Financing a Startup: Part II

In my last post I discussed the startup financing concepts of bootstrapping, asking friends and family for funds and angel investors.  Here, I discuss further financing options for the startup business owner and entrepreneur.

Government Programs

The government offers assistance to startups typically in the form of loan guarantees, financing and grants.  Government programs range from local, state to federal in scope.

The federal Small Business Administration (SBA) makes it easier for a business to obtain a commercial loan by guaranteeing the loan.  To obtain an SBA loan the startup generally must show that an SBA guarantee is necessary or otherwise the applicant may not be approved for a loan.  The applicant must also show that it is independent and not affiliated with a major entity, that the applicant does not dominate its field, and that the applicant is indeed a “small business.”  Additionally, obtaining an SBA loan involves many of the same steps necessary for obtaining any other commercial loan.  Such steps include submitting a business plan and financial projections and may even include the owner’s providing a personal guarantee and collateral.  And if you are starting a capital intensive business, such as a high technology company, the SBA loan guarantee may not cover the entire loan amount.  In such a situation your personal credit history may be important to the lender, which could make the SBA loan impractical depending on your creditworthiness.

There are other federal programs available.  The Export-Import Bank administers programs which assist businesses in exporting US goods and services.  The Economic Development Agency provides grants to local agencies that in turn provide “gap” financing to entrepreneurs and business owners.  For high technology, startup companies, the SBA Office of Technology administers the federal Small Business Innovation Research (SBIR) Program and the Small Business Technology Transfer (STTR) Program.  The SBIR and STTR programs offer specialized and competitive grant opportunities to qualified small businesses from certain federal departments.

Venture Capital Funds

A venture capital fund (VCF) has traditionally been an entity, such as a partnership or limited liability company, that invests the capital of large, institutional investors such as pension funds and universities.  When a VCF invests it typically looks to invest in preferred stock and for this reason your startup may need to be structured as a corporation (with “C corporation” status for tax purposes) to allow for different classes of stock.  Also, when a startup obtains venture capital funding, the VCF will generally want to take an active role in the business and may even take control of the business.  Increasingly, there are exceptions and today many VCFs are changing how they invest and may invest sooner in the lifespan of a business and thereby take less control initially.  But because VCFs make available larger amounts of capital than an angel investor, for example, you should expect the VCF to require greater control the greater the amount of capital it plans to invest in your business.

A main advantage of a VCF is that it can invest significantly greater amounts than other investors and without the trouble of dealing with several individual investors at the same time.  Also a VCF can bring vital resources and expertise that the founders of the business, or existing investors, may not have.

Corporate Partnering

In concept “corporate partnering” is similar to a joint venture.  However, unlike in a joint venture, in a corporate partnering arrangement a new, separate entity is not created to be jointly managed by the partners.  Instead, the startup entity will enter into a partnering arrangement that usually combines a business component with a financing component.  For example, a startup may enter into an arrangement with one of its key suppliers whereby the supplier provides certain goods or services and also financing to the startup.  The combinations of such relationships are numerous and can involve debt or equity financing together with a licensing, distribution, manufacturing or other agreement.  As you can see, in a corporate partnering arrangement the startup can retain some autonomy, at least for a short time, while obtaining critical funding.  Finding potential corporate partners is not that difficult.  One can look to competitors, companies in the same industry that would like access to your technology, customers or suppliers, and companies with technology that is compatible with yours.

The benefits to the startup are that you may be able to obtain greater amounts of funding when your business is not yet attractive to other investors because, for example, your product line is narrow or your management team is not experienced enough.  Further, the corporate partner can provide benefits beyond the mere funding.  Such benefits may be in the form of access to technology, markets, manufacturing capability, or other expertise (e.g. regulatory).

On the downside, a corporate partnering arrangement can make your company look like it is a subsidiary of the corporate partner.  This can give the impression that your company is not independent and indeed your arrangement with the corporate partner may provide for exclusive dealing rights, which would turn off potential investors.  Once you are partnered with the other corporation, you may find that conflicts arise as to what is in the best interest of the parties.  The corporate partner may want to exploit other technology or pursue a public offering when you are not ready to do so.  Also, by partnering with a particular company, your own company may become subject to regulatory or other restrictions of the corporate partner.  Such restrictions may include market or territory restrictions and rights of first refusal.

The ways to finance a startup other than through a bank loan are numerous.  No single approach will be appropriate for all startups or individual owners and the discussion here and in my last post cannot be relied on as specific advise relevant to your situation.  For this reason, you need to consider your particular circumstances and should consult with your trusted advisors, such as an accountant and attorney, to properly navigate the complicated accounting, tax and legal requirements.

This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.

This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation. If you need legal advice, consult a qualified attorney.

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About Elio Palacios, Jr.

Attorney Elio Palacios, Jr., represents individuals, corporations, entrepreneurs, small businesses, startups and early stage businesses, physicians, dentists, and healthcare businesses in corporate, business and commercial transactions and litigation. He also counsels employers and individuals on visa, immigration and naturalization matters. Visit to learn more.
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