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How Do You Negotiate A Seed Investment?
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๐ Abstract
The article discusses the key considerations and best practices for negotiating seed stage investments, which are different from later stage investing. It covers five main points: understanding what seed funding is, avoiding common mistakes, pricing the seed funding round, structuring the seed funding, and understanding the return expectations of seed investors.
๐ Q&A
[01] What is Seed Funding?
1. What is seed funding?
- Seed funding is the initial funding into a startup, which can range from as little as $1,000 to as much as $12 million.
- Most seed funding is usually less than $100,000 and is provided by a combination of the founders, friends, family, and angel investors.
- Venture capital firms typically do not participate in seed funding rounds.
[02] Mistakes to Avoid with Seed Funding
1. What are the three things to avoid when dealing with friends and family as seed investors?
- Avoid complicated investing instruments like convertible notes and SAFE notes, and keep the offer simple.
- Don't take advantage of their lack of startup investing experience by gouging them, and ensure the deal is fair.
- Clearly explain the investment process and how it differs from what they may have seen on TV shows like Shark Tank.
[03] Pricing the Seed Funding Round
1. What is the typical equity range for seed investors?
- For a small seed round of $50,000, investors typically receive around 10% equity.
- For a larger seed round of $2 million, investors may receive around 20% equity.
- The author advises against letting an investor like a "rich uncle" take too much equity (e.g., 50%) as it can deter future investment from experienced angels and VCs.
[04] Structuring the Seed Funding
1. What are the key considerations for properly structuring the seed funding?
- Ensure the company is set up correctly by working with an experienced startup lawyer.
- Properly treat the investment made by the co-founders, separating it from the founder equity.
- The co-founder investments are typically structured as preferred stock, while the founder equity is common stock with a reverse vesting schedule.
[05] Return Expectations of Seed Investors
1. What are the typical return expectations of seed investors?
- Friends and family investors may just want to get their money back.
- Experienced investors like angels and VCs typically hope for a 10x to 30x return within 7-10 years.
2. What is the author's final advice?
- Hire an experienced startup attorney to ensure the company is set up correctly from the start, as it can be difficult to unravel improperly structured agreements later on.
Shared by Daniel Chen ยท
ยฉ 2024 NewMotor Inc.