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Basic Financial Instruments: Shares/Loans/Convertibles
Ways of Financing a Startup

Deciding which is the best option to finance your startup can be quite a hassle. When the bootstrapping phase comes to an end, you’ll need to get a good overview of possible ways of financing. Raising seed capital has changed in the past few years as new technologies have unlocked new ways to raise money for your startup. In this article, we’ll help you get an idea of what different ways of financing are available to startups.

Ways of Financing a Startup

Loans:

Need to be paid back with interest by the start-up. No equity stake is given away. You can get a loan from friends or family, a bank and sometimes the government. Sometimes the founders themselves will provide a loan to their start-up. All have in common that the money needs to be repaid at some time, with interest.

Equity:

You give away an equity stake based on the valuation of your company. In return, you get an investment. Having a lawyer and visiting a notary is usually required. Equity-based investment is possible in every stage of your company. However, it is nearly impossible to value your company accurately in the beginning. The negotiation about the valuation of your company can take many weeks or even months.

Convertible note:

A convertible is basically an investment in equity, but with no valuation at first. Investors are offered a convertible note which entitles them to shares at a discounted price at the moment of conversion of the convertible note into shares. This discount is a reward for the risk they have taken when they invest at an earlier stage. A convertible note sometimes has a cap. This is the maximum share price that can be used during conversion into shares. The note is a loan and usually converts when:

    • It expires
    • When the company is acquired
    • A normal equity round is being raised

To get a better idea have a look at the chart below which indicates some financing options along the startups’ life cycle.

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