If there is one thing that every business in every industry needs, no matter its size or type, it’s money, or, in legal and financial lingo “capital". A business cannot survive without it, and there are many ways to obtain it. A business’ strategy for how it will obtain capital initially and through its lifespan is crucial to the business’ success. Proper planning from day one can help ensure the business is able to grow and succeed.
Some businesses are “bootstrapped,” meaning that the business is entirely or largely self-funded. A bootstrapped business might rely on the founder’s savings, or might take small amounts of funding from friends or family in the form of loans. But bootstrapping is not an option for every business, due to lack of access to such funds or due to the business needing to grow and scale quickly, requiring a larger amount of capital.
For a business that is not going the bootstrapping route, what are the options for raising capital?
There are many different ways to take in capital from outside sources. When raising capital, a business could issue debt or issue equity in the business. Debt is designed to be paid back to the investor at a certain milestone(s), often related to the passage of time. An equity raise provides an investor an ownership stake in the company, by issuing a portion of the company’s shares to investors in exchange for their investment. These are two basic types of investments, but within them, there are many different instruments that can be used to accomplish the ultimate goal of raising capital. For example, a company can sell shares of stock outright, or can issue equity through other means such as warrants, options or through the conversion of debt into equity in forms of convertible notes or SAFEs.
No one type of fundraising is right for every company. It is a difficult balance to raise capital on terms that are both favorable to the company and attractive to investors. There are also numerous regulatory concerns to consider. It is important to consult an attorney before you start the process to ensure that the road to raising capital is smooth and compliant.
If you are thinking about raising capital for your business, contact Smart Counsel. We have helped numerous clients raise hundreds of millions of dollars for their businesses