21 Ways to Raise For Your Early-Stage

StartupLegal Issues for Startups and Entrepreneurs

@CoStartupLawyer

ColoradoStartupLawyer.com

Caveats

Thought exercise

Not all of these ideas are mutually exclusive

Fundraising almost always involves securities compliance issues

Not an expert on all these methods

Talk with advisors, accountants, and attorneys before raising

Two questions to ask

What are the tax consequences of this

transaction?

What are the securities consequences

of this transaction?

#0 Bootstrapping

Use your own money

Bootstrapping Pros & Cons

Pros

Keep control, ownership,

possession of business

Major time saver

Not beholden to anyone

Cons

Vast majority of very

successful startups receive

funding

Only works if you have the

resources

Potential loss of resources &

mentorship

#1 Kickstarter/Indiegogo

Donation or perks-based financing

Generally, no equity or debt obligations

to donors

Costs money to do well

Kickstarter Pros & Cons

Pros

No securities compliance

issues

Free money!!!

Cons

Potential tax consequences

Some businesses don’t lend

themselves well to it

Donor negative feedback if

super successful

Can look bad if

unsuccessful

#2 Friends, Family & Fools

Generic term for early pre-seed round

FFF Pros & Cons

Pros

Easier to sell friends than

experienced investors

May be helpful for small

round

Cons

Many founders mess up

securities consequences.

Unsophisticated investors

can be an albatross

Using non-accredited

investors almost always a

bad idea

#3 Common Equity Raise

An offering that gives investors same

type of ownership as founders

Common Equity

Pros & Cons

Pros

Easy

Simple

Great if you can get it

Cons

Very few sophisticated

investors willing to invest

without special

protections/preferences

Requires speculative

valuation attempt

#4 Preferred Equity Raise

Providing stock to investors with

preferential treatment and advantages

Most common vehicle for VCs

Preferred Equity

Pros & Cons

Pros

Likely sophisticated

investors

Common vehicle for

raising large amounts

Cons

Once you start giving

preferences, you’ll have to

give out more later

Makes founders subordinate

in some circumstances

Occasionally a vehicle for

screwing founders

(participating preferred)

#5 Convertible Notes

Debt instrument that allows also allows

holder to purchase equity at a discount

at a later date

Convertible Debt

Pros & Cons

Pros

Removes valuation

question

Inexpensive

Doesn’t immediately

require equity sacrifice

Cons

Maturity without liquidity

event or subsequent raise

Debt payments

Wide variation in terms

#6 Convertible Equity

Convertible equity is an instrument that

removes the interest provision and

maturity date associated with

convertible debt

Convertible Equity

Pros & Cons

Pros

Removes valuation

question

Inexpensive

Cons

Not as well known

Many investors just don’t

think the risk/reward is

good enough

#7 SAFE

Simple Agreement for Future Equity

New vehicle created by Y Combinator

in California

Similar to Convertible Equity

SAFE Pros & Cons

Pros

Removes valuation

question

Low legal costs

Simple and clear

Cons

Brand new

Many investors risk averse

#8 Title II Crowdfunding

New investment vehicle allowing

investors to reach out to accredited

investors with whom company does

not have a pre-existing relationship

Title II Crowdfunding

Pros & Cons

Pros

Possible to raise large

amounts of money

Access to methods of

raising capital never

previously available

Cons

Number of legal hurdles

Significant regulatory

hurdles

Dangers in having large

numbers of shareholders

too early

#9 Title III

CrowdfundingLaw permitting limited fundraising to

accredited and non-accredited investors

with significant regulation and hurdles

Title III Pros & Cons

Pros

Ability to raise money

from non-accredited

investors with no pre-

existing relationship.

Cons

Regulatory and legal

morass

Significant legal and

accounting costs

Likely not worth the costs

for most startups

#10 Leverage/Sell/

License IP

Intellectual Property, usually patents,

may be leveraged to provide operating

bandwidth for company

IP leveraging Pros & Cons

Pros

Comes at no immediate

costs to startup

Cons

May discourage

subsequent investors

Only works for valuable

IP

#11 Microfinance/SBA

Loan/Simple Debt

Many institutions designed to provide

affordable loans to small businesses and

startups

Debt Pros & Cons

Pros

No equity

Simple

Cons

Often more targeted at

small businesses than

startups

Debt payments often not

feasible as all assets needed

to grow business

Not easy to get

#12 Leveraging Business

Equipment/Business Assets

Using items of value owned by

business or owners to fund the business

Business Assets Pros & Cons

Pros

No equity

No immediate cost to

startup

Cons

Few businesses have

assets

May discourage future

investors if it ties up assets

#13 Consulting/Side Work

Using company or side jobs to create

revenue in known areas of familiarity to

launch company

Consulting Pros & Cons

Pros

Provides longer runway

Shows demand for skills

Cons

Distracts from core

business

Perhaps shows lack of

faith in core

product/business

#14 Product Pre-Sales

Technique where sales of product may

be used to fund the product’s creation

and distribution

Pre-Sales Pros & Cons

Pros

No cost in terms of equity or

debt

Cons

Puts serious pressure on

founders to deliver product

under uncertain conditions

Disclosures must be clear or

legal consequences may result

#15 Revenue-Based

Financing

Offering a percentage of (usually top-

line revenue) to investors to finance

future growth

RBG Pros & Cons

Pros

Lower risk than equity

No equity sacrifice

Usually a time limitation

Cons

Not that many startups have revenue to justify this early on

Lower upside from investors’ perspective

Few standardized documents instruments available for public consumption

#16 Strategic Alliances

Major corporations or larger partners

may provide financial resources for

growth

Strategic Alliances

Pros & Cons

Pros

Depends

Cons

Depends

Startup not likely to have

much negotiating leverage

vis-à-vis major company

#17 Contests/Hackathons

Hackathons can provide cash and

notoriety that serves as a great launch-

pad for startup

Hackathon Pros & Cons

Pros

Free money!

Cons

You had better be good

Not that common

Not likely sufficient funding to

take startup all the way

#18 Accelerators

Handful of accelerators provide cash in

addition to training to help startups

Accelerators Pros & Cons

Pros

Free Money!

Cons

Very competitive

Not that much money

available

Usually comes with equity

component

#19 Angels

Private investors who put their own

money into startup companies

Angels Pros & Cons

Pros

Very common means of

raising money in startups

Logical early-stage step

Prep for raising for VCs

Cons

Depends on the angel

#20 VCs

Investors who invest money into

startups on other investors’ behalf

VC Pros & Cons

Pros

Prestige

Mentors/relationships

Most successful startups

receive VC money at

some stage in their

growth

Cons

VCs will exert meaningful

influence on your business

Odds of funding low for

most startups/very

competitive

#21

Government/Foundations

There are ways to start businesses

relying on creative use of government

resources, grants, and programs

Gov’t Pros & Cons

Pros

Free Money!

Large amounts of money

flowing through the

government

More opportunities than

most realize

Cons

It’s the government;

bureaucracy can be a bitch

Slow moving

Tough sell for unproven

products

21 Ways to RaiseLegal Issues for Startups and Entrepreneurs

@CoStartupLawyer

ColoradoStartupLawyer.com