Early Stage Funding
Part IV in the Does The Law Matter? eBook series of legal tips
 
What sort of funding is best for you? Bootstrapping? Debt? Equity? Discover the pros and cons of each method.
 
About the series
Read about the fundamental legal issues every startup or small business should consider. Understand why the law matters.
 
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Early Stage Funding

An eBook of essential tips and advice every startup or small business should consider when raising finance

Family Considerations
Learn how to reduce the risk of  disagreements down the road
Better Understand Risk
Understand the pros and cons to decide which funding is the best fit
From Seed to Series A
Find out the purpose of these different benchmarks in fundraising

Extract from the chapter on Private Investments:

How are private investments structured?
There are several common ways in which an angel investor or VCs may invest in your company:

Ordinary shares

The most straightforward and favourable to the startup. The startup and the investor will agree to a fixed cash investment, and the number of shares that the investor will receive in return. As a holder of ordinary shares, the investor will be entitled to dividends and to vote on company matters.

Preferred shares

More preferable to the investor, and more commonly seen in later “series” financing rounds, these are equity shares with special additional rights. For example, unlike holders of ordinary shares, investors who get preferred shares may be entitled to a fixed dividend regardless of profit levels. Most importantly, in the event of a liquidation of the company, investors holding these shares receive their investment back before the holders of ordinary shares (who are often likely to receive nothing).

Convertible Note

A convertible note is short-term loan that converts into equity. Investors loan money to a startup, and rather than receiving their money back with interest, the investors receive shares in the startup’s next round of funding, normally at a discount to the price paid by other investors in that round (typically around 15-20% less), based on the terms of the deal. In short, they are debt instruments backed by the equity of the company.

Simple Agreement for Future Equity (SAFE)

A private investor can invest in your company using a SAFE Agreement. It is a relatively new concept, and very similar to a convertible note, intended to replace convertible notes in some situations. Essentially, it is an agreement whereby the investor provides capital to the startup, and in return the startup 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.

Extract from Early Stage Funding, an eBook published by Zegal.

Why Zegal?
 
Zegal is the trusted platform to manage law online. Founded in Hong Kong in 2013, our mission is to transform the way businesses meet their legal needs. Our simple question-and-answer interface gathers key insights about your business, and generates highly-customised contracts that address your specific needs. We give business owners the know-how and confidence to create even the most complex legal documents from start to finish.
 
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