How Do You Negotiate A Seed Investment?

🌈 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.

🙋 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.