From Startupping Wiki
[edit] Funding
Funding a Web 2.0 company is very similar to funding a conventional start-up business. Funding can come from your own money, private funding from family, friends, bank loans, other individual investors (e.g. angel investors), or venture capital.
If you plan to finance a start-up with your own funds, these funds can come from a wide-range of options such as savings accounts, 401K plans, credit cards, home equity and more. Financing can also be a combination of these options, also known as “bootstrapping.” The benefit from bootstrapping is that you don’t give up any ownership or control of your business to other investors. The disadvantage is that you carry all the risk.
Drawing on personal relationships to raise capital is typically done when the business or business idea is not solid enough to get funding elsewhere. This option is very common, but carries the most risk. If the business fails and the loans cannot be paid back, it can place your personal relationships in jeopardy. To protect both parties, it’s wise to have legal documents in place that outline how the loan will be repaid and when it will be repaid. The legal document is usually in the form of a promissory note.
There are several different options for bank loans depending on your situation. They fall within two categories: secured loans and unsecured loans. Secured loans are loans that are secured by collateral. The lender will take a security interest in your property. If you do not pay the loan back the lender has the right to seize your collateral. Short-term and long-term commercial loans fall into this category. A short-term commercial loan is usually no more than three years and the loan will require fixed payments of principal and interest. They are excellent for seed money or working capital. Long-term loans are almost exclusively used for equipment and other asset purchases. Lenders will not lend your businesses money for longer than three years unless the loan is for a specific asset purchase or for the refinancing of an existing asset. These loans are secured by the assets being acquired and will generally have various loan covenants such as interest rate changes and prepayment penalties associated with them. Unsecured loans are loans that are not secured by any collateral. These are typically in the form of a line of credit and have a set amount that can be borrowed. When it comes to bank loans, you're required to have a good credit history, submit a personal financial statement, and sometimes make an equity investment in your business.
Venture capital can be secured if your business has the potential for above average future profits. Sources of venture capital include angel investors — wealthy individual investors, professionally managed investment funds, investment banks, or venture capital funds. Venture capital is somewhat more difficult for a small business to obtain than other sources of financing. To obtain venture capital, you need to have a solid business plan to demonstrate that your business is viable and profitable. Venture capital organizations will go through a due diligence process where they evaluate the business to ensure they’ll get their return on investment (ROI). After this process, the investor will provide the business with a term sheet, a non-binding agreement that outlines the size and conditions of the investment. Typically more phases of financing, or follow on investments, are involved after the initial investment to see the business through its growth stages. A mezzanine level round of financing takes place immediately preceding an Initial Public Offering. In return for taking an investment risk, venture capitalists are usually rewarded with some combination of profits, such as preferred stock, royalties, and capital appreciation of common shares.
[edit] Investors
Angel Investor Groups
[edit] Examples of Funding Documents
These documents are being provided as examples only. There are no representations or warranties. Even common sense would tell you to review these agreements with licensed attorney before using them.
[edit] Business Models
See Business Models
[edit] Accounting
Accounting in a start-up business can be done two ways: on your own, or done by a bookkeeper or accountant. There is a variety of accounting software programs on the market – some that are even geared to online businesses. The benefits to doing your own accounting are cost and that you have the financial information at your fingertips. A bookkeeper or account can take it a step further. Both can help set up an accounting system that best fits your business. They also provide tax consulting and preparation. Bookkeeping is just part of accounting. Accounting encompasses tracking assets, both cash and capital equipment, liabilities, and other business operations, analyzing the data, and forecasting for future business growth.
[edit] Additional References