How to invest in your startup with your own money
Starting your own business requires a lot from founders: it takes passion, drive, and risks. It also requires a lot of money, which is why most entrepreneurs invest their own capital.
But how do you decide what, when, and how to invest? Today, we’ll look at those questions and help you make the most of your funding.
Key considerations
Being a founder and investor concurrently demands risk management. As a founder, you obviously believe in your startup’s future.
At the same time, you should approach investing from a more neutral, detached perspective. Just because you’re 100% committed to your startup as a founder doesn’t mean you should be committing 100% of your money as an investor.
Don’t overinvest
Balancing your interest in the business with your personal financial stability can be tricky. Your investment should fit into your personal budget just as it fits into your business plan.
Incorporate and create a business bank account
Establishing a legal business entity and getting a dedicated business bank account creates a clear separation between your personal and professional funds. This shields your personal assets from liability — you don’t want to be personally responsible for debts or legal judgements against your business.
Consistent record-keeping
It’s critical to maintain meticulous financial records from the earliest stages. Contemporary accounting platforms can integrate directly with your bank accounts so that transactions are imported and categorized automatically.
Why startup founders struggle with getting bank loans
Banks typically prefer to lend to established businesses with a proven track record of revenue and profitability.
Since startups don't have this history, it's more difficult for banks to evaluate the risk of lending to them. Additionally, startups often have limited or no collateral, which means that there's no guarantee the bank will be able to recoup their losses if the startup fails to repay the loan.
Let's explore some options for startup founders who want to take matters into their own hands and self-fund their businesses.
Funding your startup with personal credit or cash
If you don’t have the cash on hand to fund your business, another option is to obtain a loan or credit line. It’s often easier for founders to get credit on their own behalf rather than looking for funding through their startups.
Personal credit
A personal line of credit offers flexibility and quick access to cash.
This approach can be particularly useful for early-stage startups, but careful financial planning and risk assessment are crucial to avoid overextension. Remember that a personal line of credit will be tied to your personal credit score.
Avoid credit cards
Credit cards might seem like a quick and convenient way to finance your startup, but their interest rates are typically higher compared to other forms of credit. If you must use a credit card, make sure to pay off the balance as quickly as possible.
On the other hand, personal loans typically have fixed interest rates and set repayment terms, making it easier to manage your debt.
Lenders assess you, not your business
Before relying on personal credit, it's crucial to understand your creditworthiness. Lenders will assess your credit score, income, and overall financial health to determine your eligibility for a loan or credit card.
Funding your startup with personal cash
Of course, using your own money is the most direct way to inject capital into your venture. It provides immediate access to funds without incurring debt. That means no interest to pay and no impact on your credit score.
At the same time, all the same investment risks still apply. Balancing personal financial security with business needs is crucial for long-term success.
As mentioned earlier, mixing personal and business finances can have legal implications. It's important to set up a separate business entity, such as an LLC, to protect your personal assets. We can walk you through the entire incorporation process and help keep your new business in compliance with state and federal regulations.
Understanding the YCombinator SAFE with MFN Provision: a game-changer for startup founders
Securing funding is a critical step for startups. If you don't want to use personal funds, consider funding with YCombinator, the successful startup accelerator that funded companies like Dropbox and Reddit. They offer a tool called Simple Agreement for Future Equity (SAFE) with Most Favored Nation (MFN).
What is the YC SAFE with MFN provision?
The YC SAFE with MFN provision is a standard investment agreement YCombinator provides to all companies participating in its accelerator program. Here are the key components of the agreement:
- $125k Safe: YC invests $125,000 on a post-money safe, representing 7% of the company. This investment runs parallel to the MFN safe investment.
- MFN Safe: YC invests $375,000 on an uncapped safe with an MFN provision. The MFN safe aligns its terms with the most favorable terms negotiated between the start of the YC batch and the company's next equity round.
Why is the YC SAFE with MFN provision beneficial for startup founders?
The YC SAFE with MFN provision offers several advantages that support startup founders on their funding journey. Here's why founders find this provision appealing:
- Early-stage funding: YC's investment of $500,000 provides a substantial financial boost for startups.
- Flexible terms: The MFN provision ensures that companies benefit from the most favorable terms negotiated with other investors in subsequent rounds.
- Trusted partnership: YCombinator is a highly respected accelerator that gives founders access to a vast network of mentors, experts, and other resources.
- Legal safety: The MFN provision explicitly states that YC's rights in a company and its profits are non-exclusive, meaning that startups can continue to seek funding from other investors.
While this is a great option for startups, it may be difficult to get approval early on. You may have to start by investing your own money or seeking other sources of funding before applying to YC.
Investing your personal cash in your startup offers quick access to funds, but it also puts your personal finances at risk. Fortunately, help manage liability through incorporation and provides tools to effectively tackle these challenges. Incorporate today to take the next step forward for your startup.