What Are The Different Types Of Funding For A Startup

Written by Josh Hines on May 22, 2013 under Startup Funding Blogs
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There are a number of ways to raise money for your startup business, here are the most common ways that people raise funds for their startup in order to reach success.

What Are The Different Types Of Funding For A Startup

A hypothetical startup will get about $15,000 from family and friends, about $200,000 from an angel investor three months later, and about $2 Million from a VC another six months later. If all goes well.

Family and Friends

Family and friends are usually the best place to start searching for funds. These people know you the best and are most willing to give you the money you need to start your business and get it off the ground while you are in the beginning stages and will most likely take a small percentage of ownership for their investment because your company value hasn't been established yet.

Be careful who you reach out to though because from a legal standpoint you can't reach out to the general public for an investment when you are structured as a private entity.

Friends and family can usually give you a cushion of around $15,000 maybe more depending on your relatives. In order to establish this personal investment you must register your company and issue stock to your friends and family accordingly. You can register your company at LegalZoom for $400 or a local lawyer for $500-2000. This stock option will be needed for future investments and from a legal standpoint will keep things documented for future actions.

Angel Investors

Incubators and accelerator programs have been sprouting up all across the nation and have helped a number of startups establish themselves in the market. These programs usually invest between $15,000-25,000 and usually take 6-10% ownership of the company. They usually provide space and mentors to help you make less mistakes and streamline your business to success.

Angel investors are highly successful investors that calculate risk and give large sums of money to startups to get them to the next level. The typical first round investment in 2013 was $600,000 but these funds were mostly given to startups that were evaluated at $2.5 million and up. Angels usually take 1/6 of the company for their initial investment.

Venture Capitalists

Venture capitalists (VC) further investing in companies that have built a successful portfolio and have established a growth model. VCs usually invest $500,000+ into companies they follow the same rules as Angel investors just offer higher amount of capital. There can be multiple investment rounds by the initial investment round is called your "Series A".

Now let's count what percentage of the company you will give to the angel or venture capitalist. We have to add the 'pre-money valuation'and the investment together to determine the current company evaluation. For the equation below, let's assume that your company is valued at a $1 million dollars and an investor is wanting to invest another $200,000 into your company, they would in turn own 16.7% of your company.

$1,000,000 + $200,000 = $1,200,000 post-money valuation

Now divide the investment by the post-money valuation $200,000/$1,200,000 = 1/6 = 16.7%

The angel gets 16.7% of the company, or 1/6.

Public Stock - IPO

Going public is not for every company but there are a number of benefits and risks associated with this option. For one thing when a company goes public, the original founders of the company lose a lot of ownership and authorization to the stock holders. Although a lot of ownership is lost, stock options allow for huge amounts of capital to be raised by the general public and can substantially launch a business to an entirely new level.

Through all the levels though, you just need to be able to effectively manage and distribute your new funds to continually add value to your company to reach and satisfy more and more customers.

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