Realistic Financing Options for Startup Companies

Sure, you dream of venture capital to turn your great idea into entrepreneurial success. But guess what: The vast majority of startups will never come close receiving venture funding.

There are alternatives, however. Here are approaches that my clients typically consider:

• Personal savings – This approach is one of the safest, although not available to most entrepreneurs. If you have enough savings to get your company started while leaving some behind as a cushion against personal emergencies, you will be in a position to focus immediately on running the business and to achieve success that much more quickly.
• Personal loans – These loans usually are secured by a lien against the entrepreneur’s home (pursuant to either a home equity line of credit or a second mortgage / deed of trust). If you take this approach – which may be more difficult with the recent drop in property values almost everywhere – be sure that you can afford the monthly payments. The last thing you want is the anxiety of possibly losing your home on top of the anxiety of starting a new business.
• Services revenue – Some startups are fortunate that they can deliver revenue-generating services while developing their products. The downside: Delivering services may distract from, and thus delay, the company’s eventual success.
• Friends and family – These sources can contribute equity, debt, or debt that is convertible to equity. The important points are to make sure that (a) the proper agreements and related documents are in place (don’t accept money with just a handshake) and (b) the investors understand that they may lose their entire investment and, if that occurs, they will not suffer undue financial hardship (or hate you for years to come).
• Angels – These investors are affluent individuals who invest in startups and, often, provide helpful advice and contacts. Here in the Bay Area, there are many angel investor groups. Some of the most prominent include Band of Angels, Keiretsu Forum, Sand Hill Angels and The Angels Forum.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.