Bootstrapping or Capital Raising: The Founder’s Funding Dilemma

One of the primary issues the founders of a company face is determining how to fund the business. On the one hand, the founders could use their own personal funds and “bootstrap” the company. On the other hand, the company could raise capital through external sources like venture capitalists, crowdfunding, angel investors, or friends and family. Each of these options comes with its own pros and cons, ultimately leading young companies to ask its advisors, “which option is best for us”? Unfortunately, the usual answer is “it depends,” because there is not a one-size fits all solution.

At the outset, companies should consider the advantages and disadvantages of both options. Generally, the primary advantages of bootstrapping a startup are, among other things, (i) maintaining complete ownership and control of the business since all the equity is held by individuals who are (usually) actively involved in the business; and (ii) the potential for long-term profitability and M&A attractiveness, because of the company’s limited debt, low overhead, and minimal investor obligations. 

From Commodity Trading to Contract Law: What Entrepreneurs Can Learn About Risk

Before I became a transactional attorney, I was a grain trader. If you’re ever in an airport, you can spot a grain trader rather easily. They will be the person in a polo, grain company brand over their heart, pacing back and forth, trying to get just a little more phone time in before they take off to someplace else. On any given day, I might have fielded a hundred phone calls and reviewed well over a hundred pages of contracts before heading home. The pace was relentless, but what mattered most was precision. If you didn’t know the rules, the actual, technical rules, and understand the “industry rules,” you could expose the company to hundreds of thousands of dollars in losses from a single mistake. The margin for error was zero.