Cashflow challenges are among the most common reasons for startup failure, accounting for nearly one-third of startup business closures. One in four startups are not able to secure the financing they need for growth. These statistics can seem daunting, and that’s why getting a grasp on startup financing is so crucial.
Whether you’re a seasoned entrepreneur or just beginning to build your startup, these tips will help you determine the best financing options to ensure success for your startup.
Align Your Stock Structure
Understanding the key differences between preferred and common stock will help you and your investors get on the same page. We like to think of preferred stock as VIP and common stock as general admission. Investors often want preferred stock for its perks and flexibility — it’s less risky, and they get priority over company assets if things fall apart. Find more details in our Stock For Startups blog.
Know When The Price is Right
Early-stage startups often face the challenge of having to price their enterprise when there is no comparable or competition, and no real cash flowing into the business. That’s just part of the startup journey! While there are several startup valuation methods, we often call the first funding round an unpriced round because it’s difficult to put a price on the securities you are offering.
Practice Your Pitch
Venture capitalists reject more than 98% of startup pitches. In the initial rounds, investors are betting on you and your vision. If you don’t have the force of personality and creativity to sell your vision, it can be challenging to find financing. This is where a lot of startups fail. Besides a good idea, you need a great pitch — at the right time.
Understand Funding-Round Details
Understanding the different startup funding rounds will help you pick the best option for your startup’s financing structure. A priced round is based on a negotiated valuation of your company, but most early-stage startups use unpriced rounds. The beauty here is the flexibility in valuation, allowing you to focus on growth without fixating on price.
Weigh Loan Pros and Cons
Loans can seem attractive when you’re not giving up your lottery ticket (i.e. equity), but they’re not usually a great idea for early-stage startups. Loans have to be repaid, and while you have little revenue, a loan can become a drag on your balance sheet. Investors may be a better fit for your high-growth plans.
Bootstrap to Billions
Some startups thrive by self-financing (or family-financing). If you have the vision, appetite, and risk tolerance, bootstrapping may be your ticket to success. This option also allows you to maintain more control over your startup, and can offer substantial growth opportunities.
Make New Friends, But Keep the Old
Some friends are family, and other family members are friends. Don’t underestimate the power of your inner circle! Friends and family can be helpful, quick investors and provide early-stage funding with less stringent terms. For startups leveraging crowdfunding, it is still important to clearly relay the risks involved.
Watch Out for Shark-Infested Waters
Angel investors can help you build a company by bringing both capital and expertise to the table, but do your due diligence. If you have ever watched Shark Tank, you’ve seen the Sharks ask for royalties on a product. Yes, it sounds great at first – hey, someone’s investing in your startup! It also means giving up a portion of your earnings forever. Forever is a long time, and could be disastrous for your bottom line.
Money Talks, Plans Walk
It’s not just about the Benjamins – it’s about how you use them. Find a financial advisor or a CFO – someone who knows the industry and landscape – to help you build a plan that aligns with your growth goals and sets you up for financial success. If you can’t afford one, there are many publicly available financial planning tools out there.
It’s Never Too Early to Hire a Lawyer
From structuring deals to protecting your ideas, a good lawyer can help you avoid legal mistakes. Legal counsel can be expensive, which is why we offer unique, creative pricing models to give you more flexibility and help you achieve your goals from day one. At the end of the day, there are many risks startup founders have to take, but securing expert counsel shouldn’t be one of them.
HJF Law serves as your ground control, helping you scale to achieve your growth goals. Call us at (917) 267-8184 or visit hjflaw.com/contact to learn how.