UNDERSTANDING OF STOCKS, CONVERTIBLE NOTES, AND FUNDRAISING FOR START-UP COMPANIES
START-UP FUNDRAISING: -
When a newly established tech-savvy company, looking for money to grow its company, the term is called fundraising. The recommended instrument to boost funds is a convertible note. Now we go through the step by step procedures for finding the best way to fundraising for start-ups.
Stock is what represents the corporate ownership, distributed in parts to reflect what proportion of the corporate each owner possesses. Each owner, or shareholder, receives a certain number of shares of stock.
“The person’s percentage ownership of the company = The number of shares a person or entity owns in the company / the total number of shares that have been issued”
PRICED ROUND CONCEPT FOR RAISING CAPITAL:-
- This is a traditional concept for raising capital by rounding up the amount where both the founders and the investor are able to agree on an accurate valuation for the company, and the investor gets equal shares of the company.
- But tech start-ups are different. Tech start-ups could have tremendous scale potential and fantastic margins, so it’s extremely hard to measure how large and fast they can grow in revenues and in value.
- the valuation of the startup is defined by how much potential an investor sees in the business, how risky it is, and how much upside do they expect in exchange for risking their money, just like a bet.
THE KEY PARAMETERS THAT MUST BE KEPT IN MIND WHILE EVALUATING THE PRICED ROUND:-
- How many votes does each share get in particular decisions? Usually, you get one vote per share, but investors will often want more control over certain decisions since they have minority ownership.
- If the corporate goes bankrupt and needs to liquidate assets, do investors get paid first?
- How does the Board of Directors look? Investors also will want to regulate a seat and to guard themselves against being removed from the Board.
All of these decisions require negotiations, advocates, and contract signing. It takes more than six months from “agreeing to invest”. so most companies choose to go with a Convertible Note.
- A convertible note is an instrument that allows the company and the investor to reasonably agree to go forward with the investment faster with less negotiation, less complicated and inexpensive legal processes.
- The primary advantage of convertible notes is that it does not force the issuer and investors to determine the value of the company at the start-up phase. That valuation will usually be calculated during the financing when there are more data points off which to base a valuation.
- The investor also needs to believe in the business to invest, because the investor intends to convert its note into stock. So at first investor gives money to grow then after profit that will convert in stocks.
THE KEY PARAMETERS THAT MUST BE KEPT IN MIND WHILE EVALUATING THE CONVERTIBLE NOTES:-
This represents the valuation discount you receive relative to investors within the subsequent financing round, which compensates you for the extra risk you bore by investing earlier.
It effectively caps the worth at which your notes will convert into equity and — in a way — provides convertible note holders with equity-like upside if the corporate flies out of the gate.
Since you’re lending money to a corporation, convertible notes will more often than not accrue interest also. However, as against being paid back in cash, this interest accrues to the principal invested, increasing the number of shares issued upon conversion.
This denotes the date on which the note is due, at which time the corporate must repay it.
The KISS-A (Keep it simple security) and the SAFE (simple agreement for future equity) are simplified convertible note templates that you can use to raise money and skip lawyer fees. They both work as a convertible note but reducing a lot of the paperwork requirements.
I hope, i covered maximum knowledge i came to know about fundraising process for start-up companies. Thank you all the readers and your feed back and comment will be fruitful for me to improve this article in future.