Funding Your Startup Company

Published by Jim Zhou on

Business formation

Three million dollars in funding, ready to invest. Then the due diligence revealed undocumented SAFEs and missing board approvals. Deal dead. This happens more often than you’d think in Silicon Valley. Let’s prevent this from happening to your startup.

First Money In: Getting It Right

Every dollar into your startup creates legal obligations. Even your own money. A promising AI startup just lost their lead investor because they couldn’t explain where their initial $300K came from. No loan documents, no equity records, nothing. Basic documentation could have saved the deal.

Think of your startup’s funding like building a house. The foundation – those first investments – needs to be solid. Here’s what that means:

Personal funds need clear documentation. Are you lending money to your company or buying equity? Document it. Future investors will ask. Missing records raise red flags.

Friends and family investments? Securities laws apply. Your aunt’s $25K investment needs the same legal compliance as a venture capital round. One founder learned this when their family investor demanded their money back – and had the legal right to get it because of missing compliance.

Early Investment Tools: Making Smart Choices

“Just use a SAFE – everyone does!” Maybe not. A SAFE (Simple Agreement for Future Equity) works like a movie ticket bought in advance – you know you’ll get a seat, but not exactly what it’ll cost. Sounds simple until you’re explaining to your team why early investors now own 40% of the company.

Let’s decode your options:

SAFEs offer quick funding but create future complexity. Consider this real example: Startup raises $1M on SAFEs at $5M cap. Series A comes in at $20M. Early investors get 4x more shares than expected. Founders learned about dilution the hard way.

Convertible notes work like loans that turn into ownership. They give you more control over timing but add interest costs and maturity deadlines. Missing these deadlines recently forced one startup into an emergency funding round – not a strong negotiating position.

Series A: The Reality Check

Due diligence killed more deals last year than any other factor. Investors don’t just look at your product and metrics – they dissect your legal foundation. Here’s what catches most startups unprepared:

Your cap table tells all. Every share, option, SAFE, and promise of equity needs documentation. A local fintech startup thought they had 15% equity reserved for employees. Due diligence revealed 28% committed through undocumented promises. Deal terms changed overnight.

Intellectual property drives value. Missing contractor agreements? Unsigned IP assignments? One AI startup discovered their core algorithm wasn’t clearly owned by the company. The developer’s previous employer claimed rights. Series A delayed six months.

Deal Terms: Protecting Your Future

“Standard terms” can cost you control. Recently watched a founder lose hiring authority because they didn’t understand their protective provisions. Let’s break down what really matters:

Liquidation preferences sound technical but translate directly to money. Simple example: $10M invested gets 2x preference. Company sells for $25M. Investors take $20M before founders see a penny. Structure these terms carefully.

Board control determines your destiny. Yes, investors get board seats. But voting rights and protective provisions define real power. One founder can’t raise more money without investor approval – buried in “standard” terms they didn’t review carefully.

Running a Funded Company: New Rules Apply

Series A changes everything. Your board deck is late? Expect a call from your lead investor. Recently watched a SaaS startup struggle when casual updates met institutional expectations. Here’s what works:

Professional board meetings drive success. One founder created a simple system: Monthly financials, detailed quarterly reviews, annual strategic planning. Key metrics always ready. No surprises. Happy investors.

Document every major decision. Option grants, key hires, strategic contracts – all need board approval and clear minutes. Missing documentation recently forced a startup to recreate six months of board decisions before their Series B could close.

Staying Clean as You Scale

Growth brings complexity. One fintech client discovered this when their innovative product triggered three different regulatory frameworks. Tackle compliance systematically:

Create a compliance calendar. Track filing deadlines, renewal dates, reporting requirements. Assign specific owners. Review quarterly with counsel. One founder uses a simple spreadsheet that saved them during SEC review.

Watch your metrics closely. Many Series A terms include growth targets. Missing them can trigger investor rights – sometimes even forced sale provisions. A recent client lost their CEO role after missing two quarters of targets. Read those terms carefully.

Building for Tomorrow

Smart founders think two steps ahead. Clean records, current compliance, professional governance – these aren’t just good practices. They’re essential for your next round or exit.

Remember that $3M deal we started with? Another startup closed it last week. The difference? They had their house in order. Every document ready. Every share accounted for. Every compliance requirement met.

Your next funding round starts today. Build your foundation right.