If you’re starting your first company, understanding stock, preferred stock, options, convertible notes, and other fundraising instruments can be truly overwhelming. We didn’t find a single video that covered this, so here we go.
Startup Fundraising 101.
If you are an early-stage startup in the tech space and you are looking for money to grow your company, the official term is raising capital, the most commonly recommended instrument to raise funds is a convertible note. However, to understand how those work, we first need to understand how equity (or stock) works.
What is a Stock?
You are probably semi-familiar with the term ‘stock.’ A Stock is what represents the company ownership and it is distributed in parts to reflect how much of the company each owner possesses. Each owner, or shareholder, receives a certain number of shares of stock.
The number of shares a person or entity owns in the company, divided by the total number of shares that have been issued, reflects that person’s percentage ownership of the company.
A Stock is what represents the company ownership and it is distributed in parts to reflect how much of the company each owner possesses
That ownership of the company is often acquired with a cash investment, but it can also be acquired through other forms of value contributed, like your hard work. The percentage owned normally determines a shareholders’ claim on the company distributed profits (the term used is dividends) and the voting power on certain key company decisions.
Let’s an example we’ll call… Slidebean.
Let’s say that Slidebean has two founders, who came up with the concept together, and have both committed all of their professional time to develop this business, so they’ll be equal partners.