Seed funding is an essential step in the growth of any startup business. Find out how to prepare your company for seed funding with the venture capital and seed funding experts at YK Law.
The lawyers at YK law has matched startups with investors for over 35 years. Let us help your new business get seed funding, or help you find the right startup to back.
Why Seed Funding?
Pre-seed funding will have gotten your business off the ground. You invested your own money in getting started, and now that you are operating or just about ready to start operations, you need seed funding to bridge the gap between production and sales.
Obtaining funding from third parties is a necessary step in the growth of many businesses. For companies already in operation, there may be a market opportunity that additional funding will help the company meet, or a related business or vendor may be available for purchase. Perhaps there is a need for research and development of new products. Regardless of the nature of your planned expansion, you will need an infusion of capital.
Five Steps to Take Before Seed Funding Your Startup
Determine How Equity in the Company is Divided
If you are the sole owner of the company, you can sell up to 49% of the business and still have control. However, if you have partners, you need to determine who owns what stake and how much equity you can sell to investors and maintain control.
For example, if you have two equal partners, each owning one-third of the business, you cannot sell anything more than 24% to a single investor, such as an angel investor. Why? Because that would give that investor control. For example, if you sell 25%, you give the investor a stake that is equal to the three of you. That is a recipe for dispute.
Determine How Your Equity Investors Will Make Money
Your investors can see returns on their investment in a couple of different ways.
Capital Gains
The most common way an investor makes money from investing in start-ups is when they sell their stake in the company later on, when the company has grown, become profitable, and their stake is worth more.
Dividends
A company can pay shares of the profit according to the percentage of equity owned. This will affect the company’s ability to plow profits into operations and growth, so consider carefully whether you can afford to pay dividends.
Understand Your Budget and Calculate Overheads
Simply put, keeping a business afloat is all about balancing money out with money in. You should have a clear understanding of your operating costs, including rent or mortgage, utilities, wages, any applicable taxes and government licenses and fees, maintenance, supplies, and materials. Don’t forget to factor in your marketing and product development costs as well.
Create Your Long-Term Plan
When you know how much you need to operate, you can calculate how much to raise in your seed funding round, keeping in mind the amount of equity you can sell. Your potential investors want value for their investment and will consider the ratio between the amount you are seeking and the value of your company.
Your long-term business plan should include a timeline of revenue targets based on market projections to persuade potential investors of profits in the future, near and far.
Conduct a Valuation of Your Business
An accurate valuation of your company ensures that:
- Investors pay a fair price for equity
- You raise the money you need
- You retain as much of your company’s equity as possible
In the early days of a startup, it is tricky to pin down an exact value. Hopefully you have signed contracts or orders to support a value, but if not you should consult an experienced equity funding attorney for assistance.
The attorneys at YK Law have assisted both business owners and investors in the seed funding process and can help you get the money you need while keeping control of the company.
When to Start Seed Fundraising
You can seed fund at any stage of the development of your company. Often funding is done in rounds as a company grows. A startup may use seed funding to bridge the gap between production of goods and payment of invoices, which can take 60 or 90 days. A company already in operation can use seed funding to research and develop new products, to expand production, or to purchase a related business, vendor, or supplier.
How Much You Should Be Seed Funding
Your seed funding goal is determined not only by your need but also the value of your business in the eyes of potential investors. Businesses in operation will be able to provide hard figures supporting worth, while a startup will likely have a prototype, market projections, and a business plan to meet market demand.
Meeting Investors During Seed Funding
It is advisable to meet with potential investors in pre-round meetings to test the water, so to say. You can explain your idea and why your team is the best to execute that idea, and get feedback. If there seems to be little interest, you can ask why, well before you start any fundraising campaigns. These initial meetings will help you polish your pitch.
What You Need to Prepare Before Negotiating & Closing Seed Funding Deals
You want your presentation to be succinct and compelling. This can be done with an executive summary and a PowerPoint presentation that you can leave with your investors for their continuing consideration.
Executive Summary
Your executive summary should only be one or two pages at most, and should introduce your vision, the product, your team, traction, market size, and current financials including revenue, if any, and prior fundraising.
PowerPoint Presentation
Your PowerPoint presentation should include graphics and charts, because a picture is worth a thousand words. You will flesh out the information that was introduced in the executive summary and “pitch” your dream. Your presentation might include any or all of the following twelve components:
1. Your company logo and brand
2. Your vision for the company – why does your new company exist?
3. The Problem your product or service solves.
4. The Customer who has this problem – who are they and how will you reach them?
5. How your creation is the Solution to the problem.
6. The Total Available Market (TAM) you are targeting.
7. The Market Landscape – who is your competition and what can you do that they can’t?
8. Current Traction – what are your plans for scaling and future customer acquisition?
9. Your Business Model – how customers translate to revenue currently and projected.
10. Your Team – who you are and why you can solve the problem better than your competition.
11. Summary – three to five key takeaways, such as a comparison of growth to date with projected growth, etc.
12. Prior Fundraising – set forth what you have raised in the past and what you are planning to raise now, and why. Indicate here what an investment in your company buys.
How YK Law Can Help Your Startup Throughout Seed Funding
Angel investors and venture capitalists are much more experienced than you in negotiating equity purchases. Let YK Law help you raise the money you need. If you are an investor looking for seed funding opportunities, we can match you with high-quality start-ups and help you negotiate the biggest return on your investment.