Startup funding round technicalities

CFA General
#1

Hello people,

I am trying to raise money for a startup and I have a number of questions regarding the technicalities of the process. I don’t have any experience in this, just text book knowledge so if anyone can provide insights it would be great.

As a background, I have my product, valuation and pitching material ready and I now want to get out there and bring funds in. For the sake of conversation, say I have 10m pre money valuation and looking for 2m funding. The questions I have are the following:

  • Does the funding round need to have a specified closing date or can it be technically on for ever?

  • Do I have to issue shares beforehand and then go out to get investors in? Since I don’t know the final amount i will manage to raise, should I be issuing shares as money comes in?

  • Say I have an investor willing to invest part of the total funds required. Will he be diluted by subsequent investors (of the same round) or is there a process in place to avoid that? For example, if he can invest only 1 of the 2 million i am looking for he is getting 1/(10+1). Will his share become 1/(11+1) when I bring in the other 1m? Not sure if this is a problem if you are already stating that the end goal is to raise 2m but wanted to hear your opinion on it.

  • Do you see a problem advertising on your website or through google ads that you are looking for funds?

  • do term sheets need to be the same for all investors in the same round?

That’s all! Thanks for your time everyone:)

#2
  • Closing date should be date bound otherwise those investors who have given commitments to invest may withdraw their commitment in case of delay in round closure.
  • How can you issue shares without actual receipt of funds. No you cant.
  • Yes dilution will take place for the existing investors and that is fine because although they are diluted but with new funds company will grow more so they will also get the benefit of increased valuation. You can give existing shareholders a Right of First Refusal to invest in subsequent round to avoid dilution.
  • No. But would be difficult to raise funds in this way. You need to take a focused approach and identify potential investors to pitch.
  • Ideally yes because same terms will also be reflected in your financial projections and you will not justify different terms to learned investors who can easily verify the terms in your projections.
#3

_Th_anks for the response. So regarding my first question on the closing date, I understand that what you are implying is that investors commit funds in the same way as in a PE fund and then those funds are called in by the closing date. So I won’t be receiving any real funds before the round’s closing date, just commitments to invest - and that date, I suppose, should also be written on the term sheets.

Is this correct?

#4

Yes. You may write in the term sheet as:

Closing Date : (date) unless mutually extended otherwise.