Seed Round Lawyers

Every new business needs investment in order to grow. Many founders start with their own capital and with contributions from family and friends. Many startups also find capital on platforms like AngelList, Republic, WeFunder, or Kickstarter.

To raise even more capital from serious investors, it is often necessary to seek investors through one or more seed rounds. This can be an excellent way to raise the initial capital to launch a business, but it is important to protect your interest by working with seed round lawyers.

What Are Startup Seed Funding and Seed Rounds?

As the name suggests, seed funding is the earliest type of investment in a startup. At this point, people are investing in the idea of a company, providing enough capital to help reach a prototype, proof-of-concept, initial sale, or other key early milestone.

A seed round is the stage during which the company raises this initial funding. Rather than focusing on the business itself, founders seek capital from investors, which will allow the startup to proceed to the next step.

What is the Difference Between a Seed Round and Other Sources of Financing for a New Business?

Seed round financing is unique for several reasons. It is different from other sources of financing because:

• Seed funding is initial funding. Seed funding occurs before the business has a product line, market base, or revenue. It often occurs before the company even has a prototype. It is meant to launch a business into existence.
• Seed funding is especially risky. Because this investment is so early, before the startup has established itself and proved its concept, it is especially high risk. Investors must be able to wait a long time for a return on their investment and must be comfortable with the idea of not getting a return at all.
• Seed funding is small. Because of these risks, seed funding is typically smaller than other funding rounds. Most seed round investors are individuals rather than funds. Initial investors contribute less money, and the overall funding round is smaller than later types of finance.

Once the new business is established, it is a less risky investment, and other forms of financing become easier to access.

How Do I Obtain Seed Funding?

Generally speaking, entrepreneurs obtain seed funding by convincing investors of the soundness of their business idea. Founders should persuade investors that there is a market for their product or service, that their solution meets the needs of that market, and that they can operate the business profitably. Investors often want to see unique solutions, innovative products, and businesses that stand out from the rest.

For new founders seeking capital, there are a lot of risks at this stage of development. In their desire to launch the business, they may reach equity or finance agreements that aren’t on the best terms, or pose long-term risks of dilution. Founders at the earliest stages of growth should always work with seed round lawyers and startup attorneys to negotiate and understand the terms of all finance agreements.

What Is the Purpose of a Seed Round?

The purpose of a seed round is to bring a new venture into existence and legitimize the concept. It is capital used to reach crucial initial milestones, like the creation of a first product or prototype, or to accomplish the first sale, the first profits, or another key goal.

When Should a Startup Raise a Seed Round?

A startup should raise a seed round when it needs initial capital and has a solid business plan with a compelling concept. The founders need to indicate that they thoroughly understand their market and the opportunity and that all they need is an investment to take the startup to the next step.

Generally speaking, if a founder cannot summarize their business opportunity and explain how it is special in a couple of sentences, they are not ready for seed round funding.

Should I Worry About Seed Round Valuations?

Investors use the potential future value of a company to determine whether it is a good investment, so seed round valuations are one of the most important and challenging aspects of seed rounds. Deciding the future value of a business at this early stage, before it has a product or a customer, can be difficult and sometimes contentious. Founders and investors may disagree about the worth of a company, and without an established market, customer base, and revenue, there is little objective information on which to base the valuation.

Incorrect valuations at the seed round can lead to later problems for both founders and investors. If a seed round valuation is too low, it may not persuade investors that it will be profitable for them in the future. If the valuation is too high, it may deter future investors. If the valuation is inaccurate and has to be lowered in the future, it has a diluting effect on existing investors.

The seed round valuation helps investors determine how much they are willing to invest but also sets the terms of their investment agreement. Founders should consider valuation carefully and also take care when they are offering equity and company control. Seed round valuation and financing agreements should be reviewed and considered carefully with seed round lawyers to ensure that the valuation is reasonable and the investment agreement is fair.

How To Convince Seed Funders To Invest in Your Startup

Pitching can be difficult, and many founders find it stressful and unnatural. It does get easier with practice, and a seed round creates many, many opportunities to practice your pitch.

The first goal should be to meet as many potential seed investors as possible. Do not try to get funding right away – instead, focus on getting a second meeting. Investors typically take their time making decisions and reaching agreements, and the more meetings you schedule, the more likely you are to make a deal. Here are some key aspects of convincing funders to invest in your startup:

Know the Investor

Do plenty of research ahead of time and make sure this investor is a good fit for your company. Know what investments they prefer and why. Familiarize yourself with their successes, or with investments that may have burned them in the past. Make sure you are pitching the right investor, and have an opportunity that is likely to intrigue them.

Know Your Market

The size of your market determines the potential size of your company, which then drives the potential profit for investors. Your pitch should convince investors that this market exists and how much it may be worth.

Know Your Product

Next, you have to convince investors that you have the solution that meets the needs of this market. Even if it’s only a concept at this stage, your product should be the solution your market is looking for and have key advantages over competitor products.

Secure Your Reputation

Investing is all about building trust. Investors need to believe that you and your team offer the ideal way to reach this market and grow the next big company. You should have special insight into the solution you are offering and a track record of success in the industry.

Be Compelling

Remember that many investors hear pitches all the time, and are looking for stories that stand out and are interesting. They want to partner with founders and companies that have big dreams and share their vision. Find an engaging way to tell the story of your brand.

Looking for Seed Round Lawyers?

At the Fridman Law Firm, we offer personalized service and legal expertise with an entrepreneurial spirit that is invested in your success. From seed round funding to shareholder agreements, we support startups at every stage of growth.

Working with seed round lawyers ensures that you get the financing you need at the best terms available, protecting your interests and your investors for the long term. For more information about how the Fridman Law Firm supports innovators and helps new businesses grow, call 212-262-9823 or contact us today.