Sources of Financing for Startup Companies

Sources-of-Financing-for-Startup-Companies

Deciding to form a startup company can be a very exciting time.  You work hard to come up with a novel idea and devise a strategy for developing the underlying product. The next step would be to obtain financing to put your business goals into practice.  If there is not enough to bootstrap and fund your business, you must explore different options for financing.  Pre-seed stage refers to the period when a company is developing its idea before it tries to sell it to any customers.  At this point, very few investors will take a chance at a first-time entrepreneur.  The California startup attorneys at Startup Company Counsel have the knowledge and experience to guide entrepreneurs on the best avenues and options for success when searching for pre-seed stage financing.

Different Types of Pre-Seed Stage Financing

Seed funding rounds are typically small and are channeled toward development and growth of an initial product. The money may also be used for conducting market research or expanding the team.  A distinction must be made between pre-seed stage and seed-stage financing – this distinction is key to understanding the best avenue for financing your startup at its current stage.

Here are some of the potential options for pre-seed stage California startups seeking financing:

  • Crowdfunding – Crowdfunding is a relatively new source of financing that is often utilized by pre-seed stage startups. Crowdfunding refers to entrepreneurs seeking relatively insignificant financial contributions from a large number of people, often via social media or other internet networks, to fund the start or growth of a business venture.  Recent regulatory changes have made it much easier to obtain crowdfunding financing, and many observers expect crowdfunding to overtake venture capital as a source of financing.
  • Angel Investors – Angel investors are high-net-worth individuals who are willing to invest their personal assets into a portfolio of pre-seed stage startups and lead multiple rounds of investment.
  • Micro-Venture Capital – These firms investment 3rd party money into pre-seed stage companies that are too small to be attractive to traditional venture capital.
  • Venture CapitalThe capital invested in a project in which there is substantial element of risk, typically a new or expanding business.
  • Startup Incubators – Startup incubators are typically open-ended programs that provide small seed investments. They are offered by local governments in order to facilitate economic growth, and they are offered by private funds such as Y Combinator, 500 Startups, or tech stars.
  • Accelerators – These programs provide pre-seed stage funding and other support like office space, mentoring, and professional services in return for equity in a new company.
  • Corporate Seed Funds – Many established companies such as Google, Intel, Nokia, and Microsoft have developed “venture capital arms” that invest in promising companies that may make good acquisition targets in the future.

It is important to note that these are far from the only options for startup financing and you should evaluate all of your options with a skilled California startup lawyer before choosing one particular route.

Pre-Seed Stage Equity

One structure for pre-seed stage financing involves the creation and issuing of Preferred Stock.  By purchasing Preferred Stock, investors become owners of the company and a valuation for the company is set.  Ownership entitles the investors to voting and other rights, and although the NVCA and other organizations have created templates to lower the cost of structuring and papering these transactions, they remain complex and more expensive than seed loans.

Contact your California Startup Company Business Lawyer Today

Because finding financing for your California startup company can influence many other important issues, it is important to consult with your experienced business lawyer at Startup Company Counsel before taking any action.  Not only do you need to choose the correct option for pre-seed stage financing, special attention needs to be given to giving others stock in your company.  Please call our office at 408-441-7555 or email us to learn more about our startup services.

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