Starting a business is often very exciting and challenging at the same time. It involves a lot of costs and expenses that may exceed your revenues. Depending on the size, the up-front costs and the type of business you want to launch, you will probably have to consider raising capital in order to fulfil the needs of your start-up business. Raising capital may seem like a challenge but if you don’t have enough capital to launch your business project or idea, finding investors might be your solution. Traditionally, entrepreneurs were only asking capital loans from banks. However, the lending criteria’s became too strict for many start-up businesses that don’t have a perfect or long track record. These days, start-up businesses owners have more funding options, such as private investments from friends and family or even crowdfunding. You should take the time to evaluate your investments options depending on the characteristics and the specific needs of your start-up business in order to choose the appropriate investment for you.
Stages of funding
1. Business plan
Before starting to raise capital, we recommend that you make a business plan to assess the best raising option for your start-up business. This way, you will be able to know if your business idea is possible and if it will generate capital return for investors. Also, you should ask yourself how much money you want to raise and how will you invest it. Investigating who has invested in similar start-up businesses might also help you target the right investors for you. Raising capital and finding investors are not easy and in order to raise capital you will have to give up a portion/percentage of the equity of your business in exchange of that capital. This means that your investors will become co-owners of the company. With a detailed business plan, you will be able to work out the exact amount you need to make your start-up business a success.
2. Funding possibilities
Furthermore, you should consider all your funding possibilities offered to you such as:
- Bank loans and credit loans – This will require a good credit history and a solid business plan;
- Grants – You can verify if your business could beneficiate from a grant from local, state or Federal Government or private companies (the grant and assistance finder website can help you find financial assistance packages in your state depending on the characteristics of your start-up business);
- Family and friends – They can also offer personal fund in exchange for equity in your company;
- Co-founders – They can also bring their experience and investment to your company. You might have to offer equity in exchange of their investment in your start-up if you cannot guarantee dividend at this stage of your start-up business;
- Seed funding or seed capital – You can open up to potential investors known as “angel’s investors” or “venture capitalists” in exchange for an equity stake in the start-up. They are accredited potential investors and they could provide you an investment ( at different stage of your business expansion), working spaces or /and advices in exchange of equity in your business; and
- Crowdfunding – This method of funding has become more popular over the last years. There are a range of platforms that connect the investors with the start-up business in need of capital. You will need to follow the guidelines set by the Australian Securities & Investments Commission (ASIC) (depending on the type of crowdfunding). Finally, there are two ways to receive your investment back. Investors can invest money in the company and have the guarantee that they will be among the first to receive their investment back. The other option is that the investor will co-own a part of the company by equity.
There are a lot of benefits in raising capital for your start-up business, it is worth spending the time to think about your business in detail to work out if raising capital makes sense for you and if it is the best option for your start-up business.
Convertible notes are an investment alternative where a short term debt of the company has the potential to be converted into equity. Instead of receiving a set amount of shares upfront, the investor will have to wait until the date fixed in the agreement or when the company raises a certain level of capital
The convertible note will come to an end by either converting into a set amount of shares at a discounted rate to the investors, or by the return to the investor of the amount of their investment (this will depend on the agreement). The convertible note agreement will usually contain the amount invested, details of when the automatic conversion will happen (trigger event) and the discount rate applicable. Convertible notes are a flexible and cost effective way to raise capital for a start-up business and have a variety of benefits. Generally, in order to raise capital you are required to value your start-up business – which can be quite difficult in the early days when you may not have much information about your business or potential revenue. By raising capital through convertible notes you don’t have to value your business up front. Further, issuing convertible notes allows you to retain the control of your business from investors (although, once the investors receive their shares on conversion, they will then have significant rights). Keep in mind that when you will issue shares, you might have to draft a shareholders agreement including the new investors and shareholders.