Funding & Investors: A Guide for New Ventures
What is the difference between a funding and an investor for your start-up business? As a startup entrepreneur you already understand the difference between funding and investors. But do you know what the difference means when it comes to investors? And do you know what you need to do as a startup business in order to get funding from angel investors or from a private funding source?
I’ll start by describing what each term means, and then I’ll describe how you can use them to help you raise the capital you need. First, I want to describe what a funding is. A funding is typically a personal donation that’s made to a non-profit organization in exchange for shares of the company’s equity. The terms may vary slightly by organization, but typically a funding will provide start-up entrepreneurs with seed money that they need to launch their venture.
An investor is typically someone who has purchased a large block of shares of stock in a company and is looking for someone to buy those shares from him in the future for a set price. Typically, an investor will require that the recipient sell (or liquidate) a large portion of his ownership in order to receive the payment, but he won’t require that the recipient give up all of his ownership in the company. With respect to angel investors, this is a common practice that’s used to attract both new venture capitalists and experienced venture capitalists to invest in a given company. Typically, an angel investor will require a significant amount of personal information, such as your past business history and your current level of success, but he will not require you to submit financial statements or to disclose your business plan to him before he will invest. He will also most likely require a majority stake in your business.
When it comes to third party funding, we are primarily referring to sources of capital that have purchased a significant amount of your company’s stock. As you probably know, on a regular basis, third party investors fail to meet their financial obligations, often due to the fact that they over-extend themselves. As a result, if you do not have the proper safeguards in place to protect your capital from these risks, you could find yourself owing a great deal of money to these investors – whether you were aware of the potential risk or not. While you can work with private funding sources to provide you with the necessary protection and guidance, you will need to be extremely careful with these third party funding sources, as they have a great tendency to default on their investments, which could result in your company losing its investment and its owner getting nothing.
As we’ve outlined, in most angel investor transactions, there is a significant level of trust between the entrepreneurs and the funding organizations, as well as between the funding organization and the entrepreneur. In addition, we strongly recommend that you work with a highly professional funding broker, who is experienced and knowledgeable in working with businesses like yours. Many entrepreneurs make the mistake of believing that working with angel investors is somehow less demanding and difficult than working with a private funding source. We strongly encourage you to rethink this assumption – as we believe it can significantly increase your chances of making an incredible investment, both for your business and for your personal finances.
The reality is that you will need to have a plan in place prior to approaching any private investor, as this will play a very large role in how you proceed after you secure their funding. We strongly recommend that you work with a highly reputable business attorney before going forward with any investment, as this will ensure that your business will operate legally and remain in compliance with all of the local, state and federal laws. In particular, we believe that working with a qualified attorney that has experience working with entrepreneurs and/or private investors is very important in order to avoid many of the pitfalls associated with going through a traditional financing vehicle such as a private placement. We have assembled a list of high quality business attorneys in the San Francisco area that are willing to provide free consultation to new and mid-sized business entrepreneurs in order to assist them with managing their businesses during the process of raising venture capital. If you would like to learn more about working with a qualified attorney to achieve the best results, please visit the website below.
