What are the different stages in startup funding?

The first stage of funding your startup is bootstrapping. With bootstrapping, you’re using existing resources. In the sense of funding a startup, you take your own funds and abilities and begin to support what you can of your startup. If you’re still in the idea stage of your startup, this could mean that you work more hours or get a second job to put money into your startup. If your startup is running and you’re making a little money, the money is put right back into the business. Bootstrapping is a great phase because you learn how to work with what you got. This is part of pre-seed capital.

The second stage of funding is crowdfunding. Crowdfunding gives your friends, family, and social media followers a chance to help support what it is that your startup does. Here’s a hint for crowdfunding (that works in other forms of fundraising, too): if you want people to give you money, you have to show them what’s in it for them. What are the benefits? Sure, you probably have some friends and family members who will donate just because it’s you, but most people (even in crowdfunding) want something for their money. Make sure that you use your crowdfunding money wisely and fulfill any obligations that you promised in return for the funds. This is part of seed capital.

The third stage of funding involves other sources of seed capital. You have several options. You could use your own savings (and I am not necessarily recommending that), take out credit card advances (again, not necessarily recommending that), take out a loan, borrow from friends and family, or you can begin to seek out other investors or accelerators. Accelerators invest in your startup and in your ability to develop and sell your solution to other potential investors. Remember that seed funding refers to equity funding. This means that people are giving you money in return to have part of your business. You must learn to how to manage people and your relationships with those people in order to successfully receive seed capital.

Common terms you may also hear are series A, series B, and series C.

  • Series A is the first round of stock offered to investors during the early days of business.
  • Series B is a second stage of financing. It happens after a startup has met certain goals and shown that it is viable. Sometimes, it is known as a venture round.
  • Series C is an additional round of funding. Basically, any future rounds of funding generally go alphabetically down the line.

You could look for an accredited angel investor. The SEC defines an accredited angel investor as someone with a net worth of at least $1 million and with an annual income of at least $200,000 if they are single and $300,000 if they are married. Angel investors use their own money. That’s really important to remember when you’re pitching to them.

Understand your options for debt funding. Debt funding means that you borrow cash and you pay it back even if your company isn’t making a profit. Common forms of debt funding include: venture debt, AR line, an asset loan, and an SBA loan.

I hope this helps. If you’d like to get some expert legal advice about your startup (everything from formation to funding to operating agreements to tax questions), check out LawTrades. We love startups so much that we’ve helped thousands. We want to help as many startups as possible so that’s why we offer things like free initial consults, transparent flat-fee pricing, and a satisfaction guarantee!