Types of investors
Investors fall under a number of different categories. Here, we have outlined some of the most common:
- Founders: You! If you are putting any of your own capital into your business, you are an investor.
- Initial advisors: For example your University Tutors or someone you know in the industry with experience in your field may invest in you and your company.
- Incubators & Accelerators: These may provide access to programs, advice or workshops on startup basics and how to run your business and may also provide workspace and/or finances, in exchange for equity in your business.
- Friends & Family: People who believe in you and your idea and want to help you succeed.
- Angel Investors: These are usually experienced investors or people who are in your industry and want to make small investments in ventures they believe in. They can often also offer their valuable advice and expertise.
- Venture Capital: This is the most common and maybe the type of investment you have heard the most about. These are funds put together that pool money from limited partners that is then put forward as an investment made on behalf of other people. Venture capital participants are usually looking for a high return on their investment in a defined period of time.
Investors can be accredited or non accredited. When any agreements are made, they will need to sign off and understand the risks and implications of all eventual outcomes of your startup.
Types of Investments
Once you’ve found your investor/s, let’s take a look at the different ways they can invest.
- Restricted stock: Normally issued to founders and team members. Stock that has a restriction attached to it. Usually a vesting clause.
- Share subscription: When your company first issues shares, you are providing a share subscription and this has its own agreement.
- FAST: (Founder/Advisor Standard Template): Advice in return for equity is covered by this type of agreement.
- SAFE: (Simple Agreement for Future Equity) A convertible security. Includes a document that sets out a valuation cap and possibly a discount on that cap. A SAFE is a term setting out that at a future financing event, the investors funds will be converted into equity at the valuation and discount cap negotiated.
- Convertible Note: Similar to SAFE but including a repayment clause, a debt aspect and has an interest rate attached to it.
(It’s important to look closely into the wording of these agreements and understand what your obligations are)
- Share purchase (secondary): If an investor buys shares from someone who already owns shares in your company (could be a third party/someone not involved in the business) this is a simple share purchase.
Accepting investment in any form is a big step for you and your business. At lawyersinhouse.com it is our goal to guide you and ensure you have all the necessary information to make the best decisions for the future of your company.