There are two main types of financing instrument:
- Equity (shares, stock):
- Typically the only form of financing in the early years because no commercial bank wants to finance your business (risk to him for them)!
- Ownership of the business
- Entitled to dividend (if any…)
- Company by share, either private (i.e. not listed on stock market) or listed (NASDAQ, TecDax etc)
- If not listed, then selling might not be easy (selling internally to other shareholder in the company, trade sale to a larger firm)
- Have the largest risk: you can loose everything
- If no success, shares might be worth next to nothing; but if success, shares might be worth a lot
- Borrow money from someone else (friend, bank, other company etc)
- Principle (amount borrowed) has to be reimbursed at some stage down the road (in phases or in one shot, as stipulated by the debt contract)
- Also interest rates
- Can also be risky (that’s why bank want collateral. E.g. buy a house -> Mortgage)
- Debt can be callable; convertible into equity.
The following pictures shows how a typical start-up gets financed in multiple rounds. As additional shareholders (venture capitalists) come on board, the initial ownership gets diluted. Source: Equity Fingerprints 2011. Thank you to Philip Baddeley for allowing us to reproduce this material here.
When you start a technology start-up, this is what you want to achieve, right?