From the embryonic stage to the revenue generation stage (and
often even beyond!), all startup software companies and their
founders have at least one thing in common: a need to finance
The right option for your company will depend on a number of
considerations with different legal obligations and liabilities for
a company's board of directors and management. You need to
consult your legal professionals, since the list of possible
problems with legal or regulatory matters is almost endless: tax
complications stemming from your choice of legal entity or
jurisdiction of incorporation, disputes arising from poorly
structured financing, or lawsuits from new shareholders alleging
misrepresentation are all examples of reasons to seek professional
A key step towards mitigating legal and regulatory risk is to
learn enough about the subject so you can fully appreciate the
risks. Below are a few
financing options you may want to consider:
Bootstrapping occurs when founders fund development costs
without external assistance. Doing so provides founders with a
great amount of flexibility in terms of running the business and
ownership, but also requires them to take on additional financial
Seed financing involves the investment of capital into a company
to fund development or the investigation of a market
opportunity. It is often provided by the founders themselves,
friends and family, or angel investors. Recently, many Canadian
jurisdictions have announced crowdfunding rules that can be
harnessed to raise seed capital from many investors.
There are different types of seed financing structures:
Common share financing: Investors receive an
ownership stake in the company, in the form of common shares, in
exchange for an investment of cash into the company.
Note financing: Investors receive an
interest-bearing promissory note in exchange for their investment,
which is repayable upon the terms and conditions set out in the
note. A note financing is a common investment structure and can
also include an option or requirement that it be converted into
equity at a prescribed time in the future.
Series seed financing: Investors receive
preferred shares in exchange for their investment in the company.
Investors who hold preferred shares receive certain preferential
rights to get their investment back (plus an additional return in
some circumstances) before holders of common shares are paid upon a
sale or liquidation of the company.
Venture capital financing
A venture capital financing typically results in a larger
investment from a venture capital firm in exchange for preferred
shares. In addition to receiving a preferred return, like in a
series seed financing, venture capital investors also typically
receive corporate governance rights such as a seat on the
company's board of directors and approval rights on certain
transactions. A venture capital financing typically occurs when a
company can demonstrate a significant business opportunity to
quickly grow the value of the company but requires significant
capital to do so.
Each option has its fair share of pros and cons, and there
isn't a hard and fast rule for which option is best. It's
important to understand that there are intricacies within each
financing option that should be considered on a case by case basis,
which is why a solid and trusting relationship with a legal
professional who knows your business and its background is
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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