Start-up Seed Financing

Posted on 02-28-2018

By: Kristine Di Bacco and Doug Sharp Fenwick & West LLP

Start-up companies use seed financings primarily to raise the capital required to build a minimum viable product and test their product-market fit. This article provides guidance to company counsel and founders on how to identify a seed investor and choose the financing method that best fits the company’s needs. The article assumes that the company is a Delaware C corporation, which is the market standard for venture-backed companies.

Understanding the Goals of Various Types of Investors

A typical seed financing features a founding team (and perhaps up to a handful of employees) raising between $500,000 and $2 million to allow for 12 to 24 months of operational capital. During this time, the founders will attempt to prove out their idea and develop the traction required for raising the next round of financing (known as a Series A financing) from a professional venture capitalist.

A seed investor’s purpose is typically to test an investment hypothesis (either on a founding team, idea, or market) by providing capital to a company that will test the hypothesis. Investors at this stage will often make a large number of small investments in a variety of companies on the theory that, while many of them will fail, the few that are successful will generate significant returns for the investor. At the seed stage, investors are deciding to make their investment primarily on their assessment of the quality of the founding team and the market opportunity presented by the business model.

A few traits of founders that are seen as positive signals to investors include, but are not limited to:

  • Technical/domain expertise in the planned business
  • Prior successful entrepreneurial forays
  • Strong introductions from people in their network
  • Promising early traction
  • Strong educational background (e.g., engineers from Stanford)

To decide whether to invest in a seed round, an investor will likely meet with the founding team, who will give the investor a pitch on their product/idea, market, team, and business model. Often the company’s existing contacts (e.g., advisors, former co-workers, or lawyers) set up these pitch meetings (known as a warm introduction).

 

To read the full practice note in Lexis Practice Advisor, follow this link.

 


Kristine Di Bacco represents emerging technology companies primarily in the consumer internet, e-commerce, FinTech, digital health, and consumer hardware and software sectors at Fenwick & West. Her practice includes a broad range of corporate transactional matters, including the formation of new start-up companies, venture capital financings, mergers & acquisitions, and public offerings. Kristine provides clients with practical and thoughtful advice to help solve their business and legal issues and assists clients in structuring, negotiating, and closing business transactions quickly and effectively. Kristine also represents and advises leading incubators, angel investors, and venture capitalists investing in technology companies. Doug Sharp focuses his practice at Fenwick & West on a variety of corporate matters to support clients in the technology industry. While attending law school, Doug was the Financial Director & Member Editor for the Stanford Technology Law Review.


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