Fundraising Options for Your Startup

By Fernando Berrocal

Some startup funding options include Venture Capital (VC), Venture Debt, and Non-Dilutive Funding. The chaos that comes along with startup funding rounds might be overwhelming when you're trying to raise money for your own startup. How are you expected to join in on the action considering such high-stakes plays? VC does not have to be your exclusive source of finance. First, let's take a look at the landscape to see what your possibilities are.

Options Raising Funds for Startup

There are three categories of Startup Funding:

  • Equity Funding: Investors pay now for preferred stock of your business or the right to acquire shares later, once the business has been valued.
  • Venture Debt: This is a type of financing that is used to fund based on how much equity you raised during your last round, a financial institution gives you money for the long or short term.
  • Light Funding: An investing business provides you with a modest loan with a quick repayment schedule. If you have recurrent revenue, this is excellent.

Funding for your Startup in the form of Equity: Priced fundraising rounds, convertible notes, and Simple Agreements for Future Equity are the three basic types of equity funding (SAFEs).

Priced Fundraising Rounds: To raise funds, you offer preferred stock in your business to investors. This strategy requires you to get an agreement with investors on the organization's valuation before selling shares. Preparing models to determine the share price based on the accounting situation and specific assumptions is one approach. It also provides investors the most authority over your business as compared to other possibilities. Institutions that invest in your organization may get voting rights or a board seat. If you have strong financial predictions, and can afford the paperwork and accounting involved needed to raise a considerable amount of capital, this is an excellent option.

Convertible Notes: When you issue a convertible note, you obtain a short-term loan from an investor in return for the ability to convert the debt before a priced capital round. This loan has a rate of interest of 4% to 8%. If your business collapses before the note converts, the loan you obtained for it takes precedence over your equity shares and most other obligations. The key advantage of convertible notes is that you don't have to go through the time-consuming process of valuing your organization's shares before you can start raising money.

Simple Agreements for Future Equity (SAFEs):  SAFEs are an excellent option if you haven't decided on a business valuation yet. SAFEs can be compared to simpler forms of convertible notes. They're each five pages long, and the only thing that can be changed is the value ceiling; everything else is boilerplate. The money you receive for a SAFE isn't debt, so it doesn't accrue interest like convertible notes do.

Light Funding for your Startup: The numerous small-scale lenders that have sprung out to assist seed bootstrappers, individual innovators, and other non-giant businesses fall within this group. If your financial requirements are modest and you're just getting started with your business, light funding is a good option for your business. The following are some of the advantages that these sorts of investors promise:

  • Models of Alternative Finance: You may not be forced to contribute shares of your business in exchange for money, unlike with other choices.

  • Transparent Funding: If you're having trouble acquiring financing, light investors may be able to assist you. The majority of them guarantee transparent funding structures with no hidden costs and are explicit about how they function.

  • Quick Approval: AI-based techniques are used by at least some of these institutions to screen applications and expedite financing. Instead of putting up a pitch deck and pursuing investors one by one, you may gain approval in a matter of days.

When should you use Venture Capital to support your Startup? Limited Partners are represented by VC funds. They agreed to make a lot of money throughout the VC fund's existence. To fulfill that demand, the VC must invest in phenomenally successful businesses. Since so many startups fail, the earnings from a single successful business frequently offset the costs of other, less profitable initiatives. If a venture capital business invests in you, they anticipate a clear exit strategy (Initial Public Offering (IPO), acquisition, or follow-on round in which their shares are purchased) that will provide a large profit.

The Advantages of Venture Capital Investment:

  • Big Checks: VC funds can accept investments from $250,000 to $100 million or even more.

  • No Repayment Terms: You are not required to repay VC investments in your business. As a result, if things turn sour, you'll be left with less debt. This conveys the idea that personal debt or guarantees are involved.

  • Mentoring and Advice: Most venture capital funds have a lot of expertise with startups and can offer guidance and insight to the management teams of the companies they invest in.

Options Raising Funds for my Startup

Disadvantages of Venture Capital Investment:

  • Few industries: VCs concentrate their efforts on the industries in which they believe they will make the greatest money.

  • Control is lost: Keep in mind that the VC is purchasing stock. If you agree to sell them half of your stock, they may gain control of the business.

Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.

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