One of the greatest concerns for any small company or startup is money. Where do you get the money to start your company, and where do you get money to keep your company going? The three most common sources of startup capital are 1) personal savings, 2) cash flows from the business, and 3) credit cards, as seen below in a great sketch by the Kauffman foundation.
Given these numbers it may make sense to answer the question – how do we legally self-finance our business? The most obvious answer is that we can fund the company when we purchase our ownership percentage in the company. This initial ownership purchase, however, may not yield substantial funds or does not meet your company’s financial needs. Two common legal self-funding methods are a promissory note (loan) and a convertible promissory note (loan + conversion feature). We will only cover a promissory note here but we will briefly touch on a convertible note.
A promissory note is a loan agreement that allows the company and individual (be it a founder or other individual) to record the loan and the terms under which it will be governed (interest rate, payment terms, maturity date, etc.). Below is a step-by-step explanation for how to enter into a promissory note with someone loaning money to the company. We will also discuss some potential options for the individual and company once the money has been loaned. Preliminary Steps