4 - Start-up financing

Abstract

Entrepreneurs raise money for start-ups by acquiring debt, selling stock, mixing the two, and crowdfunding. This chapter explains the pros and cons of those start-up financing options. Start-ups must repay debt on time, which is hard for them to do before they start making profits. Stock investors collect repayment only when the start-up is acquired or goes public, but entrepreneurs cede some control of the start-up to stockholders. Hybrid options such as convertible debt provide a temporary solution to some financing problems. Crowdfunding is a new way to fundraise through peer-to-peer networks, but it works well only for a few types of start-ups. Entrepreneurs should perform a careful analysis before choosing a fundraising option because fundraising has long-term consequences for start-ups.