Fundraising is a crucial part of many start-ups’ journeys. While there are a few lucky entrepreneurs who can rely on funding to come from their own savings, or have wealthy friends or family members who can afford to inject capital, most business owners will need to go out of their way to raise funds from outside investors.
There are a number of things every entrepreneur needs to do before he or she thinks about fundraising. The steps will vary depending on the start-up’s sector, location, etc.; but in general, the process leading up to getting investors looks like this.
Debt is effectively a synonym for a loan. It is a type of funding founders borrow with the promise of repaying the principal and interest.
Equity refers to an ownership stake in a company. Equity financing means investors funnel money into a start-up in exchange for a portion of the company's shares which entitles them to future profit shares and (partial) control over the company.
The term grant refers to any funding instrument that makes no financial claim on a business in return for providing the funds. Oftentimes the money can only be used in a way agreed prior to disbursement.
Mezzanineis a hybrid funding instrument and refers to financing that sits between equity and debt (hence the name), and combines aspects of both types.
Revenue-based financing, also known as royalty-based financing, refers to when business owners sell off a part of their companies' total gross revenues in exchange for funding.
SAFE (simple agreement for future equity) is an agreement between a firm and an investor that grants rights to the investor for future equity in the firm. However, at the time of the agreement the exact share price is yet to be determined.