time—usually 3 years. Venture debt is typically senior to other company debt and is collateralized by all of a company’s assets. Unlike traditional bank debt, venture debt typically does not include financial covenants (such as a requirement to maintain a minimum amount of cash in the company’s bank account), though the interest rates on venture debt are typically higher than traditional bank loans (generally, ranging from 10% to 15%). In addition, a venture lender typically receives a warrant to purchase stock of the company. A warrant is like a stock option—it provides the holder with the right to purchase shares of stock (common or preferred) of a company at a fixed price for a period of time. A warrant issued to venture lender is typically exercisable for preferred stock with an exercise period of 5 or 10 years.
Crowdfunding
In the context of financing, crowdfunding is the process of getting funding, usually online, for a project from a large number (the “crowd”) of people who typically each contribute small dollar amounts. With crowdfunding platforms such as Kickstarter, the entrepreneur will set a target for the dollar amount to be raised, the deadline by which it must be raised and any reward to the persons contributing to the project. Typically, the dollar amount to be raised must reach the targeted amount on or prior to the deadline or all funds raised must be returned to the people who contributed to the project. Contributors in this type of crowdfunding offering typically receive a reward—a copy of the product that their contribution helped fund or some other token of appreciation. They do not receive any ownership interest in the company in the form of shares of stock, convertible notes or other securities.
