Last updated: 2021-06-02 (originally published on 2017-06-20) — by Alex Tanglao
All businesses require capital. Whether it is to start a company, pay salaries, innovate, or spend on marketing, your business won’t be able to grow without any funding. There are many ways to raise capital. It is important to understand the advantages and disadvantages of different types of fundraising and to make sure you use the right documents when raising finance.
There are three main fundraising avenues to choose from: personal, debt, and equity. Many entrepreneurs use a combination of different funding types.
Invoice financing and bank loans are popular ways to get an initial infusion of capital as most entrepreneurs do not have enough personal money to fund their business.
You can also ask family and friends for support via a loan. A simple Promissory Note details the terms of the loan and can avoid future disagreements.
Other businesses might be interested in helping you out. In that case, use a Commercial Loan Agreement to set out the terms and conditions of the loan. Sometimes, a director or shareholder decides to lend money, especially when the business is still relatively young and it is not so easy to obtain funding. Then a Loan from Director or Shareholder is the correct document to use. In the case a sister company helps out, you should use an Intragroup Loan Agreement.
You can ask private investors, such as venture capital firms or angel investors, to purchase shares in your company in return for an investment. You will need a Term Sheet, a Seed Investment Agreement, and a Share Certificate if you choose investment through ordinary shares. Alternatively, if the investment is funded through a convertible note, you will need a Convertible Note Term Sheet, a Convertible Note Subscription Agreement, and a Convertible Note Certificate.
A private investor can also invest in your company using a Simple Agreement for Future Equity (SAFE). This is a relatively new concept and is similar to a convertible note. Essentially, it is an agreement whereby the investor provides capital to the company and, in return, the company provides a warrant to issue shares to the investor at a later time and upon a specific event, such as at the next round of funding.
You will also need a new Shareholders’ Agreement and a Directors’ Resolution to Issue Shares.
Governments also offer a wide range of support and grants. Check whether you are eligible.
- Promissory Note
- Seed Investment Agreement (Ordinary Shares)
- Term Sheet (Ordinary Shares)
- Share Certificate
- Intragroup Loan Agreement
- Convertible Note Subscription Agreements
- Convertible Note Term Sheet
- Convertible Note Certificate
- Commercial Loan Agreement
- Loan from Director or Shareholder
- Directors’ Resolution to Issue Shares
- Shareholders’ Agreement
- Simple Agreement for Future Equity (SAFE)