Seed funding · Angel investing

How To Set Minimum Investment at Seed Round?

Lucia Guh-Siesel CEO & Founder, Bandalou

January 11th, 2015

I'd love to ask for some advice about how to go about setting a minimum investment at a seed round.  The seed round would comprise of friends, family and angels. If I'm looking to raise $500K, is there a rule of thumb for the minimum? 

What is too low or too high?  I've heard a huge range on this.  What other factors should I consider besides the number of seed investors (I planned on treating them as one pool).  What are the pros and cons of crowdfunding -- which suggest no minimum at all?  Should we even set a minimum?  If so, should a minimum have some relation to what we want to raise at A?  It would be great to get your perspective on this.  Thanks in advance.

Lucia

Val Tsanev Founder at CityRaven

January 12th, 2015

Ask for $25K, get $50K,  hope for $100K. For pre-revenue and pre-market fit startups pre-money valuations are between $1-$5 million. Most convertible notes' caps are between $4-$6 million. If you manage to raise $500K from 5 people would be great but unless you are already heavily connected to HNWI might be a challenge, most realistic number is 10 to 15 investors. Even for rich people $100K is a significant amount of money and given the inherent huge risk with startups it is not that easy to find people willing to invest that amount. Good luck!

Corey Blaser Sailor. Mormon. Entrepreneur.

January 11th, 2015

I would set something like a minimum of like $50k but give better terms if they make a larger investment, i.e. conv. note with a discount of 20% vs. 10% if they do $100k+, etc. 

 ***Don't give them seats on your board unless it is strategic for you. Not financially strategic and don't make this part of the funding agreement. This would be if they have certain connections that make the difference for your company or they are looking to contribute say more than $1mm during your A round. Think long term on this point.

And just a couple of strategic questions for you to ponder. 

1. What do you suspect your next round is going to look like and how much runway will this seed round give you? Are you going to be flat before you need the next round?

2. What other kinds of investments have they been doing, size, frequency, field.

3. Do you know your A round targets and what they like to see when it comes to cap tables?

Pick your investors (and partners) like you would pick a spouse. Because it is harder to divorce an investor.

Corey Blaser Sailor. Mormon. Entrepreneur.

January 11th, 2015

Ideally you will want to find a lead investor who will put together a syndicate and a good attorney who specializes in these kinds of transactions. That way you will have one interface, one due diligence, etc. Everyone else will just follow on. 

And your question of how many investors/minimum investment will be answered by your lead investor. He/She will help determine how many people they want to interface with on your behalf. For only $500k, I would suspect that it would be less than 10 people, and probably closer to 4 or 5.

Lucia Guh-Siesel CEO & Founder, Bandalou

January 11th, 2015

Thanks Corey.  If the lead investor has not set the minimum, what should I begin telling people at the start?  I have to pick something, right?  What should that number be based on?  Based on your 4 or 5 investors, are you saying the min will be $100K?

Alan Clayton Roaming Mentor @ SOSV

January 13th, 2015

Hi Lucia, The fact is there is NO minimum. Its entirely specific to the cash projections for your venture. You building a food factory - maybe 500k would be good You building an online network for hobbits - maybe 25k would be good Fewer shareholders the better. Crowdfunding is good as a way to pre-sell a product. Unproven for pure fundraising. Personally I'd need to be convinced you need 500k - that's a big seed. If you haven't got a product yet, I'd invest the minimum required to get an MVP up and running (6 months and ? 100k) and then review. That way you dont give away equity cheaply Alan C

Chris Carruth VP/Director. Strategy | Business Development | Operations | Product | Solutions

March 30th, 2015

Lucia-

A good CFO, with securities/capital raise experience should be able to run cash flow projections that tell you how much you will likely need through breakeven. As you hit your revenue targets (hopefully) more types of capital will become open that aren't as expensive to you as equity is. You have to remember that equity is not a one time cost, not just because of distributions (assumed) but at exit as well. 

Caveat - projections for a startup are usually wrong immediately, so make sure you are very conservative on revenue and very "generous" on expenses.

Equity is the most expensive way to raise capital, albeit in the beginning perhaps the only way. Validating the concept as evidenced by revenues, user growth, churn rates, etc all will help drive down the cost of capital as it lowers your risk profile. All this is tied together hence the focus on proving a MVP as fast as possible using as little money as possible. 

Tony Dykes CEO at Novol

March 31st, 2015

Too low? Don't go below $10k, use convertible notes w/ a cap and stock forms like the Series Seed ones Ted Wang put out there to minimize attorneys fees and more important negotiation on both sides. Make sure they are accredited investors.

To high? Thats a huge red flag, don't take any of it and send them my way ;-). But seriously you might not want to take more than $100k from family members if you are just starting out just to spread the risk.

Val's comment was pretty spot on for a good startup. Everyone thinks they are a good startup.