A few of the most common ways to fund a startup are equity rounds (i.e., VC funding), debt rounds, and angel investment. Startups also raise capital from a number of other funding sources, including crowdsourcing, revenue-based financing, purchase order financing, credit lines, government grants, and services.
- What are the different ways to fund a startup?
- How does revenue-based financing work?
- What is the difference between equity financing and debt financing?
- What is a startup's cap table?
- When should a startup raise Series A funding?
- How much should a startup raise for Series A funding?
- What is a down round?
- What is a term sheet?
- How much equity should a startup expect to exchange for VC funding?
- How many months of runway should a startup maintain?
With revenue-based financing, you agree on a total return over a period of time, and pay your lender back from your monthly revenue stream. Revenue-based financing is non-dilutive, so your startup doesn’t exchange any equity for the funds like you would in a traditional equity-based VC deal. Revenue-based financing can offer a way to accelerate growth or extend runway for startups that have already proven market fit and have some level of predictable recurring revenue.
Equity-based financing involves raising money from VCs and other investors in exchange for an ownership stake in your business, while debt-based financing typically involves borrowing money from lenders such as banks or other financial institutions.
A startup’s cap table is the record the business’s ownership and equity structure. It lists the company’s founders, shareholders, and investors, and the percentage of the company owned by each.
Most startups should think about raising Series A funding once they’re beyond the MVP stage, have a proven product-market fit, and are ready to accelerate growth. At the MVP stage, startups typically raise their Seed or Pre-seed rounds. These rounds are usually for substantially lower dollar amounts than Series A.
You should raise the funds you need at Series A, and not more. Most startups should plan to raise enough capital to cover 18-24 months of runway based on growth plans after the round, while preserving as much equity as possible.
A down round is a financing round whereby venture capitalists, angel investors, or another kind of private investor invests in a company at a lower valuation than the previous round. Down rounds can occur when there is an economic downturn, decreased performance or increased risk at the company, a change in the competitive landscape, or a lack of investor confidence.
A term sheet is a document outlining the key terms and conditions of an investment agreement between your startup and a prospective investor. It serves as a framework for negotiations and outlines details such as the amount of investment, the level of equity offered, the valuation of the company, and other relevant terms and conditions. The agreement between the two parties will eventually be more detailed and formalized in a contract, but the term sheet serves as an initial blueprint for the deal.
The amount of equity a startup should exchange for a VC funding round depends on a number of factors, including company valuation, the amount being raised, and the funding stage. In general, seed funding rounds involve higher equity stakes in exchange for investments, as early investors take on more risk. For later rounds, the level of equity exchanged for investments typically decreases as the company has established itself and is seen as less of a risk. Early-stage startups should usually expect to exchange at least 10-20% equity for a significant equity investment round.
In today’s economic environment, most startups should maintain enough cash to cover at least 18 months of burn rate.