What you need to know: equity funding

Businesses need money to grow and there are a number of different ways for your company to get cash. Unless you raise debt finance (e.g. borrowing money from a lender), each stage of funding will require you to give up equity in your company. Here we answer the 5 questions we are most often asked in relation to funding.

What are the stages of funding a startup?

  • Day 1: if all you have is an idea and you don’t have a business or a company incorporated, there is no real value for that idea. 

  • Co-Founders: your idea is becoming a reality and you have a business. You and your other co-founders are unlikely to be receiving a salary so you offer equity in exchange for efforts (sweat equity). You may incorporate a company and issue shares to reflect that equity. 

  • Friends and Family: you need more capital to grow your business so you approach your private network. Friends and family give you cash in exchange for shares in your company.

  • Seed funding: the first round of financing from third party investors. Angel investors or venture capital firms take equity in your company in return for giving it a significant capital injection.

  • Series A: large amounts of capital are contributed to your company, which has a valuation much higher than in earlier funding rounds.

  • Series B, C, D: the sky is the limit – your company may go through multiple rounds of investment.

  • Initial Public Offering: your company is listed on an exchange and the public can buy shares in it. Your business will raise a large amount of capital and your earlier investors may exit.

What documents do I need to bring on an investor?

Bringing shareholders into your company will usually involve the following:

  • Term Sheet: summarises the key terms of the investment and shows a serious intention to complete it.

  • Shareholders’ Agreement: sets out how the company will be governed and may vary the companies regulations which would otherwise apply to the company. Please see our article [What you need to know: do we need a shareholders’ agreement?] for more information.

  • Subscription Agreement: offers the shares to the new shareholders on the terms which have been agreed.

  • Deed of Accession: if your company already has a shareholders’ agreement, new shareholders can simply agree to its terms by signing a deed of accession. This avoids the need to have every shareholder re-sign the shareholders’ agreement.

How else can I fund my startup?

There are other ways to fund your company which do not involve giving up equity:

  • Bank or peer-to-peer loan

  • Crowdfunding

  • Government or private sector grants or sponsorship arrangements