Equity Financing

This is the practice of raising money by selling shares of the venture’s company to potential investors. Most of financing in the world of start-ups are in fact equity financing where Angel Investors, Venture Capitals, Accelerators or Incubators take shares of your start-up in consideration for their investment.

The big question for equity financing is always valuation: how much is the venture worth? Or could be worth in the near future? For early stage start-ups this is the most difficult hurdle. After all how can a start-up be objectively quantified if it has not produced anything yet? These difficulties often make friends and families the best resource for early start-up funding.  But extra caution is necessary to protect the venture’s future interests.

The best strategy to overcome these difficulties at early stages is for the founders to plan and document their goals and strategies. The founders further need to practice their storytelling skills to deliver effective pitches and presentations to family, friends and sophisticated VCs alike. Founders need to remember that at early stages, they themselves are among the most important selling factors of the venture.

Angle Investors

Angel investors are typically high net worth individuals or groups of these individuals who are Accredited Investors* that invest in start-ups in exchange for equity or convertible debt*. Angels can have any background but those roaming the start-up world are typically current or former entrepreneurs interested in innovation.

*Accredited Investors: In Canada, an “Accredited Investor” is defined by the provincial securities commission in each province. In Ontario for example, an Accredited Investor is defined in OSC Rule 45-501. This definition includes, but is not limited to: an individual who beneficially owns, or who together with a spouse beneficially own, financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $1,000,000; or an individual whose net income before taxes exceeded $200,000 in each of the two most recent years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of those years and who, in either case, has a reasonable expectation of exceeding the same net income level in the current year; or an individual who, either alone or with a spouse, has net assets of at least $5,000,000;
*Convertible Debt: investor and venture enter into an agreement with the intent (from the outset) that the investment amount be re-payed (all or in part) to investor by converting it into a certain number of common shares at some specified time in the future.

Angels are most often sophisticated investors that will want to properly research and conduct comprehensive due diligence on the ventures they eye for investment. Angels often invest their own money, in contrast to Venture Capitals who are professionals that invest money entrusted to them. As such, Angels are more flexible in practice and are more prone to creative deal structures. Angels typically invest at very early stages, and expect high returns on their investments (i.e. 5x-10x). this is understandable because risk is very high at early stages and it will need to be properly rewarded to attract investors. In short, Angles are not cheap! Therefore, founders shall carefully consider whether approaching Angel investment is right for them: is the investment necessary such that it would warrant giving up considerable equity in a venture that has not yet realized its potentials?

Investments by Angels can range from a few thousands to even a few millions and mainly in the pre-seed, seed and Series A funding (see Start-up Funding Rounds).

As mentioned, Angels can also come in groups or networks. Once Angles adopt structure they tend to become more procedure-oriented and  more risk-averse. They are less flexible that individual Angels yet more than Venture Capitals. Similar to VCs, Angel networks also specialise in certain sectors and have developed a certain appetite for investment.

If you are considering to approach an Angel Investor for the Start Up Visa (SUV) Program, you need to know that:

  • Not all Angel Investors in Canada are qualified to participate in the SUV program. Currently there are 9 Angel Investors designated by IRCC and therefore qualified for the SUV program;

  •  As a legal requirement, designated Angel Investors must commit to an investment of at least $75,000 in the start-up company they choose to support for the SUV program;

Venture Capital Funds

VCs are often professionally managed pools of funds with an exclusive interest in start-ups (i.e. high growth potential). As VCs are more sophisticated and more structured that Angels, they often tend to invest at later stages of a start-up (there are specialized VCs that fund start-ups at early stages). VC investments just like any other investment in the world of start-ups have high rates of failure and are duly categorized as high risk. Risk that needs to be properly rewarded by giving up shares and/or control in the start-up venture as consideration for VC’s investment. Founders therefore shall expect lengthy, complicated and burdensome negotiations when dealing with VCs.

VCs are often specialized and have an established investment appetite. Some invest globally while others are geographically focused (i.e. Canada, US, …). VCs often specify the stages at which they would want to interview companies (see Start-up Funding Rounds) and they have a preference for sector (i.e. AI, VR, IOT, etc.). Therefore, founders are advised to duly research VCs to see whether their ventures are a suitable match to potential VCs’ portfolios. Just like any other important meeting in life, the best way to approach VCs are through a warm introduction from an influential individual in your network (i.e. a lawyer, accountant or etc.).

If you are considering to approach a VC for the Start Up Visa (SUV) Program, you need to know that:

  • Not all VCs in Canada are qualified to participate in the SUV program. Currently there are 23 VCs designated by IRCC and therefore qualified for the SUV program;

  • As a legal requirement, designated Venture Capitals must commit to an investment of at least $200,000 in the start-up company they choose to support for the SUV program;

Canadian VC Investment Statistics in 2019

2019 was an incredibly impressive year for venture capital investment in Canada as a record CAD $6.2B was invested over 539 deals. This represents a 69% increase than the CAD $3.7B invested in 2018 and three times more than when CVCA began market analysis in 2013. The last quarter of 2019 alone contributed CAD $1.6B to the staggering new record. For more information see Canadian VC Investment Conquers New Peaks in 2019.

Accelerators & Incubators

Just like “start-up” itself, anything associated with the start-up world, like accelerators and incubators, do not have universal definitions. Best way to differentiate between an accelerator and an incubator is perhaps by resorting to the plain meaning of the words:

  • Incubator: enclosed apparatus providing a controlled environment for the care and protection of premature;

  • Accelerator: a thing that causes something to develop more quickly;

The plain meaning is also in line with the practice in the start-up world where incubators often serve ventures that are at very early stages and accelerators often cater to ventures that are more developed and in later stages.

Accelerators and Incubators are not prima facie seen as sources of financing but they often provide ventures with valuable resources that will pave their way to financing. Although there are incubators and accelerators that invest in start-ups in exchange for equity or convertible debt just like angles or VCs, this is not prevalent among their peers. Most common services offered by these organizations are: advice, mentoring, operational technologies, and often a co-working space. They often engage with start-ups at the earliest stages, sometimes at a point where the company is still refining its proposition and doesn’t require capital yet.

Incubators and Accelerators, like colleges and universities come in different reputations and prestige. Just like the reputation of a university that will determine the kind of job a graduate will land, the influence of the incubator/accelerator will determine which investors will show interest in the venture. Incubators/accelerators are very different in their admission standards, and their fees. Some like the Creative Destruction Lab are free but have a very rigorous application procedure with a very low acceptance rate. On the other hand, some incubators just accept about any venture regardless of merit and in exchange for very high and rather unreasonable fees.

Founders are advised to be careful when considering incubation or acceleration for their ventures. They have to do their due diligence and properly weight the costs and opportunities before making any commitments. It is very important to ask questions and research the organization’s network (i.e. consultants, mentors, executives, board members and etc.). This research will help making an assessment on whether the organization is a match for the venture. It is best if founders make a list of their expectations before approaching incubators to ensure they will address all of their concerns before they commit to rigorous application processes or very high incubation costs.

If you are considering to approach an Incubator for the Start Up Visa (SUV) Program, you need to know that:

  • Not all Business Incubators in Canada are qualified to participate in the SUV program. Currently there are 29 Incubators designated by IRCC and therefore qualified for the SUV program;

  • There is no legal requirement for designated Incubators to invest in the start-up company they choose to support for the SUV program;


In simple terms, crowdfunding is the practice of funding a start-up venture by raising small amounts from a large number of people (i.e. crowd + funding) typically through the internet. One of the advantages of this approach is gaining exposure by attracting a large of number of investors who will play an important role in advocating for the venture. On the other hand, a big challenge for crowdfunding is creating an appeal for the company that would attract a large number of investors. There are different types of crowdfunding. The primary ones are:

  •  Donation-based Crowdfunding: this type of crowdfunding is strictly charitable and allows people to give money with no expectation of receiving anything in return. It is obvious that not all ventures can create the necessary appeal to attract charitable donations;

  •  Equity Crowdfunding: just like equity financing, equity crowdfunding allows people to invest in a venture in exchange for a small stake in the company;

  •  Reward-based Crowdfunding: in this type of crowdfunding, investors will get rewards, usually in from of exclusive product or service in exchange for their contributions;

Like many other avenues of funding, crowdfunding is a regulated activity. The provincial securities commissions are in charge of the regulatory regime imposed on crowdfunding. For example, equity crowdfunding is an option available to everyday (retail) investors in Ontario as of January 25, 2016.

The crowdfunding regulations typically fall under prospectus* exemptions that allow start-ups to raise money without the need to prepare and disclose a prospectus. As such there are fewer requirements imposed upon businesses offering these investment opportunities to the public and that of course comes with less protections offered to investors. This is because investors will not have the chance of reviewing the prospectus for their target investment company.

* Prospectus: A disclosure document that describes the securities being offered to potential buyers. A prospectus is an important protective instrument for investors because it provides them with material information about the securities they are considering to purchase. Provision of such information is a mandatory requirement in many jurisdictions aimed at enabling investors to make informed investment decisions.

Founders and investors considering this approach shall pay close attention to the regulatory framework under which they are operating. For example, in Ontario, a crowdfunding issuer (the venture raising money through crowdfunding) shall make certain information available to investors like annual financial statements, and an annual notice detailing how the money raised has been spent. On the other hand, and in Ontario, everyday investors can only invest up to $2,500 per investment and cannot invest more than $10,000 in total in any given year.

Debt Financing

Perhaps the most traditional approach to fundraising is debt financing where a business raises money by borrowing it from individual or institutional investors. In this scenario the lender becomes a creditor, and receives a promise that the principle and interest on the debt will be repaid in accordance with some terms and conditions. As opposed to equity financing, no stake in the company is relinquished through debt financing but the borrower will remain liable for the debt regardless of the fate of the financed venture through this approach. In other words, if the venture fails the liability to pay back the debt remains. In equity financing however the failure of the venture will not cause any liability to pay back the equity financiers.

The most typical debt financing is bank loans. Banks are extremely sophisticated and savvy investors operating within a tight regulatory framework that makes it difficult for early stage start-ups to access them. For early start-ups with no financial history and revenue, options are limited. There are many banks offering loans and lines of credit to start-ups if they have a sound business plan and solid financial projections. The amounts however are often small and range between $10,000 to $100,000.

When considering debt financing founders shall consider, among other things, the cost of debt. Like many things in life, debts are not free and they often come with many terms and conditions. It is therefore very important that founders carefully consider the costs and weight them against the benefits.

Banks in Canada are heavily regulated, and one can expect to see a lot of similarities between banks procedures in giving loans to start-ups. There are also other entities that start-ups can approach for debt financing, like private loan companies. These entities, albeit more flexible than banks in terms of vetting processes and procedures, are often much more expensive avenues of financing. For example, if a typical bank loan would cost prime + 3-5%, private loans can cost in excess of 10% in interest.

Government Funding

One of the biggest advantages of lunching a start-up in Canada is access to a vast pool of government funding. Incentivising innovation is now a top priority for the Canadian government and billions of dollars are now dedicated to funding innovation, research, and development all across Canada.

Government funding can be divided into two major categories of federal government funding and provincial government funding. What follows are examples of each head of government funds dedicated to the start-ups, but start-up founders shall be advised to proceed with caution as government money, just like any money, comes with many strings attached, and they often have rigorous application processes.

Example of Federal Funds for Start-ups

– Scientific Research and Experimental Development (SR&ED): This is ideal for companies that can do a lot of R&D. It does not matter if the company is pre-revenue(or profit) but the deciding factor will be how well the company can define and implement R&D. If eligible, companies can earn SR&ED credits up to 45% of eligible expenditures up to the first $2 million. For eligible expenses beyond $2 million, companies can receive credits of 20%. Salaries and wages are biggest contributors to SR&ED credits, therefore start up founders sacrificing on wages and salaries will have reduced their size of SR&ED claim;

– Industrial Research Assistance Program (IRAP): This is ideal for businesses developing and implementing process improvements. IRAP shall always be considered if a venture is planning on performing a technology-driven research and development in Canada. IRAP’s contribution can be up to 80% of internal technical labour and subcontractor expenses;

– Agri-Innovate Program: Provides repayable contributions for projects that aim to accelerate the commercialization, adoption and/or demonstration of innovative products, technologies, processes or services that increase agri-sector competitiveness and sustainability;

– Going Global Innovation (GGI): This is ideal for start-ups looking to establish new R&D collaborations with foreign partners to co-develop, validate or adapt their technologies for commercialization. GGI offers access to up to $75,000 for different activities such as travel to meet foreign partners, development of legal documents necessary to formalize contractual agreements with the foreign R&D partner and etc;

– Strategic Innovation Fund: With a pool of more than 2 billion dollars, this fund is designed to spur innovation in Canada by providing funding for large projects(over $10 million in requested contribution);

– Innovative Solutions Canada Program: this program helps Canadian innovators by funding R&D and testing prototypes in real-life settings. The program has two streams with a  combined funding of over $140 million;

Examples of Provincial Funds for Start-ups (Ontario)

– Market Readiness Investment Program: Ontario Center of Excellence (OCE) supports early stage companies that are raising pre-seed and seed investments (total round sizes range from $500,000 to $2 million) on behalf of the government of Ontario. This is a highly competitive process with more than 300 companies applying each year and only 10% receive investments. This fund is ideal for companies headquartered and predominantly located in Ontario, less than 5 years old and in early stages that are the commercialization stage;

– SmartStart Seed Fund: This fund is also administered by OCE and provides seed financing and funding for entrepreneurship skills training to help group start-up companies and make them investment and customer ready. The funding is up to $30,000, including up to $7,500 for skills training and professional advisory services within the seed funding amount;

Final Remarks

It’s obvious start-ups or businesses in general can seldom succeed without capital. But adopting a financing strategy in a sophisticated market like Canada is much less obvious. Although options are abundant, solutions are not. They take skills and expertise, and they have to be tailored for each venture. 

Leave a Reply

Your email address will not be published. Required fields are marked *