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?

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

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

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.

Michael Barnathan

September 16th, 2015

Since you don't want to price your later investors out of the round, do a convertible note. I'm not very experienced with notes (much moreso with equity), but others have given what seem like standard terms.

Alex Eckelberry CEO at Meros.io

September 16th, 2015

Yup. Convertible note. No brainer. 

Andrew Lockley

September 16th, 2015

Convertible debt if you can possibly get away with it!

Federico Segura Catalyzing change in the financial services industry

September 16th, 2015

Like the other guys said, convertible note and definitely make sure you do it right so get a law firm!

For the later round investors, make sure the deal isn't as good as for the initial investors who took more of the risk. Example might be raising 150k at a 2.5M cap initially and a second round of 850k at a 6M cap. Remember the later guys are demanding more proof of concept that the earlier ones meaning less risk.

Florian Pestoni

September 16th, 2015

Agree with previous responses on convertible note, adding a bit more detail. 

I'm making some assumptions here, but since you mention "non-professional investors" it sounds like your $150K round would be more of a friends & family (or perhaps 3Fs) and likely at least 6 months (it always takes longer than expected to get traction) from your $1M seed. 

In that case, try to avoid a cap altogether (there's very little to go on at this stage to make any assessments on valuation, which is essentially what the cap represents), but give the early investors a higher discount than those who will come later, since the former will be taking on more risk. In the grand scheme of things, an extra 5% discount on 10% of your overall seed investment will likely not move the needle for you. Additionally, you should negotiate a longer repayment period (2 or ideally 3 years), since you'll need a longer runway to get to the Series A (which triggers conversion). You don't want to be in a situation where some of the non-professional investors suddenly need the money they invested, calls the debt and expect you to use part of the funds from the new seed investors to repay the early investors, as that will make the whole deal unravel.

+1 as well on working with an experienced lawyer. The larger firms will often offer to defer fees, but eventually you have to pay and it's not cheap. You can also find experienced startup attorneys with small/private practices, pay cash upfront and you will in all likelihood end up spending much less.

F