Fundraising the Super Basics

So you found someone willing to give you money now in exchange for your giving them more money later. Is that debt or equity though? What actually is the difference between debt and equity?

In short, there a lot of ways to structure investments. Founders need to be familiar with the basics such as:

  • Lines of Credit

  • Convertible Notes and Simple Agreements for Future Equity (SAFEs)

  • Priced Rounds (Friends and Family, Seed, Series A are not as well defined as you may think)

  • Preferred Shares

  • Common Shares

  • Incentive Equity

  • Stock Options

Each one of these, and more, need to be carefully considered as to their risks and rewards in any situation. Very importantly for start-up owners is to keep track of all these instruments as they issue them.

Also, most types of fundraising raise (pun!) various state and federal securities questions. When do you need to file a Form D or register with a state where an investor resides?

Lastly, just to make it all worse, Section 409A (non-qualified deferred compensation) of the tax code as well as various securities rules create requirements and significant penalties for using these instruments incorrectly.

Kurt Watkins