When you are a small company like the Los Angeles ORM team, you can sometimes struggle to get some startup funding. It is important to know the basic lingo of funding so when someone discusses this with you, you aren’t a noob and clueless as to what they are saying.
Starting at incorporation
When you are incorporated, this means that you will authorize shares and issue shares. Authorized is the number of shares the company may issue over the lifespan of the company without changing its charter with the state. Issued shares include the number of shares for founders at the time of incorporation, the stock option pool which is usually 10 to 20 percent depending on if early employees get a grant of an option.
Common shares are granted to founders and early employees at the time of incorporation or held in reserve. Preferred shares are the type of shares sold to investors, and the specific preferences can change with each round of funding.
Your attorney represents the company
It is important to make sure the attorney doesn’t represent the investor and shouldn’t decide to help out the investor.
The stock options are the shares held by the early team member or contractors. The stock options are usually incentive stock options, or non qualified stock options. A strike price is the price of the shares that are granted at the time, at incorporation, its likely $0.01 per share. As a later option the strike price will be closer to the fair market value.
A convertible debt is a debt instrument used to put money into a company without having to put a price on the value of the company and the corresponding value of the shares. The legal costs associated with this type of financing should be the cheapest option for your startup.