Essential Seed Financing Strategies for Early-Stage Success

Through a convertible instrument (e.g., convertible note or Simple Agreement for Future Equity [SAFE]), tech CEOs can raise the money they need in exchange for an IOU for equity in the company. This creates breathing room by:

• Allowing you to raise money before the company has a set valuation.

• Avoiding the exorbitant costs of an equity round, which range from $40K to $50K for legal documents, government filings and lead investors’ legal fees.

• Allowing you to raise small amounts of capital on an ongoing basis without the need to negotiate new terms each time.

• Offering investors protection in case of bankruptcy. This enables them to recoup their investment before equity shareholders or call their note for full repayment on its maturity date.

If all goes well, the “convertible” part of “convertible instrument” is realized when the instrument turns into a fully priced equity round of financing — the moment when investors’ trust, patience and cash pay off. Early investors take a much bigger risk in entrusting their money at the seed financing stage, when a company faces higher hurdles and the odds of success are steeper. 

To motivate investors to take the leap:

• Offer prospective investors a discount on the price per share of the future round of preferred equity versus the price set for other investors. 

• Set a price cap on the valuation of the company to reward early investors with a lower conversion price. Initial investors’ capital may help fuel a high valuation for a Series A Preferred round; those investors may expect some price protection for the next round.

Instead of waiting until all necessary capital is committed to close on the investment, use a rolling closing, adding investors as capital is needed. This allows investors to commit when they’re ready and produces multiple closings at smaller amounts. The funds from each closing can be used to incrementally build the company (e.g., by hiring staff and developing products).

Each of these additions builds the value of the business, as does reaching other milestones, such as achieving product market fit or hitting revenue thresholds. These represent tangible evidence of momentum and stability, which are key to attracting new investors.

The more milestones a tech CEO hits, the more likely the investment terms will be favorable to the company and the more prepared the company will be for a priced equity round with institutional investors.

Finding your first investors may be the hardest part of the seed financing process. After all, there are countless startups vying for funds and only so much to go around. However, today’s startups have more options than their predecessors, who had defaulted to friends and family rounds. These include: 

• Venture capital (VC) firms: Organizations that raise money from limited partners (LPs) to invest in promising startups.

• Incubators: Firms whose business is to foster early-stage companies through their developmental phases.

• Angel networks: Groups of wealthy individuals who pool their resources to invest in entrepreneurs and small businesses.

• Family offices: Private wealth management firms established by ultra-high-net-worth families.

• Crowdfunding platforms: Online tools that allow individuals and organizations to raise funds by collecting small amounts of money from many people.