As a startup founder, one of the key challenges you may face is raising funds to turn your idea into reality or scale up your existing business. Fortunately, there are multiple options available for fundraising. In this article, we will discuss three common methods - issuing equity shares, taking on debt, and utilizing convertible instruments. Additionally, we will explore various government schemes that can provide support to startups in their early stages.
1. Issuing Equity Shares:
One option for raising funds is by issuing equity shares to investors. By doing so, you give them a portion of ownership in your company in exchange for financial investment. This method allows you to retain control over decision-making while sharing the risks and rewards with investors.
2. Debt Financing:
Another approach is debt financing where you borrow money from an investor such as a bank or another company. You agree to repay the principal amount along with interest within a predetermined time frame. Unlike equity financing which dilutes ownership stakes, debt financing does not involve giving away any ownership rights.
3. Convertible Instruments:
Convertible instruments have gained popularity among startups as they offer flexible funding options combining elements of both equity and debt instruments. These instruments can be in the form of convertible preference shares or convertible debentures initially treated as debt but later converted into equity if certain conditions are met.
Get Free Quote in Minutes
Choosing the Right Option:
Deciding which funding option suits your startup requires careful consideration based on its stage of development and growth plans. Equity financing brings potential benefits like shared risk-taking but comes at the expense of diluting ownership control whereas debt financing offers fixed repayment obligations without dilution concerns.
Striking a balance between these two approaches depends on factors such as business viability assessments and future growth prospects specific to each startup's unique circumstances. Seeking expert advice can be helpful during this decision-making process.
Government Support through Schemes:
Governments worldwide recognize the importance of nurturing startups and have introduced various schemes to support their fundraising efforts. These government initiatives often aim at promoting innovation, job creation, and economic growth.
For instance, in Tamil Nadu (India), the "TANSEED" funding program provides assistance to startups by offering equity funding up to 50 lakh rupees. Similarly, Telangana's "T-Hub Incubation Center" enables startups to raise funds up to 50 lakhs through equity exchange.
Furthermore, there are sector-specific schemes available for sunrise sectors such as artificial intelligence, machine learning, organic farming, and renewable energy. Startups operating in these areas can explore financing opportunities offered by the government.
Steps in the Fundraising Process:
While the number of steps involved in a fundraising process may vary depending on investors' requirements and the instrument type chosen, here are some key steps commonly followed:
1. Term Sheet Signing: Initial terms are agreed upon between the company and investor(s).
2. Valuation Report: A valuation report helps determine your startup's worth based on its assets, liabilities, revenue projections, or other relevant factors.
3. Due Diligence: Investors conduct due diligence to verify all aspects of your business including financials, legal compliance records, and operational practices.
4. Fund Transfer: Once satisfied with due diligence outcomes, funds are transferred from investors to your startup account.
5. Shareholder/Loan Agreement: A legally binding agreement is drafted laying out terms and conditions related either to shareholding or loan repayment structure or convertible instruments arrangement.
6. Legal Compliance: Filing all necessary documentation with appropriate regulators/legal authorities ensures adherence to applicable laws and regulations.
Fundraising is an exciting yet challenging phase for any startup founder. In navigating this critical process successfully, you can seek professional assistance from firms that specialize in guiding founders through every step of raising capital. Whether it's preparing a pitch deck, negotiating deals, closing agreements, or ensuring regulatory compliance, their team of experts can streamline the fundraising journey.
Read more about MoU vs Term Sheet