Financing your Startup

Megan Muir

Good news for budding entrepreneurs located in (or willing to relocate to) Seattle, Boston, Boulder and New York.  As reported on Geekwire and TechCrunch, TechStars has raised an additional $24M to enable the startup incubator/boot-camp to offer the companies in its summer-long program $100,000 in convertible debt.  This additional funding should enable the TechStars entrepreneurs to focus on building their early-stage companies a little longer before launching into the time-consuming fundraising process.  The new funding comes from Foundry Group, IA Ventures, Avalon Ventures
Continue Reading TechStars raises $24M – Startups Eligible for Additional Funding

A few months ago we posted an article entitled “Financing Your Startup: How to Sell Stock without Going to Jail.” Among other things, the post described a series of legal restrictions associated with raising funds legally. Although there have been many widely publicized calls to relax these restrictions over the past decade (such as this 2006 Report of the SEC’s Advisory Committee on Smaller Public Companies or this 2007 SEC Release), most of these efforts fizzled with no action. However, in connection with the Dodd-Frank Act reforms, there has recently been a notable resurgence of pressure to simplify rules regarding private company capital raising. This pressure has come from a variety of sources, most notably Congressman Darrell Issa (R-CA), Chairman of the House Oversight and Government Reform Committee. Recently, SEC Chairman Mary L. Schapiro, and Director of the SEC’s Division of Corporation Finance Meredith Cross, testified before the House Oversight and Government Reform Committee to discuss some of these topics. A transcript of their testimony can be found here.

The two issues that appear to be center stage are (1) relaxing the general solicitation prohibitions in private offerings and (2) increasing the 500-shareholder threshold for triggering reporting obligations under the Securities Exchange Act of 1934, as amended (the “1934 Act”).Continue Reading Potential Changes to the Private Financing Landscape

This post is part two of a two-part series and will focus on shareholder controls.  Here is our prior post that focused on board of director controls.

Shareholder Controls:  There are a number of mechanisms available to increase the control of one or more groups of shareholders, such as the founders or all holders of a certain series of stock (e.g., Series A Preferred shareholders).  The most common ways are set forth below.  Note that they are often used in combination.Continue Reading Financing Your Startup: Understanding Control and Voting Issues (Part 2, Shareholder Controls)

When negotiating a term sheet for an angel or venture capital investment, there is often tension between the founders and investors with respect to allocation of control over various future company actions and decisions.  There are many different ways for a founder to retain, or a new investor to obtain, control over a startup.  Below is a brief, but not exhaustive, outline of some of the most typical control features found in early stage financings.
Continue Reading Financing Your Startup: Understanding Control and Voting Issues (Part 1, Board Controls)

(in collaboration with Megan Muir)

We recently guest posted the below article on TechFlash.  At the end of this post, we have added some supplemental information in an effort to respond to a few questions we received from TechFlash readers.

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As the founder of a startup, one of the first issues you need to address is how to finance your company’s operations.  If you are lucky enough to be able to fund your startup out-of-pocket, or through generous family members, congratulations.  You can probably skip the rest of this post and get back to building your business.  However, if you are like most founders, you won’t be able to self-fund your company entirely and your revenues won’t exist yet, or won’t be adequate to grow the company.  In some instances you may be able to obtain government grants or if you have some type of hard asset or significant accounts receivable to use as collateral, you may be able to borrow from a bank.

This post addresses a common method for financing the growth of a tech startup – by selling stock in your company.  What type of investor is right for your company – family and friends, angel investors, venture capitalists, or some combination of these – is something you will want to consider carefully.  We’ll save that discussion for another post as it’s an interesting topic on its own.Continue Reading Financing Your Startup: How to Sell Stock without Going to Jail

Mathsphoto © 2010 Mike Hammerton | more info (via: Wylio)In the world of startup financing, the term “pre-money valuation” is used to describe the value of your company prior to a financing. The pre-money valuation is used to calculate the price per share of the stock that will be sold in the proposed financing (the “Offering Price”) using the following formula: (x) pre-money valuation divided by (y) the company’s share denominator (prior to the financing) equals (z) the Offering Price.

While the pre-money valuation is usually the centerpiece of valuation discussions, it is also important to understand how the “(y)” share denominator figure can play a significant role in ultimate dilution of the company’s existing shareholders from the proposed financing. (more after the jump)Continue Reading Financing Your Startup: Understanding Pre-money Valuation