Types of Funding - I
Money doesn’t grow on trees and you need money to convert your Idea into a great product. An entrepreneur needs funding at various stages.
Many entrepreneurs start with some level of self-funding (also known as bootstrapping) and, in fact, future investors likely will want to see that you have some “skin in the game”. Even if you can only put in a little money, it is worth considering the benefits. For example, you don't have to worry about keeping investors happy. You also can keep more profits to yourself. Many founders also hold off on taking a salary, consider tapping into the 401(k) retirement account, and/or have a side job to help make ends meet while they get their business up and running.
Friends and Family Investors
First, make sure you read our guide on raising money from friends and family investors and the dangers that your startup faces. Your friends and family may be willing to help you grow, and they probably wouldn't make you jump through the many hoops. These investments generally are some type of loans or stock purchases and are something later investors will likely find to be a positive (i.e., if your family and friends don’t believe in you, why should the investor).
However, to protect yourself and your relationships, make sure you have a clear written agreement that outlines how the money will be repaid. Also, remember that even if the arrangement is informal, you should confirm if any securities restrictions apply to the arrangement.
Crowdfunding is quickly becoming a popular way to help fund a startup.
However, before seeking crowdfunding, make sure you look at our guide on the various crowdfunding legal issues and tips on how to avoid legal mistakes.
In the traditional approach to crowdfunding, you offer a first-run product or some other incentive in exchange for a monetary contribution. Contributors receive no equity and are not entitled to be repaid.
Equity crowdfunding is a newer option made possible under the Jumpstart Our Business Startups Act -- which allows you to seek small investments from a large number of investors. You use a crowdfunding platform to post a listing similar to a traditional crowdfunding campaign, but your investors become shareholders. This includes voting and dividend rights as outlined in the shareholder agreement.
If you're interested in equity crowdfunding, carefully review the requirements of the Jumpstart Our Business Startups Act because it is a regulated securities offering.
Incubators and accelerators generally provide groups of startups with workspace, business advice and training, and potential funding. They are often sponsored by universities, industry organizations, or individual companies. You can learn more about what you should do to legally prepare for the accelerator program beforehand in our guide here.
Each startup gets support from the sponsor plus networking opportunities with the other startups. In exchange, the incubator or accelerator may take an equity stake especially if they provide funding.
Before seeking out angel investors, it is highly recommended to make sure that you read the guide on angel investors and the things startups must know and prepare for beforehand.
The upside is often a closer personal relationship that includes heavy mentoring. The downside is that an angel investor will often ask for a large equity stake and possibly even a controlling interest.
While getting a large investment offer is exciting, you need to make sure it's best for you.