Funding Your Startup: You Should Know…

“You’ve even formed a company to develop your concept into a working technology. Now what? You’ll need money to support yourself, recruit a team, rent space, obtain equipment, and build your technology.” (Ervin Cohen & Jessup)

Entrepreneurs know that a great business idea doesn’t get very far without funding. But what to know about funding that will turn your idea into a successful venture?

These five things, for starters:

1. Look beyond the money when evaluating investors:

[Link: Valuation – How to Assess Funding Options as a Start-up - Fenwick & West LLP]

2. Family and friends can help – but it’s still business:

“In the search for startup capital funding, family and friends can be a great source of financing as they will have a vested interest in your success, and they may be willing to take a chance on you that no bank or other investor would… As the initial investors are family and friends though, you have to structure any financing for your business very carefully to preserve relationships, and you should ensure that your investors fully understand the risk.” (Scott Legal Services)

3. Crowdfunding is coming – but it may not be your best option:

“[T]here can be drawbacks to targeting a large pool of smaller investors. For example, small shareholders have rights to inspect the company’s books and records, rights to bring a derivative claim on behalf of the company, and, often, some protections against oppression by the controlling stakeholders, all of which may add additional layers of complexity for the management team… [V]enture capital investors and other sophisticated investors may be discouraged from investing in companies with larger shareholder bases in an effort to avoid the administrative headaches, costs, and potentially greater litigation risk that some believe are caused by large shareholder bases.” (Foley & Lardner)

4. Potential investors play hardball:

“[A]t some point, you’ll need financing beyond … immediate resources. That’s when you’ll have to depend on the self-interest of strangers. Not their kindness, their self-interest: these are angel investors looking for return on their own money, or venture capitalists or other professionals who must produce returns for their fund investors. And their experience instructs them that, however great your concept may be, turning it into a commercial success that gives them a strong return on the money you’re asking them to risk is a long-shot. So your first meeting with any potential investment decider is critical: You must be prepared to answer their hard questions to move beyond that meeting.” (Ervin Cohen & Jessup)

5. Whatever you do, you’ll need a lawyer:

“A lawyer can guide you through the risks and benefits of entity formation, including a corporation or limited liability company (LLC). You may need to discuss liability, tax treatment, business organization, government filings and disclosures, methods to raise capital, investor risk, government regulation and drafting the necessary paperwork for filing.” (Barger & Wolen)

The updates:

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