What are the different types of funding available?
When starting your business, you'll want to ensure you have adequate funding to help pay for any expenditures. By understanding what type of funding is available to you and the potential advantages, you will be able to make the best choice for your business. Funding options that you may want to consider include loans or investments from friends and family, bank loans, angel investors, and venture capital funds.
Asking your friends and family for a loan or investment can be a good option, especially if you have little to no business credit history. The amount of funding you can obtain from friends and family may be limited, however, and personal relationships may be negatively affected if the loan or investment doesn't pay off.
Bank loans are another funding option, especially if you and your co-founders have solid credit. Shop carefully for these loans and consider whether the loans are backed by the Small Business Administration. You may be required to provide the bank with your business plan and/or a personal guaranty of the loan (with your personal assets as security) so be prepared for these requests.
Angel investors are wealthy individuals who can provide you with money in exchange for an equity stake in your business. Angels often invest in early stage startups in the hopes of achieving greater returns on their money than investors who come in later in the growth cycle. They tend to have valuable industry experience and business expertise and may provide you with advice and connections to their network. You will want to carefully prepare your “pitch” in order to convince them to invest in your vision for your business.
Venture capitalists use money pooled from multiple investors, including institutions and high net worth individuals, to invest in your business in exchange for an equity stake. Venture capitalists often invest in businesses that are already established but need investors for their later rounds of financing. They have an expectation of profit and they may provide relevant experience or knowledge for your business. Venture capitalists tend to invest more money than other investors, but they also expect to cash in on their investment through a quick IPO exit or other sale of their interests within a short time period (the median time frame was 6.3 years in 2019).
What documents do I need to get funding?
After you choose your preferred funding options for your business, you'll want to make sure you have the proper documents. This is extremely important because without the proper documents, you may not be able to receive the funding you need. Common documents required for most types of funding are your complete business plan and your business financials, including projections. Each type of funding may require additional documents, so make sure you are aware of all the documents you may need.
For example, a bank loan may require one or more credit reports, bank statements, tax returns, income statements, balance sheets, a budget and future cash flow projections. Angel or venture capital investment may require a convertible note, term sheet, voting agreement, stock purchase agreement, investor rights agreement, the right of first refusal and a co-sale agreement. And you are wise to carefully document the terms of investments or loans from friends and family so there are no disputes later about the terms of their investment or loan.
For assistance with entity selection and funding documents, be sure to consult an experienced business lawyer. Res Nova Law attorneys can help you with that or we can refer you on if it's not a good fit.