In this lesson, you’ll learn how to raise equity, the different stages of raising capital, and how to split the equity of your company.
Equity Capital Stages: Overview
cheap prednisone online Seed Capital
is a form of securities offering in which an investor invests capital in exchange for an equity stake in the company.
The term seed suggests that this is a very early investment, meant to support the business until it can generate cash of its own.
Seed capital stage includes friends and family funding, angel funding and crowdfunding.
Money is generally used to pay for preliminary operations such as market research and product development.
For companies that are able to begin operations but are not yet at the stage of commercial manufacturing and sales, early stage financing supports a step-up in capabilities.
Capital provided after commercial manufacturing and sales but before any initial public offering.
The product or service is in production and is commercially available. The company demonstrates significant revenue growth but may or may not be showing a profit. It has usually been in business for more than three years.
Initial Public Offering (IPO) is a type of public offering in which shares are sold to the general public, on a securities exchange, for the first time.
In other words, the company is going public through an IPO.
Investors are putting money in because they want to get more money back. The exit is what gives investors their return.
Every startup needs an “exit”.
It doesn’t mean “exit” for the founders, just for the money 😉
Types of Exit
: How do investors get their money back?
– Acquisition: The startup is sold to a bigger company for profit
– IPO: Going public also allows investors to get their money back
– “Cash Cow”: Not really an exit, a really profitable startup keeps offering dividends to investors
Investors invest because they expect to get a lot more money back than what they invested.
Successful startups give a very high rate of return for investors.
According to CrunchBase, the average successful startup raises $41M, exits at $242.9M (Dec 2013)
Full article here (available later on in the further readings section): http://tcrn.ch/2ebz41A
Although successful startups have a very high rate of return, very few startups are successful.
Thus, investors need to invest in many startups and hope that one successful startup will repay much more than the total investment.
Only 1 out of 10 startups accepted by the Y Combinator (one of the most famous accelerators) is actually successful and it’s difficult to get accepted.
There are restrictions
that apply to private companies when it comes to raising capital.
We are going to give you some examples, but please keep in mind that the law is different in every country.
Don’t hesitate to look for more information about your country.
Some types of financial offerings may only be made to accredited investors.
Check what applies in your country.
Criteria to be an accredited investor for some countries: http://bit.ly/2ewCINN
Number of Shareholders in Private Companies
Example: The U.S. Securities Exchange Act of 1934, section 12(g), generally limits a privately held company to fewer than 500 shareholders.
Note that it may be different in your country.
There are several ways to split the equity of your company.
#1 Issuing normal shares
#2 Issuing convertible debt
A company borrows money from investors and the intention of both the investors and the company is to convert the debt to equity at some later date.
Typically the way the debt will be converted into equity is specified at the time the loan is made.
Note that it is not “pure equity” but it’s “convertible”.
#3 Issuing phantom shares
A phantom share plan is a contract between an employee and a company. The contract defines the number and the value of phantom shares granted by the company to the employee, as well as the conditions that trigger a payout.
Therefore, the shares are not owned by the employee until the conditions are met.
#4 Issuing stock options
A stock option gives the recipient the right to acquire company common stock at a set exercise price established at the time of grant of the option. If the option is granted early in the life cycle of the company, it will likely be at a favorably low exercise price.
Note: It is often used for early startup employees.