Do this, and you are on the 알바구인 path to getting seed money, which could put your company on a path of success. To be successful at that seed round of startup financing, it is about convincing prospective investors that your company has the potential to be a business with a long-term earning potential.
You will want to show potential investors that your company has a defined exit strategy in place that ensures that you make a profit. You want to work with an investor that takes equity in your business, and who can possibly push for additional funding down the road. If you spend your career building a business that cannot defend its profits, your investors will make an underwhelming return, but it is you that never gets back your time.
It is important to keep in mind that the valuations you pick in that first round rarely have any bearing on whether a company succeeds or fails. Seed-stage valuations typically range between $2MM and $10MM, but remember the objective is not to get the best valuation, and neither does having a higher valuation improve the probability that you will succeed. The goal is to find a valuation that you are comfortable with, one that allows you to raise the necessary amount needed to reach your goals at an acceptable amount of dilution, and one that investors find sensible and appealing enough to write you a check.
Obviously, which stocks you buy will in part depend on how much capital you really have to put into them. What is more important than how much money you have to begin investing is learning to choose the best stocks. You also have to consider how much progress your company would have made at various sizes of investments, and how much you would need to divest from your company in order to receive this amount of seed money.
The amount of money raised with seed funding can be quite varied, the amounts are usually smaller than what is invested in a Series A round and subsequent rounds of funding. While seed funding rounds differ greatly in terms of how much equity they produce for the new company, it is not unusual for these rounds to generate anywhere between $10,000 to $2 million for the startup in question. There are substantial variations in how much companies raise in this phase, but expect rounds ranging anywhere from $50,000 up to $2,000,000.
Seed rounds are typically smaller, between $250,000 to $1 million, and typically feature a convertible debt or equity function, which allows investors to take advantage of later rounds. Another important difference between seed and later rounds is that pre-seed funding is typically raised in a SAFE, or convertible note, which you can read more about here. Both SAFEs and convertible notes are ways of raising capital without having to attach specific values to your startup and define how much equity investors receive.
Preferred stock may also have attractive protections for investors, like anti-dilution clauses, which would protect the percent share an investor has of your company for future rounds of financing your company receives–though those clauses could hurt how much equity founders get of your company going forward. By repurchasing or buying back shares from other shareholders, like investors, a founder is able to dilute an investors ownership stake and have a greater ownership share of the start-up than an investor might want. To obtain funding, entrepreneurs typically grant investors a stake in the business, and/or a portion of the profits, in return for monetary investments.
Seed-stage startups give shares in the company to VC investors in exchange for equity in order to finance operations. In other words, seed financing is the first formal stage where investors provide capital to the start-up in return for equity stakes in the company. For some startups, the seed round is all that the founders believe is needed for them to get their business off the ground successfully; these companies may never go on to take on the Series A round of funding.
Part of the reasoning behind this usage is the reality that many companies, even those who successfully raise seed money, often do not manage to generate investor interest in the Series A financing effort. Angel investors and venture capitalists also may be more inclined to make loans to companies at an earlier stage than make equity investments. Angel investors do also invest in this phase, but tend to be far less influential at this stage of financing than they are in their seed stage of financing.
Seed funding, on the other hand, comes in before investors have the project to assess, and as such, amounts invested are usually lower than those from VCs. Pre-seed investors are usually friends and family, or business angels, and investments can be anywhere from $50,000-$200,000, with equity shares ranging between 5-10%. In addition to VCs, these rounds are expected to include larger enterprise investors, financial institutions, private equity, and hedge funds.
If this crosses the threshold, angel investors who are professionals typically will utilize seed equity, in which investors buy preferred shares, receive voting rights, and become co-owners in essence of the start-up. In some cases, however, the company will go on to raise Series D round, as it plans on buying out another company, and needs capital to finance that deal. Companies that go through the Seed and Series A rounds of funding have already developed significant user bases and proven to investors that they are ready to succeed at a larger scale.
While seed funding typically requires giving away equity in your company, having a small stake in a very successful company is better than having 100% ownership in something you do not. Keep in mind, a single share of a very successful company can cost thousands of dollars, whereas a brand-new, largely unknown publicly traded company may offer shares at just a few dollars per share. You probably will want to have an Executive Summary and Slide Deck you can show investors, and possibly keep, for VCs to show to other partners.