There are several things that founders should know before raising funds for their startup.
1. Understand the different types of funding available. Selling your company’s shares in exchange for money is just one usual way of raising funds. There are various ways to raise capital, including debt financing, equity financing, or even crowdfunding (see Oxwhite’s pre-order model as a case study). Each option has its own pros and cons so you need to decide which one is best for your business.
2. Know your company’s valuation. Even though it may be hard to come up with the exact value especially when you’re just starting out, you should have a general range on how much your company’s business is worth based on the other competitors or companies in a similar industry. A company’s valuation is an important factor in determining how much funding you can raise and on what terms. Figure out your company’s value before engaging with potential investors.
3. Learn and be prepared to negotiate. Fundraising involves negotiating funding terms. Although the terms will be spelt out in the agreements (more on this below) you need to have a basic grasp of the usual funding terms like funding tranches (i.e how long and what conditions need to be fulfilled before you see any money in the bank account), the rights and preferences of the investors such as the inclusion of reserved matters, and the use of funding proceeds.
4. Understand the legal documents involved. There are various fundraising documents, like a term sheet, a subscription agreement, and a shareholders agreement involved. Understand the terms of these documents and of course please hire and get a startup lawyer to review them before signing them.
5. Know your investors. Every investor wants to make money but you should know how an angel investor is different from a VC or a family office and which one is better suited for your startup. Know the investor’s track record, and investment style, and ensure that it is aligned with your company’s mission.
By considering these factors and other fundraising mistakes that you should avoid that we’ve written previously, you can be better prepared to make an informed decision about your company’s fundraising journey.