How to Raise Capital

Short Answer: There are five ways to fund a business: (1) with your own capital; (2) from the reinvestment of profits back into your company as it grows (this is typically the slowest but sometimes more robust growth); (3) with capital raised from friends and family; (4) with capital from outside sophisticated investors like venture capitalists or angel investors; and (5) with a loan from a bank or other lending institution.

Raising capital through friends, family, outside investors, or banks or lending institutions will almost certainly require the services of counsel in negotiating and preparing the requisite documentation. That said, let’s briefly explore each of these options.

Friends and Family

When raising capital from friends and family, it’s often tempting to disregard the importance of fully documenting the transaction. I have litigated numerous disputes between friends/family members, most of which take years to resolve and cost hundreds of thousands of dollars. It’s simply not worth taking these investments lightly. Make sure that everyone is on the same page. The easiest way to do that is to have a written agreement, whether it’s a grant of equity or a promissory note to repay a loan.

Outside Investors

Raising capital from outside investors often feels like winning the lottery. It is not. While venture capital investments are often vital to a company’s success, they are just as often the cause of a young company’s failure. Venture capitalists seek much larger returns than ordinary investors or lenders. As such, they often push growth at a faster rate than the company can handle, and they do so by acquiring management rights in conjunction with their investment. This is not to say that venture capital lending is bad – it’s often in the company’s best interest. However, make sure you’ve considered all possible opportunities and futures before handing over equity to outside investors who might push you to grow so fast it kills you. 

Bank or Lending Institution 

If you are able to grow your company with a loan or line of credit from a bank or lending institution, this is often the safest route to take. Unlike other lenders, they will not have any control over the management of your company.  Capital from lending institutions is also a great bridge to get a company through periods of growth or financially tight periods, until the company can secure a larger amount of outside funding through an equity grant. It would benefit you to have counsel review any promissory notes, especially those that include a security agreement and/or a personal guarantee.

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