All businesses require capital. Whether it is to start a company, pay salaries, innovate, or spend on marketing, your business won't be able to grow without any funding. There are many ways to raise capital. It is important to understand the advantages and disadvantages of different types of fundraising and to make sure you use the right documents when raising finance.
There are three main fundraising avenues to choose from: personal, debt, and equity. Many entrepreneurs use a combination of different funding types.
If you are borrowing money from another business, use a Commercial Loan Agreement to set out the terms and conditions of the loan.
Alternatively, you can ask private investors, such as venture capital firms or angel investors, to purchase shares in your company in return for an investment (also known as an equity stake or share equity).
You will need a Term Sheet, a Seed Investment Agreement, and a Share Certificate if you choose investment through ordinary shares. If the investment is funded through a convertible note, you will need a Convertible Note Term Sheet, a Convertible Note Purchase Agreement, and a Convertible Note Certificate.
A private investor can also invest in your company using a Simple Agreement for Future Equity (SAFE). This is a relatively new concept and is similar to a convertible note. Essentially, it is an agreement whereby the investor provides capital to the company and, in return, the company provides a warrant to issue shares to the investor at a later time and upon a specific event, such as at the next round of funding.