Doing it! – Part 2

“Elements” – Doing it!-Part 2:  Six months have passed since you and your partners put in money to form your new venture and it is almost gone. What do you do now? An early source of venture funding is from F&F (“friends and family” and sometimes “fools” are added as a third “F”). The category includes general associates such as lawyers, doctors, etc.; generally people that have “extra” cash for risky investments. The extra “F” is cynically added to this group because in most cases, they will lose their investment. The responsibility of the founders is to make it clear that this is a high risk investment and that they could lose their money.
While providing shares to F&F investors is a common approach, a better way can be a loan with a good return rate. The risk is just as high as shares but the returns to the investor are clear and no special exit strategy is required for them to benefit from the investment. In this early round, maybe you collect $100,000 to $200,000. The funds are enough to cover out of pocket expenses, but you will likely not have enough to start paying yourselves.
For the next round of funding, you will likely need the assistance of a venture funding advisor, who fill work off a finder’s fee (i.e., percentage of funds brought in) and may require a monthly stipend. The decision of the founders is how much they are willing to give up for the venture funding. Emotions may run high among the founders, with much discussion about the “worth” of the sweat equity that they have put into the project.
The founders must be willing to dilute themselves to attract funders, as the new investors are risking the most capital. The sweat equity is not worthless but it is not worth 50% of the company either. Remember a dollar brought in today is much more valuable than one tomorrow.