Getting a startup to be up and running requires a lot of resources upfront. This gets trickier as you have to grow more. Hence the initial capital that is collected by a company is the ‘seed’ upon which the company grows. This is a great way for startups to get off their feet. This can be used to finance the early goals of a company. Here, the investment is made in return for equity or debt. It is equally beneficial for both parties as startups can get the required funds quickly and without complications and investors can get a good return on their investment.
A SAFE is a type of investment contract used during the seed share round. Here, the investment is exchanged with the rights to subscribe to new shares in the future. Hence the investment converts into equity during the event of “equity financing”, “liquidity event”, or “a dissolution
Angel investors are private investors who use their own net worth to invest in companies in exchange for equity. They are usually more focused on financing startups and smaller ventures. For startups, this can be quite helpful as the business will not have to repay the funds to an angel investor as one will already have given their ownership shares in exchange for the invested money. Further, as the investors have their money on the line, it can motivate them to take part in the business more actively and help in making the business a success.
Startups can be at various stages on their own. If your company is not ready for valuation yet but is growing rapidly, convertible notes can be a good option or way to get in investors. Here investors invest money and are repaid in equity as the convertible note. It usually converts into equity after a certain point. They are faster and more straightforward. The notes also convert into the equity of the company at a discounted price. After the conversion, the holder of the convertible note becomes a shareholder of the company.
Investment via preferred shares is quite sophisticated. As the name implies, investors with preferred stock get preferential treatment and special rights over other investors during certain situations. What this means is negotiable and can be discussed before moving ahead but the most common one is liquidation preference which ensures that they are paid first and so it lessens the risk. Those with preferred shares get the dividends before ordinary shareholders do.
Startups have multiple options to move forward with their funding. While the complexity, benefits, and methods might vary, they will always come at the expense of a long and expensive legal process. For a company where every penny counts it can be pretty daunting. But the silver lining here is the introduction of legal tech companies who can step in and make quite a difference.
Most legal costs are associated with the time a professional lawyer has to give in. But when this process is automated and simplified to its core essentials, it is more affordable, accessible and within reach of all. Zegal is an excellent example of this. The company offers all sorts of professional and legally compliant documents that startups and other companies could need within an app.
The entire legal side of fundraising is simplified and one can easily find all relevant documents that will be needed. For Instance, Zegal has specific services dedicated to startups. Here, one can find all kinds of legal documents that a startup could need, from founders’ agreements to fundraising documents, trademarks, patents, and so much more. All of this can be accessed from anywhere and is quite inexpensive.
For startups, legal is an important aspect that needs to be given good consideration. But as a company that is trying to invest in its growth and future, it’s best to look outside the box to find options that suit one’s needs well.