During a panel discussion organized by Asia Law Network, with partners General Assembly, e27 and WeWork Beach Centre, Ronald JJ Wong (Director with Covenant Chambers LLC), Wang Yingyu (Director with Taylor Vinters Via LLC), Paul Ong (Associate Director at Innoven Capital) and Kelvin Teo (CEO and Co-Founder of Funding Societies) shared their thoughts on the different ways startups can raise funds.
The panellists covered the different fund raising options available to startups, including: (1) Angel Funding (2) Venture Debt (3) Initial Coin Offerings (ICOs) and (4) Crowdfunding.
#1 . Angel Funding
When should you rely on angel funding?
In the early stages of a startup, one option to raise funds is angel funding. An angel investor, who is usually an affluent individual, provides funding in exchange for equity or provides a loan. According to Ronald, when startups usually begin, they don’t have a proven product or established userbase. This makes it hard for them to obtain loans from a bank. In contrast, angel funding is preferable as an angel investor is usually not as concerned about the track record of your startup.
What are the legal documents required?
In Ronald’s experience, legal documents for angel funding are usually kept simple. A simple loan agreement, investment agreement or shareholder agreement is typically required, such that parties are aware about their rights and obligations.
#2 . Venture Debt
When should you rely on venture debt?
For high growth startups that want to minimize equity dilution for both employees and investors, one fund raising option is venture debt. Venture debt gives early stage companies who are still cash burning access to debt capital, which is a cheaper form of financing compared to raising equity. Paul observed that unlike traditional bank lending, which usually requires positive cash flows or significant assets as collateral, venture debt offers more flexibility as venture debt firms look out for different requirements such as operational cash runway. In Paul’s experience, later stage companies are usually the one they rely on venture debt, especially those that are Series A onwards.
Venture debt arrangements also typically come with a warrant or right to purchase equity. However, as observed by Paul, venture debt firms are not in the business of holding on shares and only exercise the option if there is a liquidity event like an Initial Public Offering (IPO) or mergers and acquisition (M&A).
What type of startup should rely on venture debt?
If your business model is working capital intensive, you should consider venture debt financing. Examples include business to business (B2B) startups that are required to take credit terms. In such situations, Paul observed that it would not be advisable to take equity money and plug it into the working capital cycle. Instead, you should consider raising funds through venture debt.
What do venture debt providers look out for?
Venture debt firms usually look at the amount of cash a startup has raised in previous rounds of fund raising. According to Paul, firms also typically look out for companies with at least 15 months of operational cash flow.
#3 . Initial Coin Offerings
When should you rely on ICOs?
An ICO is a funding raising mechanism in which new projects sell their crypto tokens/coins in exchange for other established cryptocurrencies. In Yingyu’s experience, an ICO can work for companies who at different stages. For example, if you are a pre-IPO startup, you can do an ICO to fund your expansion and growth. It is also possible for listed companies to do a “reverse ICO”.
What are some of the considerations when doing ICOs?
Yingyu observed that having a good blockchain use case is not sufficient. Startups should also have a good token economy. Some examples include startups that are in social media and consumer facing.
Yingyu also pointed out that ICOs are costly. While they are less expensive than an IPO, they still cost quite a bit. It may be very difficult for startups who do not have a blockchain developing background to do ICOs.
#4 . Crowdfunding
When should you rely on crowdfunding?
Kelvin shared that there are 5 considerations when lending money: capital, collateral, capacity, character and conditions. Traditional bank lending focuses on the first two factors while crowdfunding platforms rely on the latter 3 factors.
In Kelvin’s experience, crowdfunding is a viable option for startups who require fast short term loans (<12 months) for company expansion, growth or bridging. In contrast, typical bank loans are usually offered to companies established for at least 3 years, and for a longer period of time
What are some of the considerations when crowdfunding?
Startups who can establish a certainty of future cash flow are more likely to succeed in crowdfunding. Whether it is through a contract with a repeat customer or steady monthly earnings, these are some examples how startups can promotes confidence and demonstrate certainty in future cash flow
Always remember to carefully examine the conditions at every stage of fund raising
Regardless of the type of fund raising, the panellist all agreed that it is important for startups to carefully examine the conditions they are agreeing to. Here are some important things that startups should look out for:
- Ensure non-dilution of equity and board seats
- Conduct a pre and post valuation to figure out where you stand
- Check the reserved matters list in the Shareholder Agreement
You may wish to see the live feed of the video here:
Would you like to speak with Ronald or Yingyu about fundraising for your startup?
If you want to get legal or general advice on your startup or business funding, get a Quick Consult with Ronald JJ Wong. With Quick Consult, you can check out in minutes and for a transparent, flat fee, the lawyers will call you back on the phone within 1-2 days to answer your questions and give you legal advice. You can also request a quote from Wang Yingyu.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to a practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.
Continue reading:
- What Is Series Funding & Why You Need To Know Your ABCs
- Pro bono: Singapore lawyer Samuel Ng gives practical legal tips for startups
- Pro bono: Practical legal advice about startup fundraising from lawyer Yingyu Wang (as published on e27)