Fund raising can be a daunting task for any entrepreneur or investor because it is

both mystifying and onerous. When over-ambitious mentality of budding founders

combined with concealed-incentive of venture capitalists, the nature of raising
money becomes excruciating or, even worse, leads to malaise for either side.
This article first deals with different sources of funding (priority-wise) meanwhile
discussing that how significance of such sources changes given the context or
phase of the start-up, and lastly, article will examine some key aspects of term
sheet.

In order to set the list of different funding sources, the article would assume that
there is technology-start-up which is developing a modern ski-helmet. The stage
of start-up is at a prototype phase, where founder is looking to conduct proof of
concept and then will develop a prototype. From here, the source of funding
would lead to manufacturing, distribution and marketing of ski-helmets. And in
2/3 years, company would diversify into different application such as biking. At
4/5-year horizon, the company would seek an exit either through IPO or
acquisition. The list of sources is not just based on the funding priorities but also
on the stage of the start-up (early/mid/late)

1) Bootstrapping ($5-20K) Through this source a founder could bring his/her

own money to at least validate the hypothesis or functionality of potential
idea. The founder can also focus on developing a team which may include a
temp technologist.
2) Government Grants As company is developing a $200-$300 worth ski-
helmet, a founder can seek different grants such as IRAP, NSERC. These
funds have no strings attached and can get up to $100,000 to $300,000
worth of funding. This is quite enough to pay a temporary technologist to
develop a prototype and for associated costs.
3) Business Incubator ($100-200K) As company has proven hypothesis and
developed a workable prototype, the start-up can go and work with an
incubator. The incubator could provide a suitable premises which would
help founder learn about taking company to next-level and also would help
to share some over-head costs such as admin, logistics or tech resource.
Lastly, there might be a situation where an incubator would take a part of
start-up equity.
4) Angel Investor ($200-300K) In order to develop a full scale manufacturing
of beta-tested ski helmet prototype, founder can reach out to angel
investors who can fund the company with seed money. This will help start-
up to build some connections with seller, generate revenue and create a
market acceptability or validation for the product.
5) Venture Capital ($1-4M & 2/3 years of operation) As company has
developed a market recognition of its brand and product, and have
generated healthy revenues, this is a correct time to reach out to VCs not
just to raise enough capital for scale-up but also to form a well diverse and
experienced team. Series A funding would be succeeded by Series B (since
4/5 years of inception) by raising $3-5M of funding with an expectation of
either going IPO or to be acquired in next couple of years.

The above stated funding sources can be replaced by some other options (which
are secondary to listed above)
 1) Crowdfunding This source can replace business incubator. Kickstarter is a
good source of funding ($100-200K). This would highlight the interest by
potential buyers. But sometimes due to lack of proper traction this funding
source may end up pre-maturely.
2) Patient Capital Bootstrapping can be replaced with money from family or
friends with some repayment agreement associated with it.
3) Debt Financing/Convertible debt VC funding can be replaced with loan
from a bank. With sound revenue track and good credit history, bank can
give a loan at negotiable interest rates.

VC is considered to be at epicenter of the giant see-saw where at one side there

are LPs (whose money is being used to fund risky businesses) and on the other
end there are entrepreneurs (whose idea is being flourished). The article does not
believe that VCs are greedy, rather the facts of term sheets are designed in order
to safe guard them from potential uncertainties. Further, a founder can also pitch
his/her discontent or agreement with terms stated in the agreement. Its a
negotiation between entrepreneur and VC that leads to a balanced term sheet.
The three elements of term sheet will be discussed from the lens of an
entrepreneur. Inordinate focus on either all the elements or just few of them can
affect relationship with investor and proposed deal, so going forward these are
the key aspects

1) Liquidation preference At the event of exit of the business (either IPO or

acquisition), the distribution of the proceeds between common stock and
preferred stock holders irrespective equity ownership of the company will
impact an entrepreneurs value-capture. Multiple liquidation preference
(1X/2X) and participation or non-participation preference can protect either
party. Lower liquidation preference will debar investor to take-home bigger
portion of the pie. Considering cap with participation preferred would help
common shareholder to prevent the flow of maximum value to investors.
Non-participation preferred can assist investors to get their liquidation
preference or they can choose to convert the preferred stock to common
with pro-rata among all shareholders. This can be most contentious and
baffling element of a term sheet. If preferred participation is inevitable,
then founder should aim for establishing a cap provision to it, which is more
justified.

2) Founder Vesting This element of term sheet focuses on the stock a

founder has originally purchased at the initial capitalization of the start-up
(beyond the options offered down the row). At the beginning of the young
start-up, a founder would be considered a critical asset of the company, so,
he/she may be requested to re-earn his/her equity with the growth of the
company. This element helps investor to make sure that the founder is
really committed to the company with gradual evolution of the firm, which
is justified. Still a founder should be cognizant to accept more appropriate
provision to it such as vesting monthly for 4 years is common. If founder is
fired in a year since establishing term sheet and can only vest his/her share
after 4 years or forced to sell shares with pre-decided price, then this will
leave a founder with zero up-side. Further, this goes in hand with founders
 presence in the board and associated voting rights, if founder has only one
seat in the board, then he can also be kicked off the board.

3) Board Even if founder owns the biggest percentage of common stocks,

the true control of the company is managed by the board, hence, the
composition of board and its associated voting rights portrays the correct
distribution of power inside the firm. It is imperative for an entrepreneur to
know that who is representing whom in the board along with the number of
seats. A founder may also choose to include a nonpartisan party at the
board seat to get a balance between seats from founder or investor side. In
subsequent rounds of financing, with exchange of money, a founder will be
forgoing part of his/her control of the company. So, an entrepreneur should
keenly focus on both composition and structure of the board in regards to
not just on current financing round but also going forward to next rounds.