Financing Your Startup

Posted by Louis Lehot on March 19th, 2020

Louis Lehot, L2 Counsel, P.C.

While many entrepreneurs think they should focus their efforts on venture capital financing, there are several more common sources of funding for early-stage companies. This article will highlight the differences between two common early-stage financing rounds.

Friends and family financing round

The first capital you obtain will likely come from your own savings or your personal network. Investors in this early financing round can provide anywhere from 000 to 0 000 of their own wealth because they feel a personal connection to the entrepreneur or are motivated by the idea of the startup. Because this round consists primarily of those in your personal network, it is referred to as the “friends and family” financing round.

Your personal network is a convenient way to raise capital, however you should ensure you
maintain the same formalities you would for a corporate or institutional investment. It is
imperative to document all investments, regardless who they come from, in order to prevent
future conflicts and provide a foundation for future investments.


Angel financing rounds

Angel investments come from small firms formed primarily for investment purposes, or from
wealthy individuals who wish to and have experience investing in early-stage companies. A
company should seek capital from an angel financing round if they already have a deliverable
product and are past the earliest stages of the startup. Angel investments will be larger than
those from the friends and family round, with angels investing up to million in a company.
Angel investors are motivated by the return on their investment and their ability to provide
entrepreneurial guidance.


6 Key differences between the friends and family round versus the angel round


1. Who the investor is
                  In the friends and family round, the investor will be a personal connection of the
founder. They may not have industry knowledge or a large amount of expendable capital, but
they are willing to invest based on their relationship with the founder. An angel investor has
much more capital to invest, and can take on an advisory role based on their industry
experience.

2. Investment size

                   The average capital raised from a friends and family round is 000, whereas the average angel investment is 000, with the median investment size being around 0 000.

3. Valuation of the startup at time of investment

             During the friends and family financing round, a startup typically has a valuation between --content--.5 and million. During an angel round, a startup typically has a valuation between and million, and requires the board to retain around 10% of its equity.

4. Time to close the investment deal

                A friends and family investment can provide immediate financial assistance as it takes only around two months to close the deal. An angel investment will take between three and six months to close, however this could be extended if the investment is through an angel group that has a structured review process.

5. Chance of repeated investment
                Due to the close relationship between the founder and investor in a friends and family
round, the investment often becomes continuous or long-term. Angel investors seek to
diversify their portfolios so they are unlikely invest in the same company more than once.

6. Cost of the financing round
              A friends and family financing round cost less because it is more informal and has fewer
transaction, legal, or documentation fees associated with it. An angel financing round will have
more associated costs, however the guidance and industry knowledge provided by an angel
investor may counterbalance these costs.

While not every startup will pursue a friends and family or angel investment round, they should
be considered as they can provide a solid capital base in the early stages of a company.
Louis Lehot is the founder and managing

Louis Lehot is the founder and managing partner of L2 Counsel, P.C.

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Louis Lehot

About the Author

Louis Lehot
Joined: February 18th, 2020
Articles Posted: 3

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