Questions and Answers
Many of you have sent us questions about some of the basics of raising seed capital and the whole process of funding a startup. Rather than answering each person individually, we thought it would be beneficial to set up a Q&A category and regularly post these answers for everyone’s benefit. If you have questions that aren’t answered here, feel free to contact us and ask.
Q: Do Angels want to see revenue projections? Aren’t projections just guesses?
A: Absolutely. If they’re experienced investors, they know just as well as you do that these projections are subject to change at the drop of a hat. However, providing these projections, and more importantly, the reasoning behind them, shows the investor that you understand your business and you (hopefully) have a grasp on what is and isn’t realistic.
Q: How much of my company’s ownership should I give up to an investor?
A: Enough to make it worth both you’re time. Technically, this amount is based on the value of your business (almost always a point of contention in an investment round) and the amount invested. Crudely, investment/company value = percent ownership you’re giving up.
Q: What is convertible debt and why does my investor want to use it as the investment instrument?
A: Convertible debt is quickly becoming the investment tool of choice for most early stage investors. It’s name is pretty self-explanatory: it’s debt that, at some point in time converts to equity. The reason it’s popular has to do with the risks and rewards of investing in companies. To protect the investor, if things go bad, the debtors will be repaid first in liquidation. If things go well, the debt can be converted to equity, so the investor shares in the upside. Be sure to have an attorney or qualified advisor explain any convertible debt instrument an investor proposes to you so you have a clear picture of how all this will play out in your situation.
Q: How do I create financial statements (or projections) for investors?
A: For most early stage companies, there are little assets to show on a Balance Sheet, and often operations aren’t robust enough yet to support creating a Cash Flow Statement, so most investors will look for an Income Statement as the minimum financial statement you need to produce. Check out our Investor Information Package category to learn more about producing it.
