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After several pitches we've kinda positive of closing our seed-funding (amount X) round, which is being funded by my family friends. However, very (un)fortunately for us, the seed investors aren't taking any collateral or stake in our company, it's happening completely on good-will and they just want us to return twice the funding amount (2X) in an year's time. Well, we know that in year it's impossible to be able to double their investments, but you know, as an over-optimist entrepreneur and with lot of "that gut-feeling", I've said yes.

Now, what I'd like to know is would any VC or angel would be willing to fund us for series B with (amount Y), when they realize that 2X of that Y is going out for seed-funding repayment. I mean I'd like to know that whether my decision was right or wrong in the first place.

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Well now that the decision's taken and it's done, what does it matter? You'll find out in a year when you'll have to repay 2X: if you're able to find the investors for round B then it'll have been a good decision if the amount of equity you'll have to sell to repay the loan is less than the amount of equity you would have had to sell now. And if you can't find the money to repay them and lose 100% of your equity then it would have been a bad decision. You'll find out soon enough. – frenchie Dec 25 '12 at 20:49
thank you frenchie, that's more like a litmus test. but doesn't answer my question completely. – user1798374 Dec 26 '12 at 11:35
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The thing is, your question has no definite answer. – frenchie Dec 26 '12 at 14:52

2 Answers

up vote 1 down vote

There are 3 ways of funding a startup

  1. debt
  2. equity
  3. prizes/grants

So now you've got yourself the equivalent of 100% interest "loan". This is somewhat higher than the height of the global financial crisis where private equity for seed rounds was in the 90% range. You'd be better off hitting your credit card at 20% (assuming you're credit worthy or got collateral).

The second aspect (choosers-regret) is actually a turn-off signal to any potential investors. If you don't have confidence in your product and not prepared to put sweat equity into the startup, why should they? I've seen founders in China who were in hospital and got up after operation to supervise their underlings. I've heard a story that Larry of Oracle fame was down to last thousands in his bank account before he landed a big contract. I've mentored founders who'd want to work non-stop on their idea for nothing (though that won't last when kids come along). So if angel(s) have a choice of funding any of the above or your startup, what are you doing to convince them you are the better choice?

I commend to you the book “The Art of the Start” by Guy Kawasaki

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up vote 0 down vote

That amount of money would be a liability to your company, just like buying a bunch of equipment or something. It's a "startup" cost in their mind probably, since it doesn't have to do with equity at all it's a lot simpler. You'll just need to keep that 2x on your books as liability and make it known how / when it needs to be paid back. When a company looks to fund you they may want to see if they can get an agreement in place to pay them back over time or push the payments further out OR realistically if someone else is going to fund you the money your friends and family put in would be pretty minor and they would just pay that out.

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