Every business may begin with an idea, but without money, a business cannot operate and grow. Most aspiring business owners fund their businesses from their own savings, or from credit cards or bank loans. A wide range of investment sources are available for businesses that can demonstrate a solid product or service, and the potential for growth and scalability, and profitability.
Stages of Business Financing
New businesses often follow several stages in obtaining financing:
– Seed stage: The business solely consists of an idea or a product.
– Startup financing: The business is ready to launch its product or service. In venture capital financing, this is sometimes known as the “Series A” financing round.
– Second-stage financing: The business has demonstrated its viability and needs additional capital. This is sometimes called “Series B” financing.
– Line of credit, additional financing: The business is nearing profitability and secures a line of credit from a commercial bank for “working capital.” It may also seek additional rounds of financing, beginning with “Series C” and continuing through the alphabet.
– Acquisition or IPO: The business is acquired by another business or makes an initial public offering (IPO), which makes its shares available for purchase and sale on one or more stock exchanges.
An individual who funds their business startup from their own savings, other personal assets, or personal loans is often known as a “bootstrapper,” from the phrase about “pulling yourself up by your bootstraps.”
Family and Friends
Borrowing money from family and friends is another common means of new-business finance. Money may come in the form of loans, or the investors may receive shares in the new company. Business owners should be aware of the Securities Act of 1933, 15 U.S.C. § 77a et seq., which restricts offerings of shares that are not registered with the federal government. Regulation D (or “Reg D”), 17 C.F.R. § 230.501 et seq., outlines the types of investors business owners may approach without violating the law.
Individuals known as “angel investors,” who are often affluent retired business owners and corporate executives, may invest in new businesses in exchange for ownership equity or convertible debt. Some angel investors form their own groups or networks to research investment prospects and pool resources. They also offer their own personal experience and expertise to new businesses. Research has suggested that businesses funded by angel investors have better rates of success than other new businesses.
Venture capital (VC) firms manage funds on behalf of other investors and use that money to finance startup businesses. Investment by a VC firm often involves much more money than other types of investment, but it comes with more requirements. The VC firm will likely get involved in every aspect of the business, from its organization to its daily operations.
“Crowdfunding” refers to the practice of soliciting contributions from the public, usually via the internet on sites like Kickstarter, for creative projects and other causes. Legislation passed by Congress in 2012 has opened the door to using this sort of platform to finance new businesses as well.
Business transactions attorney Samuel C. Berger represents businesses, business owners, and entrepreneurs in New York City and Northern New Jersey. We offer fixed-fee packages of legal services covering a wide range of matters. Contact us today online or at (212) 380-8117 to schedule a confidential consultation with a knowledgeable and skilled small business advocate.
More Blog Posts:
Initial Public Offerings by Small Businesses Are Surging, Possibly Due to JOBS Act, New York & New Jersey Business Lawyer Blog, November 6, 2014
New York and New Jersey Entrepreneurs May Be Able to “Crowdfund” Their Businesses Soon Under New Federal Rules, New York & New Jersey Business Lawyer Blog, October 24, 2013
Facebook IPO Both Breaks Records and Disappoints in Only Two Days, Offers Useful Lessons for New York and New Jersey Businesses, New York & New Jersey Business Lawyer Blog, May 19, 2012
Photo credit: By Peosoldier photographer [Public domain], via Wikimedia Commons.