The biggest challenge facing start-up companies is how to pay for ongoing expenses until there are sufficient revenues.  Start-ups often need to raise capital from outside sources in order to grow and become successful.  This article outlines the most common methods start-ups use to raise capital and the benefits and disadvantages of each. 

Friends/Family.  Friends and family can provide start-ups with a quick injection of capital.  However, if they do not financially qualify as “accredited investors,” the company may not be able to comply efficiently with the applicable securities laws governing investments.

Angel Investors.  Angel investors are wealthy individuals or entities who invest their own money into start-ups.  Some prefer companies that are local or that share a common mission.  The biggest difficulty is finding them and convincing them to invest.  Connecticut start-ups can utilize formal networking organizations, including the Angel Investor Forum, to meet angel investors.   

Venture Capital.  Venture capital funds are in the business of investing money in emerging companies.  They can provide substantial funding to help companies grow.  Some funds will ask for significant veto power over company decisions and numerous investor rights, which can be a problem for owners who want to maintain their control and upside.    

Equity Crowdfunding.  Start-ups can raise up to $1,000,000 from investors in any 12-month period via equity crowdfunding in compliance with the JOBS Act.  Crowdfunding campaigns must be conducted through registered investment portals and certain financial disclosures must be given to investors. Due to the compliance costs involved, a campaign may not be successful if a company’s funding goals are not achieved.      

Kickstarter Campaigns.  Campaigns on Kickstarter and other similar websites allow start-ups to raise money from the public while keeping all of their equity.  Companies usually offer free products or services to incentivize donations.  The drawback is that the donation amounts are usually small, which can hinder the company’s ability to raise a large amount of money.     

Loan Financings. Start-ups can receive loans from the Small Business Association (SBA) or traditional lenders in lieu of offering equity to investors.  But lenders tend to be less forgiving than investors if they are not timely repaid. Connecticut companies can also receive loans from the Department of Economic Community Development (DECD) which can be forgiven over time if they keep a minimum number of jobs in-state.      

Incubators / Accelerators.  Various incubator and accelerator programs (including CTech and CTNext) have been established to provide funding, advice and support to start-ups.  They can provide valuable resources.  However, some owners may find the program’s requirements to be restrictive.  Therefore, finding the right program for your company is imperative.     

Start-ups will often need to rely on multiple capital raising methods, whether in combination or in succession, during different development stages.  Advisors such as business attorneys and accountants can help start-ups develop the best strategies for raising capital based on objectives and needs.  For more information, please contact Mark W. Klein (mklein@brodywilk.com) or another BW attorney.