Chapter 13: Financing for Startups

Question 1

Define equity financing.

Answer 1

Equity financing is the sale of ownership stake within the company in exchange for funding.

Question 2

What are the 3 stages of equity financing?

Answer 2

1. Seed-stage financing: usually consists of small or modest amounts of capital provided to entrepreneurs to prove a concept.
2. Startup financing: money provided to entrepreneurs to enable them to implement their idea by funding product research and development.
3. Early stage financing: consists of larger amounts of funds provided for companies that have a team in place and a product or service tested or piloted but has yet show little or no revenue.

Question 3

What are the two main types of equity financing?

Answer 3

Angel investor
Venture capitalist

Question 4

What is an angel investor?

Answer 4

Angel investors are typically high-net-worth individuals who are accredited investors investing their own money in startup ventures.

Question 5

What are the 4 types of angel investors?

Answer 5

1. Entrepreneurial angels: experienced entrepreneurs willing to take bigger risks and provide mentorship.
2. Corporate angels: Corporate angels are individuals who are usually former business executives, often from big multinationals, looking to use their savings or current income to invest.
3. Professional angels: Professional angels are doctors, lawyers, dentists, accountants, consultants, and the like who use their savings and income to invest in entrepreneurial ventures (silent).
4. Enthusiast Angels: Enthusiast angels are independently wealthy retired or semiretired entrepreneurs or executives who often invest their personal capital in startups as a hobby.

Question 6

What are venture capitalists?

Answer 6

Like angel investors, VCs are often former or current entrepreneurs, but unlike angels, they are mostly professional money managers. Like angel investors, VCs look for opportunities that are likely to return 10 times their investment in 5 years. Typically, these venture capital money managers form a venture capital limited partnership fund that earns money through ownership of equity in different companies.