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 Start-Up and Venture Capital Law

Venture Capital has been one of the main ways for raising money to start a business. In fact 2018 was particularly good year with over $100 billion dollars raised in Venture Capital. Entrepreneurs routinely raise rounds of $10 million dollars and more. But, it is important to know that there are many ways for entrepreneurs to raise money when starting a business. In reality, only a very small percentage of entrepreneurs will receive money from VCs, particularly in the very beginning stages of the business.

The first couple of ways that startup entrepreneurs can raise money is through Friends and Family and Angel Investors.

Family and Friends

Starting with Family and Friend (F&F). Your F&F are people that are you know well and you would feel relatively comfortable with approaching for money. These are the people that want you to be successful probably more than any other group of people.

It is very important to that you treat your F&F with the same amount of respect that you would treat a Venture Capital firm when asking for money. Your F&F have worked very hard for their money and you have to convince them to give you money in the same fashion as you would a Venture Capital firm.

Pitch Your Idea

When you are pitching your idea to a VC, you are highly likely to be presenting your ideas and business plan through a power point slide show, sometimes they call this a deck. Therefore you should do the same with your F&F that you are asking for money and create a PowerPoint slide. If you don’t know how to create a PowerPoint slide presentation, you can search the internet or go to your local library and either check out a book or ask the librarian about how to create a PowerPoint slide. The PowerPoint presentation would state many things about your business.

Some of the things you want to talk about in your pitch to your Family & Friends include:

  1. The problem your product or service is trying to solve

  2. How will you make money

  3. How big is the market? What is your ideal customer?

  4. Financial Projections, and

  5. many more.

Importance of a Loan

When you are asking for money from your Friends and Family, you typically don’t want to ask for money where you are giving them shares in your company, particularly if you are trying to raise money from Venture Capital Firms at a later date. Instead you’ll ask them for a loan where you pay off the loan with interest at later time in the year.

You’ll treat it just as a traditional loan where you sign a promissory note in which means you are legally promising to pay back the loan with interest in full by a certain time.

A loan instead of an investment is important because you don’t want to give up ownership in your business when there are additional ways to get funding. In addition, as your company become more profitable, Venture Capital Firms that want to invest into your company will have want to make sure there isn’t too many owners and that the VC firm can actually make a worthy profit and that you as the owner of the startup still have enough ownership.

You can find a sample loan promissory note contract at GlobalLaw.tv/contracts.

Convertible Debt

You can also use the money for an another type of loan called “Convertible Debt”. Convertible Debt is like the middle ground between a loan and ownership. It is where the money you raise from your Family & Friends start off as a loan, but converts or changes into equity of the company when you raised a round of Venture Capital funding. Now equity, share, stock, ownership, they all basically refer to the same things: ownership into a company. And this is what happens when the loan converts into ownership of the entrepreneur’s startup.  

But many times, it may be hard to get investments from your friends and family in the beginning because they may not take your startup idea serious. They may not be able to visual your idea and the execution of your startup as clearly as you can. And that’s okay. When you can’t find anyone to give you money or invest into your dream, you’ll have to take can-do attitude and just start the business off yourself. You’ll use your own personal funds. You can get a part-time or full-time job and use some of that money to grow your business. Over time as you reach different milestones and your business grows, your family and friends will see how hard you worked on your goals and they’ll probably be more willing to give you a loan or convertible debt. In addition, as you reach economic milestones, you’ll attract angel investors that are looking to invest into early stage startups.

What are Angel Investors?

Angel investors are individual investors that invest their own money. It is important to understand the different between an angel investor and a venture capitalist. An Angel Investor is an individual person that invest anywhere between $25,000 - $100,000 of his or her own money in a startup by means of convertible debt. An venture capitalist is typically an company that invest millions into startups.

While an angel investor uses his own money to invest, the Venture Capitalist uses the money of others to invest into startups. The VC gets the money from Governments and Corporate Pension Funds, large corporations, university endowments, charities, institutional investors, and many other places.

Also, in contrast to the Angel Investor that primarily uses convertible debt, which is basically a loan that can convert into equity in the company, Venture Capitalist only makes investments for equity or ownership of the startups. In addition, the Venture Capitalist want preferred stock in the startup company in exchange for the investment in the startup. Preferred stock allows the holder of preferred shares to get paid first before common ordinary stock holders get paid. The VC will be investing millions of dollars and want to ensure they can minimize their risk of loss as much as possible. One way of doing this is by ensuring that profits come to them first before they go to the startup entrepreneur.

So the startup entrepreneur using his or her own money to start the business is not uncommon. In reality, that’s the typical path to starting a business.

The Startup Funding Progression

The Startup Funding Progression typically involves the startup founder using his or her Personal Funds to reach a milestone, then they’ll get money from Family & Friends to reach another milestone, then they receive convertible debt from an Angel Investing → then they’ll can begin receiving funding from Venture Capital Rounds. The first round of Venture Capital is called Series A, then the next round will be called Series B and so on. After receiving funding from the VC firms, the startup will typically look for an exit strategy through either an IPO where the company is places shares on the stock market or an Acquisition where a larger company comes and buys the startup.

You can find a free Sample Promissory Loan Contract at GlobalLaw.tv/contracts. The world of Venture Capital is an exciting environment where a ton of money is being raised and invested into startup businesses. If you have a business idea, you can begin the process of pitching your idea to receive funding. You might have to start your business using your own personal funds, but that’s ok. Never give up on your dreams and work hard to make them a real.

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