Fundraising · Venture capital

How to structure multiple seed rounds?

Anonymous

September 16th, 2015

I expect to do a seed round in several months for approximately $1 million. I need more traction before I get the investors I want.

However, I have a few non-professional investors who want to put in $150,000 to help keep starvation at bay.

What I don't know is the form of investment that the professional investors will want - ranging from convertible note to priced equity. I want to keep that open.

Any recommendations on how to structure the $150K investment so it doesn't create too much complexity for the larger seed investment?
You’re ready to turn your idea into a business. But how do you protect it from competitors and copycats? In this course, an experienced patent attorney explains the different types of legal protections to help you determine which is best for your business.

Robert Clegg

September 16th, 2015

Convertible note with a 20% kicker for your early guys putting in $150k.

That was the short answer. Medium answer is - get a qualified, respected law firm to represent you. These firms sponsor industry events. They also give talks on issues like these to attract business. Get a firm now so you do this right. Your non-professional investors may have some limitations that prohibit them from investing.

Long answer - Assuming you have done this right, with a reputable law firm, the lead investor on your seed round may want to eliminate some of the prior deal terms (for whatever reason). Your first investors will be faced with a decision; give up some x,y,z benefit or lose the $1M deal. Don't worry too much. If the lead investor is reputable and your company is taking off, your first investors will be happy. Get the $150k in. Hit your milestones. Get going.

Happy to discuss via pm.

Chris Kitze CEO at Safe Cash Payment Technologies, Inc.

September 16th, 2015

For early investors who want less than 50% of your seed round, offer a convertible note with 20% warrant coverage.  Investors like that.  It's also possible to break up your seed round into two tranches if you are close to 50% of what you will need.  You'd have two closes and pricing could be the same or slightly up on the second tranche.

Marcus Foster Founder & CEO at Klarismo

September 18th, 2015

Don't use a convertible note if you can avoid it. Instead push to use a YC Safe. It is similar to a note, but it is not debt, meaning you don't have to service it, there is no maturity etc. Much, much easier. European investors may not know about and be hesitant, but it is all the rage in "the valley".

Federico Segura Catalyzing change in the financial services industry

September 16th, 2015

Michael,

To keep it simple: interest rate 5%-10%, 10%-50% discount, 2 year term, and a cap of 2M-3M for the first guys. These ranges are totally acceptable by all investors(if they actually know what they are doing). I recommend 7% interest, 20% discount and a cap of 2.5M. 

For the second stage guys all I would do is change the cap to 4M-8M dependent on your traction. By only changing the cap, it keeps all the terms understandable for everyone. 

At the end of the day, if you are a hot company, growing, with a sustainable business model, you will get funding easily and it will be on your terms. Really focus on getting that beginning traction. Treat the cap as a way to avoid that discussion of valuation today but to accurately compensate your early backers immensely when it takes off.

Federico Segura Catalyzing change in the financial services industry

September 16th, 2015

I would like to highlight two things. 1) With convertible notes you can play with the Cap, Interest rate, Discount, and the term. 2) The Cap is probably the best one to play around with, especially when you are dealing with friends and family. They are coming in before any tangible proof is there. If your company takes off, they are really compensated for the putting up that initial capital needed to drive very initial growth. Personally, Caps are the best way to compensate, but you can use the combination of any of these. PM if you want to see numbers

Rob G

September 16th, 2015

Ditto re the convertible note.  A word of caution however - a convertible note is still real debt.  Pay attention to the details especially security and maturity.  If for some reason your later seed investors don't materialize or it takes longer to close (like that never happens!) than you planned you will be up against a real hard spot and you will have to renegotiate the note.  Starving for cash and having to renegotiate note terms is not a position you want to be in.  

Marcus Foster Founder & CEO at Klarismo

September 18th, 2015

Michael, a Safe creates no problems whatsoever with other investors. Just like a note it is a completely independent vehicle for each investor. You don't do a "round", you simply agree on a cap and possibly a discount with each investor and close immediately.
Any reputable Valley investor should accept a Safe.

Michael Brill Technology startup exec focused on AI-driven products

September 16th, 2015

Risk is simply uncertainty and reducing uncertainty isn't always a good thing.

I appreciate the keep it simple advice. But my issue isn't Series A... it is proposing a structure for seed1 with an explanation of what I expect seed2 structure to look like. I can't get to seed2 until I get seed1. I can't get seed1 without seed1 feeling like they are being fairly compensated for their earlier involvement.


Philip Miller Founder at Hempies™ Paper Inc.

September 16th, 2015

Recommend convertible debt with options on your stock plus royalty bump for being first in. Sent from my Phone so don't expect a well written reply but hopefully it's timely and informative.

Robert Clegg

September 16th, 2015

By definition, if you valuation tanks, risk has increased. Something has failed and you are not just back at square one. You are facing more unknowns.

Secondly, to compare the ROI across the whole sector is the perspective of a fund not individual investors. My advise was more of a realistic nature assuring you negotiation will be incredibly variable. All the numeric justifications fly out the window when you only have one investment group at the table in the Series A. Competition drives valuation, not spreadsheets.

Keep it Simple. 20% Kicker. Hit your milestones. Get several bidders on the Series A.

Get the money in and get going ; )