The Basics of Startup Funding
Funding is the key to success for any business, and without it you’ll find yourself in the offices of a bankruptcy attorney in no time. Startup funding begins small, with the people closest to you but as your startup begins to scale, you’ll reach angel investors and venture capitalists who have the means to invest millions into your business. Here are the stages of startup funding.
At the most infant stages of any startup, equity is divided simply between the founders of a company, whether it be between one, two, or three co-founders. Divide equity between your founders according to each individual’s skills, contributions, and network connections. Use (website) to help determine each founder’s individual worth to the company. Remember to allocate an options pool within your company’s equity, so that you can offer stock incentives to early employees.
Friends & Family
As you and your co-founder(s) continue to build your company, you may come to experience some relatively high operational costs and if you find yourself needing more money to continue operations, it is time to look elsewhere for funds. Start small– reach out to a close friend or family member who is interested in your idea and see if they’d be willing to make an investment for a fair percentage of equity. Ensure that you are giving away as little equity as possible, because as you continue building your startup the only way you will be able to find more funding is by giving away equity.
Within a few months, you will likely need to begin searching for more funding– remember, cash is oxygen for businesses. At this point, you should begin to search for angel investors, and in order to make the case for an investment from an angel investor, you’ll need to prove your company’s value. Before you meet with your angel investor, ensure that you can prove that your startup is worth more than $1 million, and you’ll likely be able to raise $100-200K in funding. At this point in your startup, you company is more valuable than it ever has been and thus, your equity is more valuable– aim to give away not more than 15% in equity.
If you find that reaching out to an angel investor is too difficult, reach out to a local incubator or accelerator. Although investments can be tight among incubators, the connections and network growth you’ll gain from them are invaluable. Typically, incubators will connect you to other investors, business advisors, and most commonly, they’ll offer you office space.
Now you’ve hit big time, your product should be in its first public version, and you should be gaining traction among your customers. This is going to be your biggest funding stage yet. Venture capitalists typically invest more than half a million dollars into companies but you’ll have to prove your worth. In terms of splitting equity, the math from your angel investment should carry over to this investment.
Following your venture capitalist round, you’ll continue raising money in funding rounds until you a) can’t raise any more, b) get acquired, or c) go public.