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Chapter 19. Miscellaneous Financing Sources

Angel, VC, crowdfunding... these are the standards, but there are a few other sources of funding that crop up from time to time.

Family and Friends

This is actually the very most common source of investment, but it’s usually done on more of an ad hoc basis. Most companies will have significant investment (at least $50K) from the founding team and/or their family and friends. If you don’t, investors may question your commitment to the cause. Note that while founders usually invest as a part of the company’s creation without further reward (and this is part of their contribution for their founder shares), family and friends should have some form of structured agreement. An uncapped convertible note with a 20%–30% discount is a good, fair instrument for this that won’t bother most investors because it doesn’t put your family and friends in the position of negotiating complex terms with you. I’m generally apprehensive about convertible debt, but this is a very good use of it.

Another approach is a simple uncapped note with no discount but with a most favored nation (MFN) clause. This is very generous toward you (and not very good for them), but the MFN clause specifies that as you negotiate deals that are better for the investors, they get to opt in to those as well. It basically commits them to investing at whatever terms you come up with later.

Strategic Investors

“Strategic investors” are investors who participate on terms similar ...