Questions

How much equity is typically taken by investors in a seed round?

I'm trying to figure out the value of my company for our seed round. I'm currently building the product with a very large company that wants to be a customer and probable investor. We are a SasS company in the senior care market sector. There are two similar companies which had seed rounds in the past year, Filament Labs and Medocity. Filament Labs https://www.crunchbase.com/organization/filament-labs Medocity https://www.crunchbase.com/organization/medocity

6answers

From my experience I would not advise you to go with Venture Capital when you're a start-up as in the end they will most likely end up screwing you. A much better source for funding would be angel investors or friends/family.
The question of how much equity should I give away differs for every start-up. I remember with my first company I gave away 30% because I wanted to get it off the ground. This was the best decision I ever made. Don't over valuate your company as having 70% of something is big is a whole lot better than having 100% of something small. You have to decide your companies value based on Assets/I.P(Intellectual Property)/Projections.
I assume you have some follow up questions and I would love to help you so if you need any help feel free to call me.

Kind Regards,
Giuliano


Answered 6 years ago

If you get into techstars they take 7-10% for $118k which is about a ~$1M valuation. If you're pre money, Seed investors usually cap their valuation at $4-6M, so depending on how much you need is how much they are going to get. That said VC's tend to have a much better run rate then angels. They tend to help you more with further rounds. Really good incubators (only a handful of them exist) can also help further your secondary raises, startups tend to raise on average $2m after graduating.

But the real question is why do you need funding? Are you ready for funding? What is the use of funds directed into?


Answered 6 years ago

Very tactically, at the early stage valuations are mostly arbitrary.

Typically it goes by the market rate, geography, relative strengths of the investors vs founders, growth rates, ARR, etc.

For a $1M seed round (similar to filament):
A VC firm will look to get 10%-20%
A group of angels/seed will look to get 15-25%.
This is assuming you have some traction with good growth.

Your negotiating position and skill will determine which end of the scale it will be. The funding scene is also quite variable based on who you are, and hence YMMV.

[Advising 50+ startups in Microsoft Ventures, seen a dozen angel/seed/VC rounds up-close]


Answered 6 years ago

There is no set standard, the amount of equity will depend upon the valuation and amount raised. However, as a target figure, founders shouldn't share more than 33% of equity in seed round.


Answered 2 years ago

Hi,
A very good and age-old question. The others have provided good benchmarks that I've seen recently. I'm working with a few start-ups right now that are Pre-Series A.

From a number crunching perspective, you should build a financial model with discounted cashflows to arrive at a valuation. A good model will let you fiddle with your key strategic assumptions to give you a range. Potential investors will run the numbers so you're better off having your own as their starting point.

Have you considered using a Simple Agreement for Future Equity (SAFE)? It's an instrument born out of Y Combinator for early stage companies. Like it says, it simplifies the process and doesn't force you to go through valuation negotiations and gyrations just yet even if there is an implied valuation.

Another thing to consider is limiting the investment that any single investor can put in. I am assuming that the last thing you want right now is to yield control to others.

I am happy to talk you this if you set-up a call. I can help you with all of the above and more.


Answered 2 years ago

If you are a business that is not in need of massive amounts of capital to stay relevant (think, hyperlocal delivery, food start-ups etc.) then my advice is to ensure Founders dilute no more than 30% for Investors during a Series A round. Given that in almost all cases you would be required to set aside a bare minimum 10% towards a ESOP pool before the Investor comes in, as a founding team you are left with slightly more than 60% of the company.

There are some caveats though, firstly, do your due-diligence on the Investors you are taking the funds from, make sure you talk to their portfolio companies and even senior level employees within these firms. Ensure the referral loop includes the so-called duds in their portfolio. The red flag would be if you get to hear stories of co-founders being arm-twisted out of their equity or, even their jobs. In which case think hard about how desperate you are for the funds on offer. Equally important, the fact that very few entrepreneurs tend to realise is how the rest of the terms affect their equity in future as they close their investment rounds.
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath


Answered 4 months ago

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