MDW Founder Series: What are the most effective methods to raise funds?

MDW Founder Series: What are the most effective methods to raise funds?

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
      • investor

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.

Contact us for more information about effective methods to raise funds.