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Startup Funding

Now that you have a broad sense of the startup funding game, there are a few general details that you can bank on encountering when taking on a small business investment.

What you can definitely count on

Your deal won’t be funded overnight.  Without question, investors will want to do a fair amount of research before forking over their hard earned cash to finance your dream.  Expect the funding process to take months and possibly even years before you find the right match. 

The best way to expedite this entire experience is to focus on refining and growing your business to make it much more attractive to potential investors.  Remember there are thousands of entrepreneurs out there looking for funding at any given moment and your idea had better stick out above the rest. 

You can bet that business angels will always want a portion of ownership in your company (equity) in exchange for the capital that they invest in your business.  No right-minded investor will put forth money without getting equity and/or some other sort of compensation in return. 

You’ll likely be giving up some amount of managerial control--The investor won’t just give you the money and then walk away and hope for the best.  Most investors will at least want a say in the strategic direction of your company and some will even be active in the daily operations of the business.  The amount of control demanded in these areas varies from investor to investor.

The Actual Funding Process

Here’s the basic funding process from start to finish in a nutshell.  We’ve left out some details and not every angel investor will work the same way, but you can bet on a standard startup funding negotiation process following these basic steps:

Step One
A concise overview of the funding request is presented to the investor This can be as simple as a one or two paragraph email to the investor introducing your company and the funding opportunity at hand.  Do NOT send over a business plan with your initial introduction.  It won’t be read!

Step Two
If the investor is interested in the opportunity, he or she will reply and request further information about the deal.  This is the time to send over a business plan or other information that the investor has requested.

Step Three
From here, the investor will conduct due diligence (research) on the investment opportunity to be sure that they agree with your projections.  Any respectable business investor won’t just throw money into every opportunity that comes their way.  You can bet that thorough research will be conducted.

Step Four
If the opportunity looks like a good fit, the investor will present you with a terms sheet.  This is basically just the details of the deal that they are proposing. 

Step Five
This is where the negotiation process starts.  The entrepreneur and investor will need to come to an agreement on the certain amount of equity that will be exchanged for a certain amount of funding in the deal.  They will also need to agree on other details regarding the role that the investor will now play in the business.  As you can imagine, this may take several iterations before an agreement can be struck.

Step Six
If it all works out, a deal will be made and the entrepreneur will have now have funding plus an additional partner to answer to (the investor).

The art of bargaining A.K.A. “The Hard Part”

Here are a couple of common questions and tips to consider when negotiating your startup funding deal.

You’re probably asking the question, “How much equity should be handed over in a fair exchange?”  A lot of factors play into how much leverage you will have when negotiating your deal.  Do you currently have a proven business model with paying customers?  The maturity of your business will play a key role in the funding process.  A more mature business poses less risk for an investor and they will therefore usually settle for less equity (payoff) on the opportunity.  Higher risk investments demand much higher potential returns and the investor will want a much larger portion of equity ownership in your business in this case.

How long can your company survive without an investment?  If your business isn’t in a cash crisis and can at least stay afloat without an investor, then you’ll have much more bargaining power at the table.  You won’t be forced to take the first deal that the investor offers.

With that said, if you’ve never negotiated a startup funding deal before, you’ll probably want to put some time into the preparation.  It wouldn’t hurt to grab a couple of books on the subject to familiarize your self with the jargon.  Also, hop on the Invstor.com and speak with some entrepreneurs that have been through the process.  They’ll be more than happy to give you guidance that will save you a lot of headaches in the long run.