Why Your Startup Company Needs to Keep the Number of its Investors Low
If you can’t self-fund your startup company and must take on investors, keep the number of your investors as low as possible. A low number of investors will reduce your startup company’s transaction costs and headaches associated with raising funds.
I’d rather my client raise $90k from one investor than $100k collectively from ten based upon the transaction costs my client would suffer both during the fundraising process and in the future. My client might have to cut back on Aerons, but it’s much easier to keep one person happy than ten.
If you have no choice but to take on a large number of investors, request that your investors form their own LLC. Have the LLC be your startup company’s investor and therefore you only have to deal directly with one investor.
About the Author
Ryan Roberts is a startup lawyer and represents technology companies through all phases of the startup process, including incorporation, seed & venture financings, and exit transactions. Click here to learn more about his practice.
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Please consider subscribing to The Startup Lawyer, following @startuplawyer on Twitter, or contact Ryan directly.4 Responses
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North says:
Hmm… I don’t know if i can avoid it. I don’t know very rich people, therefore I will be needing about 10 friends on board for an early seed round… I could already tell it could get ugly. I need to create a class of stock for these folks right? I just don’t want it to be a mess for angels and VCs later.
One of your posts mentioned a Startup that was not funded because of overly complex financial structure, but another mentioned “Uncle Joe Series F”
Thanks, North.
P.S. Do you have a reading list? There are a lot of junky books out there.
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OK I found the post I am refering to, it was uncle Steve not uncle Joe.
“Issue Uncle Steve a diluted ‘Series A’ preferred shares.”What I am trying to find/create is an ideal class for a Friends and Family financing. Without screwing things up for later, larger investment opps. Any examples out there?
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The friends and family round is typically common stock or just straight loans to your company.
[...] far on The Startup Lawyer, I’ve talked to you about the benefits of keeping the number of your investors low (#4 above). And for the most part, this blog is dedicated to ensuring you conduct your startup [...]