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Understanding venture capital and how it works

One of the primary concerns for entrepreneurs starting a business is start-up capital. Financing a start-up company is essential, which is why it is useful for entrepreneurs to be familiar with different options for financing their start-up business, how they work and the important legal implications that may be associated with each. One financing option to consider is venture capital. Start-ups that are funded through venture capital typically cycle through four phases.

During the first phase, foundation funding or seed capital funding is needed. Friends and family are common sources of initial capital if possible. It is important for the entrepreneur to be familiar with federal and state registration exemptions and requirements, and ensure the initial offering complies with requirements and exemptions. It is essential not to give initial investors rights that will infringe upon the company's ability to attract future investors. Next, it is helpful to find an angel investor. In addition, it may be possible to consider state and local funding for the business as well.

The next step is the development phase when companies are developing their products and services. At this point, companies may seek funding from angel investors, venture capitalists or through an initial public offering. This stage can be risky. During the next phase, the maturity stage, companies are likely to be able to obtain funding from venture capitalists or traditional banking sources. During the final phase, the growth stage, investors will exit the business and developing strategies for them to do so becomes important.

Many entrepreneurs may have a dream of running their own company, but have concerns about financing the business. The more potential entrepreneurs understand about venture capital and funding options, the better position they are in to start their business and succeed.

Source: Smallbusiness.findlaw.com, "Venture Capital Overview," Accessed Feb. 12, 2017

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