A Guide to Seed Fundraising by Geoff Ralston

TL;DR - Goes in detail about valuations and funding advice for seed rounds. Why a founder should seek funds and advice included.

Helpfulness - 5

Topic Tags - convertible debt, fundraising, seed, founder incentives, examples, SAFE, founder advice, option pools

Questions answered:

  • Why would a founder want to raise money?
  • How can a founder raise money?
  • How much money should a founder raise?
  • What is convertible debt?
  • What is SAFE?
  • How should a founder interact with investors?
  • How do founders close deals?

Summary:

  • Founders want to raise money because “money needed to take a startup to profitability is usually well beyond the ability of founders and their friends and family to finance.” Fundraising can also help a company positively develop in many other ways as well.
  • Founders should aim to raise enough money to bring their company to profitability, but this is normally unachievable in one sitting, so fundraising is normally broken up into milestones of 12-18 months.
  • Try to avoid 25+% dilution when fundraising rounds.
  • Founders can derive how much money they will need to fundraise by considering costs, normally seed rounds are around $600,000+.
  • Convertible debt is extremely common for seed rounds and they have a cap and discount.
  • SAFEs are similar to convertible debt, but also include a primer, which founders should be careful about.
  • Equity fundraising takes lots of time and a good dilution example is on the source. Keep option pools in mind for your employees.
  • Seed companies are normally valued at $2-10mil. Recently a lot more opportunities for seed funding have risen, creating “super-angels,” and “micro VC’s”.
  • Warm introductions are very important in getting VC deals.
  • Crowdfunding is good for pre-product launch fundraising, but will normally not be enough for a companies lifetime.
  • When meeting investors, do your research on the audience and be prepared to tell a story along with explanations about why you are a great investment and have the best team.
  • Founders will normally be less skilled at negotiating than VCs so try not to negotiate in real-time. No not be afraid to ask for explanations and reasoning on the numbers.
  • Documents include an ‘executive summary’ which includes vision, product, team, traction, market size, and minimum financials, and a slide deck.

Follow-up Links:

Warm introduction