Matthew Duke is a San Antonio-based transactional business attorney specializing in mergers and acquisitions. He (and law clerk Connor McQuage, a student at St. Mary’s School of Law) shares a checklist for startups looking for funding. Follow Duke on Instagram, Facebook, and LinkedIn as @Stxbusinesslawyer and @STXbusinesslaw on Twitter.
Getting funding for your business can be a daunting task. You’ll be quizzed by funding sources with no guarantee of an agreement. Investors will ask for equity in your business, and lenders will pressure you with interest.
Lawyers like me and financial professionals can negotiate every detail of your proposed deals, but where should a founder focus if your startup needs funding? This simplified six-step checklist can guide you through the most significant challenges of the funding process.
Funding checklist for your startup
- Determine the amount of funding needed.
- Choose a funding strategy.
- Pitch your business plan.
- Determine the terms of the funding financing agreement.
- Conduct diligence review with the opposing party.
- Receive funds.
Determine the amount of funding needed
Exactly how much money will you need for your startup?
It may seem obvious, but business owners often overlook the need to develop a meticulously drafted budget when searching for funding. Those who know their exact numbers have the advantage. The numbers can be subject to change, but the research and thought that went into discovering your magic number will give you valuable insights into the remainder of the funding process. Financial professionals can help you with valuation models for your business.
Choose a funding strategy
How are you going to get the money?
There are an ever-increasing variety of ways to secure your funding. Choose your strategy before crafting your pitch because your strategy will influence how you pitch for your funding.
Here are the 10 most common funding sources for startups.
- Think crowdsourcing platforms like Kickstarter. This strategy utilizes many income sources, usually individual investors, in exchange for some benefit from the borrower. Benefits can include perks, early access to products or services, or stock.
- Angel investors and/or venture capital. Angel investors are usually individuals or small groups that offer funding in exchange for a piece of your business. A venture capitalist (VC) is a private equity investor that provides capital to companies with high growth potential in exchange for an equity stake.
- Traditional loans and grants. With this basic strategy, a bank or a state entity lends you money. Instead of a loan, you could apply for a business grant that will provide you free money if your company qualifies.
- Small Business Administration Loans (SBA). These are small-business loans partially guaranteed by the SBA and issued by participating lenders, usually banks. SBA loans have tight lending standards but often have flexible terms and low-interest rates.
- Microloans. Individuals typically issue these small loans. Like crowdfunding, many individuals can offer to fund, but you will owe each lender back with interest.
- Personal financing, “Friends & Family,” or peer-to-peer lending. This strategy requires a wealthy friend or family member who will lend you money or the liquidation of your personal assets to fund your business.
- Purchase order financing. Large purchase orders can provide funding for businesses.
- Vendor financing. Your business vendor, (usually a supplier), will loan your business because you’re the vendor’s customer. The company then uses that loan money to buy supplies from the vendor. Profits from selling products go to pay back the vendor loan.
- Product pre-sales. The business advertises the product and uses the pre-order money to fund the project.
- Alternative sources like pitch competitions. Founders can win equity-free prize money from pitch competitions to keep operations going, especially in the early days of a startup.
Pitch your business plan
A well-crafted pitch deck is vital to attract the right investors, who will scrutinize it to determine you and your business are worth their funding. Even if you only fill out loan applications, knowing your numbers (see step #1) will expedite the process.
Determine the terms of the funding financing agreement
Your lender or investor will probably propose a financing agreement with favorable terms and clauses that protect them (not you). By this point, you should have already hired an attorney who will work with you on negotiations to ensure the terms are fair and protect your business.
Conduct a diligence review with the opposing party
It’s time to finalize your funding agreement. Suppose you are unfamiliar with a diligence review. In that case, this is a process where the lender or investor scrutinizes your financials and sometimes your governance documents to ensure they still want to do business with you.
Hire competent legal counsel to assist you with funding agreements. It is a significant risk to your business if you do not.
Congratulations, now it is time to turn that money into even more money! I recommend you retain your attorney for the duration of your loan to ensure you are protected from any legal issues that arise out of the financing agreement or from your lender or investor.
Like death and taxes, founders can’t ignore the need for funding, so it’s better to learn how to deal with the financial considerations upfront or get professionals to help you do this. Following this startup funding checklist will alleviate some of the intimidation and free you up to focus on building a great business.
The featured image is of a typewriter with a page that says “Funding Round.” Photo by Markus Winkler on Unsplash. Article published by Iris Gonzalez
Disclaimer: This article is made available for educational purposes only, to give you general information and a general understanding of the law, not to provide specific legal advice. By using this article, you understand and acknowledge that no attorney-client relationship is formed between you and The South Texas Business Lawyers, nor should any such relationship be implied. This article should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
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