HOW TO PUT MONEY INTO THE STARTUP TO KICK OFF
There are a number of ways to put money into the company in order to fund it for starting purposes. I am not talking about financing the company at a high level. This isn't about institutional angels or VCs. This is about the initial funding of the company to help it even get started.
There are a variety of ways to do this. But like anything, some ways to do it are better than others. A startup lawyer can help you accomplish these kinds of tasks. I will list some methods out and then at the end give my recommendation.
1. Founders pay a lot for their shares
Founders need to pay for their initial shares in the company (founders stock.) They can pay a lot for their shares and the amount they pay will go to fund the company.
Downside: This messes up the valuation of common stock. Future employees will receive common stock option grants for incentive and equity compensation purposes. These need to be offered at the fair market value and thus it is best to keep the fair market value as low as possible.
2. Founder issues convertible debt to himself/herself
Convertible debt is a loan that will convert to stock when a qualified financing takes place.
Downside: Investors may dislike that a founder has convertible debt in their own startup; all founders are not on the same page--a debt needs to be paid back and the funding founder can blow up/bankrupt the company if the debt doesn't get paid back. Startups often don't have the money to pay back the debt.
3. Founders issue convertible equity to themselves
Convertible equity is a newer creation and is similar to convertible debt except that there is no repayment feature. It simply converts at maturity.
Downside: convertible equity is newer and not used frequently--this might dissuade investors unfamiliar with convertible equity.
4. Take a business loan
Downside: It may be difficult to find a loan; too much debt on the books may dissuade investors; loans have to be paid back and many startups need to use all of their cash to help them grow.
5. Founder loan
This is where a shareholder loans money to the startup and often just buys stuff for the company. The company basically operates on an IOU level.
Downside: separation of company from shareholder needs to be clear for veil piercing purposes; similar to above--too much debt can be bad and you don't want one shareholder to be able to hold the company hostage. Investors don't like it.
6. Sell common stock to investors
Downside: hard to find investors at this stage; don't sell common stock to investors as it messes up the value of common stock.
7. Sell convertible debt/equity to investor
Downside: might be difficult to find an investor at this stage in the game.
8. Sell preferred stock to investors
Downside: hard to find investors at this stage; extremely difficult to set a proper valuation of the company at this stage.
PUTTING MONEY INTO THE STARTUP TO KICKOFF RECOMMENDATION
If founder: if marginal amount of money, buy common stock. If real money such as 20k, 30k+ use convertible equity with extremely favorable terms for the startup (e.g., automatic conversion into common at maturity.)
If investor/rich uncle, etc. make sure the investor is an accredited investor and use convertible debt.