This first article in our MDW Founder Series explores one of the most common questions for early-stage companies: how do we raise funds?
In the past six months, we have been fortunate to assist a range of founders with their capital-raising activities. We have found that the most effective methods to raise funds are a mix of the following:
- Direct investments, usually by way of a subscription of shares in a priced round
- Convertible notes (Connote), a debt instrument advanced by an investor that converts to an equity position in the company either:
- When certain milestones are achieved; or
- Depending on the terms of the Connote, at call by the:
- company; or
The investor is often encouraged to convert the debt into equity at a discount of the prevailing price per share for a priced round
- SAFE notes (SAFE), is another less complex form of debt instrument. Funds advanced by a SAFE investor convert to shares upon specified liquidity events. SAFE investors benefit from discounts on the price per share to which the investors in a subsequent priced round would be subject
- Crowd-sourced equity funding (CSF), preferred for companies seeking to capitalise on a product or offering with a degree of public acclaim. Members of the general public can purchase shares in that company up to a maximum of $5 million per year
Who are the investors, and when do they invest?
Investors are typically a mix of:
- Venture capital funds
- Family offices
- High-net-worth or sophisticated investors
- Family or friends
The mechanism of investment tends to depend on the following factors:
- The stage of the company’s life cycle. For example, we often see priced rounds or direct investments for more established companies
- The nature or size of the investor. Larger venture capital funds tend to prefer priced rounds. Family offices or high net worth investors are more open to Connotes or SAFEs
- The growth strategy of the company and particularly how quickly capital is required
The final word
Analysing the fundraising methods of company founders reveals valuable information, especially for start-up and scale-up companies.
Our ongoing Founder Series will explore investment methods in more detail, weighing up the pros and cons and shedding light on how these methods may be applied to your company.