Traditionally, when raising capital, an overwhelming majority of businesses have used Rule 506 of Regulation D, also often known as the “private placement exemption” as their exemption from securities registration requirements. In recent years, Congress, the SEC, and state regulators have enacted a number of alternative exemptions designed to make capital formation easier for growing businesses, such as equity crowdfunding and “mini-IPOs,” as well as made refinements to existing exemptions, such as Rule 147 (intrastate offerings) and Rule 504. In this post, I’ll provide an overview of these newer options. [Read more…]
Startups and Venture Capital
When it comes to raising capital to get your new business off the ground, there’s a range of investment structures available, from common stock to exchangeable shares. One of the newer and most popular forms of financing for startups is convertible equity.
When raising an angel or seed round of financing, many startups increasingly opt to offer investors some form of convertible equity rather than more-traditional convertible notes, which require the company to repay the investment plus interest if the company is unable to raise future rounds. Convertible equity, on the other hand, removes the stress of possible repayment with interest, and gives the company the potential of starting out free of significant debt. [Read more…]
The concept of pre-money valuation vs. post-money valuation can be a confusing one at first for many startup founders. Pre-money valuation refers to the valuation of the company prior to the investment whereas post-money valuation refers to the value after an investment has been made.
Most founders, when they think of the concept of valuation are referring to pre-money valuation. But calculating pre-money valuation is not intuitive or straightforward. [Read more…]
A convertible note is a hybrid of debt and equity, and it’s a popular form of financing for two main reasons. First, convertible notes are generally easy and cost-effective, because they require little negotiation and paperwork. Second, they allow the parties to put off valuation until a later time, which is useful, because accurately valuing a new company from the outset can be difficult.
Before you venture into a convertible note financing, it’s important to have a strong grasp of the terms of the note and how it will convert to equity.
I’ve previously written about the steps that startups and emerging companies need to take to prepare for an angel or seed round, one of which is becoming familiar with the popular investment structures that are available. With the variety of funding options out there, it’s easy to feel confused or overwhelmed when deciding how to go about raising funds. In this post, I’ll explain more about the most common investment structures, to help you develop a customized funding strategy that works for your particular business. [Read more…]