The term seed suggests that this is a very early investment, meant to support the business until it can generate cash of its own.
Money is generally used to pay for preliminary operations such as market research and product development.
For companies that are able to begin operations but are not yet at the stage of commercial manufacturing and sales, early stage financing supports a step-up in capabilities.
Capital provided after commercial manufacturing and sales but before any initial public offering.
The product or service is in production and is commercially available. The company demonstrates significant revenue growth but may or may not be showing a profit. It has usually been in business for more than three years.
Investors are putting money in because they want to get more money back. The exit is what gives investors their return.
Every startup needs an “exit”.
– Acquisition: The startup is sold to a bigger company for profit
– IPO: Going public also allows investors to get their money back
– “Cash Cow”: Not really an exit, a really profitable startup keeps offering dividends to investors
Successful startups give a very high rate of return for investors.
Full article here (available later on in the further readings section): http://tcrn.ch/2ebz41A
Thus, investors need to invest in many startups and hope that one successful startup will repay much more than the total investment.
We are going to give you some examples, but please keep in mind that the law is different in every country.
Criteria to be an accredited investor for some countries: http://bit.ly/2ewCINN
Example: The U.S. Securities Exchange Act of 1934, section 12(g), generally limits a privately held company to fewer than 500 shareholders.
#1 Issuing normal shares
A company borrows money from investors and the intention of both the investors and the company is to convert the debt to equity at some later date.
Typically the way the debt will be converted into equity is specified at the time the loan is made.
A phantom share plan is a contract between an employee and a company. The contract defines the number and the value of phantom shares granted by the company to the employee, as well as the conditions that trigger a payout.
A stock option gives the recipient the right to acquire company common stock at a set exercise price established at the time of grant of the option. If the option is granted early in the life cycle of the company, it will likely be at a favorably low exercise price.