There are two primary deal structures for your startup fundraise.
There’s the convertible note which is a debt instrument that converts to equity later. However, if you want to use a straight debt instrument you should use a promissory note.
Then there’s equity. It gives ownership rights in the company. The ownership is set by the valuation put on the company. An equity deal often comes with additional terms such as board seats, voting rights, and more.
Most startups use the convertible note to kick off their fundraise because it doesn’t set the valuation of the company which drives how much the investor gets for their investment.
You will find setting valuation is a major step in the fundraise process.
Until there is a lead investor and the valuation is set, there will be many investors who want to “just be in the deal,” but not spend time setting the valuation.
At some point in the fundraise an investor will express interest in joining but wants equity. If they are investing $100K or more, then they are a candidate to be the lead investor.
After the equity investment is made, the convertible notes convert into equity.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.