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COVID-19 and Your Early Stage Company: What To Do Now

COVID-19 is an unprecedented disruption affecting everyone, including early stage companies. Now more than ever, cash is king. It is time to manage the cash you have and plan for a possible mini-bridge financing to get you to the other side of the coronavirus crisis and to your next funding round.

First, update your cash budget (or create a cash budget if you do not already have one). You need to know how long your cash will last at your current burn rate. Take a hard look at ways to reduce your burn rate.

Next, consider a mini-bridge financing with your existing investors. Launching a new funding round during this crisis is not an option for most startups and early stage companies. But we are seeing companies quietly raise smaller mini-bridge rounds from their existing investors to get through the crisis.

A silver lining for early stage companies is that they have a long investment horizon. Early stage equity does not trade in the public market, and its value does not rise and fall with the stock market's gyrations. Your investors invested for the long term and still have an incentive to protect and grow that investment.

One solution is to do a simple mini-bridge round with your existing investors. The idea is to keep it simple and raise a modest amount of money now. This extends your time horizon and improves the odds of getting your company through the crisis.

You could issue more of whatever securities your existing investors purchased last time. You can also use convertible notes or simple agreements for future equity (SAFEs). These are uncomplicated methods for investing in early stage companies.

© 2020 Varnum LLP

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About this Author

Matthew Bower, Corporate formation attorney, Varnum
Partner

Matt is a partner on the Business and Corporate Services Practice Team, and participates in both the Startup and Emerging Companies and Intellectual Property Practice Teams. His practice focuses on corporate formation and organization, venture financings, joint ventures, mergers and acquisitions, corporate governance, securities law, and intellectual property protection and transactions. He works closely with startups, second stage and private companies on day-to-day issues and all manner of corporate and intellectual property transactions.

Matt's particular...

248/567-7404
Harvey Koning, Varnum, M&A attorney, merger, acquisitions
Partner

Harvey is a partner and leads the Banking, Finance and Restructuring Practice Team. He represents a wide variety of businesses and has substantial experience with mergers, acquisitions and capital raising. Harvey’s practice includes acquisition transactions (domestic and international), family businesses, securities regulation and executive compensation. Harvey works closely with the Ally Law network of law firms throughout the world to assist clients with international legal needs. He has extensive experience concerning government regulation and other matters specific to financial institutions.

616-336-6588
Zachary J. Meyer, corporate attorney, Varnum
Associate

Zachary Meyer is a member of the Corporate Practice Group and assists clients in matters of business law.  Zachary practices in the areas of corporate governance and structuring, mergers and acquisitions and regulatory compliance.  His focus is in the industries of healthcare, alternative energy, community banking and manufacturing.

616-336-6586