Early-Stage Investment Rounds to Fund Your Startup
Louis Lehot, business lawyer and partner at Foley & Lardner LLP in Silicon Valley, and formerly the founder of L2 Counsel, P.C.
In the early stages of a company’s life cycle, financing is likely to come from sources other than venture capital. This article covers the two most common early-stage financing rounds in which early-stage companies can secure capital.
Friends and family investments
Your company’s first source of capital is likely your personal savings or an investment from those in your close network. Just as the name suggests, the investor in this round is often a close personal connection. The investors provide their own money based on their loyalty and relationship with the founder, and are often motivated by seeing the business succeed.
The average investment in a friends and family round is just over $20 000, however a company may receive anywhere from $10 000 to $150 000 in this round. This round is often one of the first sources of capital for a startup, and occurs when the company’s valuation typically does not exceed $1 million.
As an informal financing round, it does not require extensive time or money to close the deal. An investment deal takes no longer than two months to close, providing the company with quick money to address financial concerns. Additionally, without complex documentation or transaction fees, this round does not come at a large cost to the company.
While informal, there should be some level of documentation kept in order to prevent future conflicts and to maintain a lasting investment relationship with the investors of this round. As the investors are in your personal network, you don’t want to damage the relationship, but instead facilitate a relationship that could provide continuous or long-term support.
Angel investments
Angel investors are often wealthy individuals or groups working within a small firm created for the purpose of investing. An angel investor typically has no relationship with the entrepreneur and sees the investment strictly as an opportunity for a return and to provide industry expertise.
An angel investment is much larger than that of a friends and family round, with the average angel investment being $77 000. While this is the average, an angel investment can range anywhere from $50 000 to $2 million as angel investors or angel groups have more capital at their disposal. Angel investors are interested in companies that have a deliverable product and a valuation between $1 and $3 million, though still in the early stages of its life cycle.
The angel investment round is more formal than the friends and family round, often taking between three and six months to close the deal due to a more structured financing process. With this formality also comes additional costs to the company, such as increased transaction or legal fees. However, these investors bring industry-specific knowledge and experience to a company that is often considered a counterbalance the costs. Unlike investors in the friends and family round, a company is unlikely to receive continuing funding from an angel investor as they prefer to main a diverse portfolio without over-concentration in one area.
As an early-stage company looking to secure capital, friends and family and angel investment rounds can provide the financing a company requires to grow and proceed to future fundraising rounds such as venture capital or Series A.
Louis Lehot is a partner and business lawyer with Foley & Lardner LLP, based in the firm’s Silicon Valley, San Francisco and Los Angeles offices, where he is a member of the Private Equity & Venture Capital, M&A and Transactions Practices and the Technology, Health Care, and Energy Industry Teams. Louis focuses his practice on advising entrepreneurs and their management teams, investors and financial advisors at all stages of growth, from garage to global. Louis especially enjoys being able to help his clients achieve hyper-growth, go public and to successfully obtain optimal liquidity events. Louis was the founder of a Silicon Valley boutique law firm called L2 Counsel. He previously served as both the co-managing partner and co-chair of the emerging growth and venture capital practice of a global law firm in Silicon Valley.
