What Happens When a Business Needs Money?
Whether you are a brand-new startup or an established business that is looking to grow, it is, unfortunately, true that you need money to make money. If you need to finance the next stage of your development, you need to understand your options. More importantly, you need someone who can guide you through the process to make sure your interests are protected. A Toronto business lawyer can explain your options and help you navigate the process of financing your business.
Capital Contributions by Shareholders
If you are in the startup phase, you want to consider your potential needs from the very beginning. A fairly common method of funding a business is to require a capital contribution from the partners, founders, or other owners. Generally speaking, a capital contribution is when an owner gives cash or other assets to the business in order to fund its operation.
If you want to require additional capital contributions from all shareholders of the business, you want to consider incorporating that requirement into your shareholders’ agreement. In a shareholders’ agreement, shareholders might bind themselves to contribute more funding to the corporation in proportion to their interests if and when the board makes a capital call. Contributions can be made through additional share subscriptions, loans (secured or unsecured), or assets.
Raising Money from Investors
Raising money by issuing new shares (equity) is the typical way of raising funds for startups. equity capital is expensive and dilutive, but can be the only type of capital available when a company is at the early stage, has no hard assets, is facing rapid growth, or working on new product development
The capital that the company is seeking may consist of debt, equity or a hybrid of the two (convertible debt). Identifying what is right or available for your company will depend on the stage of development of the company and its stage of financing (i.e. seed, early-stage, venture or private equity) and the cost of capital. We have included a high-level summary of some available fundraising options.
Angel investors can be a good resource for raising capital for your business. This type of investor typically operates alone or can team up with other individuals, all of whom are accredited with a net worth exceeding $1 million or with an annual income of more than $200,000.
Angel investors may be interested in investing as early as the seed stage but will likely want to be highly involved at the early stages. Therefore early-stage financing for Series A and sometimes Series B is often provided by Angel investors.
If your company is slightly more mature, you may be attractive to a Venture capitalist. Achieving an investment from a VC is not easy, but many small businesses have been successful. They typically want to be more involved and look to invest in companies with proven and scalable products and businesses. They may invest at the early stages if the company has good management and demonstrates the opportunity for speedy and high growth.
Venture financing typically occurs in rounds of seed, Series A, Series B, Series C, all the way to acquisition or IPO.
Closing the Deal
The most essential part of all of the fund-raising process is to close the deal, raise the money, and get back to running your business.
How do you actually close the deal? Separate it into two activities: the first is the signing of the term sheet, and the second is signing the definitive documents and getting the cash. At Fauri Law, we work closely with you to prepare and negotiate those documents toward closing the deal.
Before You Call the Bank, Call a Toronto Business Attorney
There are options for funding your business beyond getting a loan. Understanding your options is key to making an informed decision, even if financing may be your best option. If you have questions about funding your business, reach out to us. We’ll schedule a meeting to discuss your business needs and how we can help.