Now that you’ve formed your business and you and your fellow founders are hard at work building your startup, if you are like most burgeoning businesses, at some point you will need an injection of cash to keep the lights on and the engine running. But as founders of an early stage private company, you often have limited cash resources at your disposal. As such, your first foray into raising outside capital needs to be efficient and cost-effective.
“Fully Diluted” is a phrase often thrown around when discussing a company’s capitalization. But what does it really mean? Understanding your company’s capitalization is critical during any stage of the company’s lifecycle, not only to maintain an intimate understanding of current overall ownership, but also as a way to gauge whether a potential investment is worth the equity you’d be giving up in return.
To succeed as an entrepreneur, there are many laws which you need to be aware of, including “Blue Sky Laws.” In the United States, Blue Sky Laws are the securities laws of the individual states, and they reflect the ways each state regulates the offer or sale of “securities,” or the trade of financial assets such as stocks, options, or bonds.
As an entrepreneur, you are no stranger to making key decisions for the growth of your business as you secure your team, build out your business plan, and seek funding to scale. It goes without question that one of the more monumental decisions will be determining when to raise venture capital. After you make the determination to raise venture capital, you will spend time pitching your business and product to venture capitalists to seek out potential financing partners and investors.
You need others to help build your business, but as you build your team, it is important to distinguish the different roles in your corporate structure. Are you dealing with co-founders with whom you started the company? How do you divide up the equity? Do you have a board of directors, and if so, who is on it? Did the board appoint any officers? Do you need to hire employees, advisors, or contractors to help carry out the company’s objectives? Answering questions such as these is essential to running an efficient and successful corporation.
You may be thinking to yourself – why do I care about learning how to calculate issued and outstanding shares; I know how many shares I own, isn’t that enough? While knowing how many shares you own is helpful, your company’s capitalization table (“cap table”) is critical when raising money and understanding exactly how equity is allocated.
Cash is king and, as a pre-revenue company, raising venture capital is often a critical step in the success of your business. Even if you have friends and family willing to be your first angel investors, you can’t always count on friends and family to provide enough cash to get your company to the point of profitability. Startups burn through a lot of capital just getting off the ground and sustaining growth before they turn a profit, and so raising venture capital from sophisticated investors can be critical for feeding that initial burn.
While you may know that your business is one that could benefit from venture capital funding, or even how much you want to raise, you might not know at what point you should try to fundraise.
People always ask me, “What is SUP?” and “Why is its Debt Equity Model (Cap Table) relevant when I can build my cap table using an online tool?”
Here is my answer!
Issuing stock to founders, employees, contractors, and advisors is the primary way to compensate a startup’s team when there’s little to no revenue coming in to pay salaries. That said, it can sometimes be necessary for you to explain that the value in being a shareholder doesn’t come from the value when issued, but from the value when their stock is sold – the potential of a huge payday when a stock’s value skyrockets at an exit can help attract and retain talent.
There are many ways to issue stock, and the methods and restrictions that can be put in place may sound confusing. Read on to learn about the most common ways startups get equity into the hands of founders, advisors, contractors, and employees, and how to keep each one of these people honest and committed to the success of the startup.
You might not be sure where to start when attempting to raise venture capital. Your questions may include “Can I ask anyone for money?” “Can I advertise that I am looking for VC funding on social media?” “How do I ask?” “Are there any rules?” “Is it OK to ask my friends and family?” Not knowing the answers to these questions can be detrimental if you start accepting money before getting answers.