21 ways to raise

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21 Ways to Raise

21 Ways to Raise For Your Early-Stage StartupLegal Issues for Startups and Entrepreneurs@CoStartupLawyerColoradoStartupLawyer.comCaveatsThought exerciseNot all of these ideas are mutually exclusiveFundraising almost always involves securities compliance issuesNot an expert on all these methodsTalk with advisors, accountants, and attorneys before raisingTwo questions to askWhat are the tax consequences of this transaction?What are the securities consequences of this transaction?#0 BootstrappingUse your own moneyBootstrapping Pros & ConsProsKeep control, ownership, possession of businessMajor time saverNot beholden to anyoneConsVast majority of very successful startups receive fundingOnly works if you have the resourcesPotential loss of resources & mentorship#1 Kickstarter/IndiegogoDonation or perks-based financingGenerally, no equity or debt obligations to donorsCosts money to do wellKickstarter Pros & ConsProsNo securities compliance issuesFree money!!!ConsPotential tax consequencesSome businesses dont lend themselves well to itDonor negative feedback if super successfulCan look bad if unsuccessful#2 Friends, Family & FoolsGeneric term for early pre-seed round

FFF Pros & ConsProsEasier to sell friends than experienced investorsMay be helpful for small roundConsMany founders mess up securities consequences.Unsophisticated investors can be an albatrossUsing non-accredited investors almost always a bad idea

#3 Common Equity RaiseAn offering that gives investors same type of ownership as founders

Common Equity Pros & ConsProsEasySimpleGreat if you can get it ConsVery few sophisticated investors willing to invest without special protections/preferencesRequires speculative valuation attempt#4 Preferred Equity Raise Providing stock to investors with preferential treatment and advantagesMost common vehicle for VCsPreferred Equity Pros & ConsProsLikely sophisticated investorsCommon vehicle for raising large amounts ConsOnce you start giving preferences, youll have to give out more laterMakes founders subordinate in some circumstancesOccasionally a vehicle for screwing founders (participating preferred) #5 Convertible NotesDebt instrument that allows also allows holder to purchase equity at a discount at a later dateConvertible DebtPros & ConsProsRemoves valuation questionInexpensiveDoesnt immediately require equity sacrificeConsMaturity without liquidity event or subsequent raiseDebt paymentsWide variation in terms#6 Convertible EquityConvertible equity is an instrument that removes the interest provision and maturity date associated with convertible debtConvertible EquityPros & ConsProsRemoves valuation questionInexpensiveConsNot as well knownMany investors just dont think the risk/reward is good enough#7 SAFESimple Agreement for Future EquityNew vehicle created by Y Combinator in CaliforniaSimilar to Convertible EquitySAFE Pros & ConsProsRemoves valuation questionLow legal costsSimple and clearConsBrand newMany investors risk averse#8 Title II CrowdfundingNew investment vehicle allowing investors to reach out to accredited investors with whom company does not have a pre-existing relationship

Title II CrowdfundingPros & ConsProsPossible to raise large amounts of moneyAccess to methods of raising capital never previously availableConsNumber of legal hurdlesSignificant regulatory hurdlesDangers in having large numbers of shareholders too early#9 Title III CrowdfundingLaw permitting limited fundraising to accredited and non-accredited investors with significant regulation and hurdlesTitle III Pros & ConsProsAbility to raise money from non-accredited investors with no pre-existing relationship.ConsRegulatory and legal morassSignificant legal and accounting costsLikely not worth the costs for most startups#10 Leverage/Sell/License IPIntellectual Property, usually patents, may be leveraged to provide operating bandwidth for companyIP leveraging Pros & ConsProsComes at no immediate costs to startupConsMay discourage subsequent investorsOnly works for valuable IP#11 Microfinance/SBA Loan/Simple DebtMany institutions designed to provide affordable loans to small businesses and startupsDebt Pros & ConsProsNo equitySimple ConsOften more targeted at small businesses than startupsDebt payments often not feasible as all assets needed to grow businessNot easy to get #12 Leveraging Business Equipment/Business AssetsUsing items of value owned by business or owners to fund the businessBusiness Assets Pros & ConsProsNo equityNo immediate cost to startup

ConsFew businesses have assetsMay discourage future investors if it ties up assets#13 Consulting/Side WorkUsing company or side jobs to create revenue in known areas of familiarity to launch companyConsulting Pros & ConsProsProvides longer runwayShows demand for skillsConsDistracts from core businessPerhaps shows lack of faith in core product/business#14 Product Pre-SalesTechnique where sales of product may be used to fund the products creation and distributionPre-Sales Pros & ConsProsNo cost in terms of equity or debtConsPuts serious pressure on founders to deliver product under uncertain conditionsDisclosures must be clear or legal consequences may result#15 Revenue-Based FinancingOffering a percentage of (usually top-line revenue) to investors to finance future growthRBG Pros & ConsProsLower risk than equity No equity sacrificeUsually a time limitationConsNot that many startups have revenue to justify this early onLower upside from investors perspectiveFew standardized documents instruments available for public consumption

#16 Strategic AlliancesMajor corporations or larger partners may provide financial resources for growthStrategic Alliances Pros & ConsProsDependsConsDependsStartup not likely to have much negotiating leverage vis--vis major company

#17 Contests/HackathonsHackathons can provide cash and notoriety that serves as a great launch-pad for startup Hackathon Pros & ConsProsFree money!ConsYou had better be goodNot that commonNot likely sufficient funding to take startup all the way#18 AcceleratorsHandful of accelerators provide cash in addition to training to help startupsAccelerators Pros & ConsProsFree Money!

ConsVery competitiveNot that much money availableUsually comes with equity component#19 Angels Private investors who put their own money into startup companiesAngels Pros & ConsProsVery common means of raising money in startupsLogical early-stage stepPrep for raising for VCsConsDepends on the angel#20 VCsInvestors who invest money into startups on other investors behalfVC Pros & ConsProsPrestigeMentors/relationshipsMost successful startups receive VC money at some stage in their growthConsVCs will exert meaningful influence on your businessOdds of funding low for most startups/very competitive#21 Government/FoundationsThere are ways to start businesses relying on creative use of government resources, grants, and programsGovt Pros & ConsProsFree Money!Large amounts of money flowing through the governmentMore opportunities than most realizeConsIts the government; bureaucracy can be a bitchSlow movingTough sell for unproven products21 Ways to RaiseLegal Issues for Startups and Entrepreneurs@CoStartupLawyerColoradoStartupLawyer.com