Questions

What is the average cost to close a round of seed funding?

7answers

I'm reluctant to say "it depends," but legal expense for a true seed round varies dramatically based on:
1. Whether the investment is structured as a priced equity round vs. convertible debt (or variations on that theme such as "SAFE")
2. Number and location of investors, timing of closing(s), and prior angel investing experience
3. Company counsel's efficiency and fluency in industry norms
4. "Deferred maintenance" necessary in areas like corporate formation, founders' equity issuance and IP assignments.

#4 is the item that takes many entrepreneurs by surprise. On the investor side, it leads otherwise very savvy observers to give unrealistically low estimates of legal expense because they assume starting from a clean slate. This item is also most resistant to automation or standardization because startups come into being many different ways; each story is unique.

I would put the lowest estimate at around $3K, assuming the company is already formed as a Delaware corporation with clean, basic documents, has issued founders' stock and handled related IP and other matters, and simply needs to issue a convertible note to one or two accredited investors with minimal negotiation of documents.

The highest I would expect for a true "seed round" is about $15K, where some corporate cleanup is needed, the deal is structured as a streamlined kind of preferred equity (e.g., Series Seed), there are multiple closings with investors on different dates and terms, etc. Beyond that point we're really in "Series A" territory, doing things like creating a full set of VC preferred stock investment documents (about 100 pages), negotiating with investors' counsel (at the company's expense), and so forth. The expense and complexity of a traditional Series A deal have been the main impetus behind using convertible debt or Series Seed-type documents for seed-stage investments of less than $1 million or so in recent years.

I hope this proves helpful. Always happy to chat and answer further questions.


Answered 8 years ago

As for attorneys’ fees, much depends on your geographical location. Traditional law firms located in larger cities will generally cost you more than those in smaller cities and towns. An average range of legal costs for a startup at the angel stage can sit anywhere between $5000 to $20,000. The more complexities involved (e.g., intellectual property transfers and number of investors), the higher the expense.

When you get to the Series A stage, you’ll be looking at legal fees easily above $30,000. Due diligence and document review are time intensive, and you’ll want to ensure that this is done thoroughly. It’s also customary to pick up an investor’s legal fees in the ballpark of $10,000. VC preferred stock investment documents tend to run beyond 100 pages, and negotiating with investors’ counsel inevitably adds costs. Larger cities routinely see attorneys’ fees in the range of $50,000 to $100,000 once you enter the Series A phase.

Another option is utilizing convertible notes. A convertible note is essentially short-term debt that converts into equity. For example, your family and friends give you money and that automatically converts into shares of preferred stock when you close your Series A round. This is appealing for early stage investments because you don't have to deal with the valuation negotiations and it's much faster to close. Not to mention, it's only a few pages of legal documents which can cost between $1,500-$2,000 in legal fees.

Many attorneys offer fixed fees as an alternative to the billable hourly rate. This allows clients to anticipate costs and have clarity regarding expectations. For example, some attorneys might charge $5000 for a basic startup, which includes the incorporation, operating and/or shareholder agreements, stock issuance, confidentiality agreements and IP transfers. Higher fixed rate packages might include patent and trademark registration, drafting and negotiating notes, and compensation plans. Other lawyers offer a blend of fixed and hourly rate structures.

Feel free to check out www.lawtrades.com, which was designed to offer the high quality legal work from experienced startup attorneys at fraction of the price of law firms. Also don't hesitate to message me directly if I can answer any additional questions.


Answered 6 years ago

I assume you mean legal costs. In that case, the lead investor will ask for between $10,000 - $15,000 in legal costs. The Company's legal costs could run from $15,000 all the way up to $50,000 depending on the complexities involved in completing the deal. But these are costs associated with a priced round with a lead.

If you're raising under $1,000,000, it's best to raise a convertible note where you can use a standard convertible note doc and really spend no more than a couple of thousand (if that much) on legal fees.

Happy to talk this through in a call.


Answered 8 years ago

The cost is roughly as follows, based on where you raise the money from:
1. Angel investor, if you give them equity, that is a piece of your company - the cost is around $10,000
2. Angel investor, if you give them a convertible note, that is a loan - around $1,000 -$2,000
3. Angel investor, if you give them a Safe (Y Combinator alternative to convertible note) - the cost is either $0 if you use their agreement straight up, or a couple hundred to minimally tailor it


Answered 8 years ago

If you hire a professional accountant who is also familiar with securities law, the cost is so minimal. If you hire broker dealers, it is based on perceived risks of your business and market rates.


Answered 8 years ago

We charge $1000 + 3% Success Fee. It includes:
1. Searching potential investors
2. Investor connect
3. Helping in negotiating the deal
4. Term Sheet + Cap Table + SHA

The success fee is payable only when you get the funds in your bank.

I hope that helps.


Answered 3 years ago

It is a fact that starting a new business and lifting it up off the ground is a huge ask for most entrepreneurs and it only gets tougher with capital constraints. Seed funding helps get things started before the business earns any revenue. It is an effective solution for start-ups and growing businesses as it provides the much-needed early monetary support. It can cover everything from infrastructure costs, marketing, and development costs as well as the cost of initial hiring. Investment is the fuel of any business and seed funding is the first drop of this fuel. As seed money becomes much-needed cash reserve or working capital, not having it is one of the main reasons for failure.
There are several other reasons why seed funding is important:
1. Cover for insufficient funds
2. Reduces founder risk in venture
3. Brings strategic partners to the table
4. Access to working capital
5. Easier scaling up and growth acceleration

On the path of seed funding, the first step is understanding the different type of investors or potential investors as there are multiple sources where one can aid from:
1. Crowdfunding:
With more than 500 crowdfunding platforms currently active, this has become one of the most popular avenues of seed funding. Crowdfunding platforms are usually open and anybody in the world may end up backing the concept, idea or product. Some examples of successful crowdfunding campaigns include the Oculus Rift which raised more than $2 Mn, Pebble wearables which raised more than $10 Mn, and Indian company Exploride, which raised more than $500K for its heads-up display for cars.
2. Corporate seed funds:
This is a great source of seed funding as it comes with big visibility for the start-up brand. Tech giants such as Apple, Google, and Intel back start-ups regularly with seed money. Big companies often look at start-ups as a future source of profit, IP or talent, and that’s the primary motivation for investment here. GV is the investment arm of Alphabet (Google’s parent company), while Intel Capital is chipmaker Intel’s dedicated division for start-up investments.
3. Incubators
Incubators generally provide small seed investments and offer services such as office space or management training. Most incubation programmes do not take equity from the start-up but do offer support beyond just funding. The Indian Angel Network Incubator, IIT-Bombay’s Society for Innovation and Entrepreneurship or SINE, Khosla Labs and state-backed incubators such as T-Hub and KSUM are some of the most active incubators in India.
4. Accelerators
Accelerators are more focused on supporting start-ups in scaling up their business rather than backing and nurturing early-stage innovation. Accelerators also back start-ups through small seed investments along with professional services, networking opportunities, mentoring and workspace. Unlike most incubators, most accelerators take equity as they are privately funded. The popular accelerators include Y Combinator, Techstars and 500 Start-ups.
5. Angel investors
Angel investors are individuals that offer capital in place of ownership equity or convertible debt. They are called angel investors because they provide capital at times when the risk of a start-up failing is fairly high, which is during the early stage. In India, the top angel investors in H1 2019 are Sanjay Mehta with eight deals this year, followed by VC Karthic, Siddharth Ladsariya, Sharan Aggarwal and Sachin Tagra – each adding seven deals.
6. Personal Savings
Founders may put in their personal wealth and savings as seed funding. Also known as bootstrapping, this brings extra financial pressure but there is no pressure on founders to return borrowed money.
7. Debt Funding
Debt mostly includes money taken from banks as loans or borrowed from friends and family. Sometimes, venture capitalists or angel investors also issue loans instead of equity investments to ventures in sectors where cashburn is high, but so is the traction.
8. Convertible Securities
These are investments which start off as loans but change into equity or shares depending on the progress of the company, and when it reaches certain milestones such as sales or revenue targets.
9. VC Funding
Venture capitalists are marquee investors that provide funding based on a number of parameters such as growth potential, market conditions, founder vision, idea or simply execution. In return, they take some portion of equity or stake in the start-up. VCs usually join multiple rounds of investment after seed stage, if the start-up managers to reach those rounds. For seed funding, Accel Ventures, Seed fund, Sequoia Surge, Axilor Ventures, SEAFund are some of the most venture capital firms in India.
10. Angel Funds or Angel Networks
Sometimes, investors come together to form angel networks or groups where they each invest small amounts in the idea or the company during the early stage financing round. The major angel networks in the market currently are AngelList, Indian Angel Network, Lead Angels, as well as angel networks for each major start-up hub in India.

As you can see that there are numerous methods of Seed funding. In pandemic times, it is exceedingly difficult to ascertain how much Seed Amount to Raise and what will be the average cost. To understand how much to raise, founders must first know what their business is worth. This is where “valuation” comes into play. Valuation at the seed stage is a measure of growth potential and not the current value of the assets or IP. It is important to determine the valuation of the company before heading to investors as they always have that in mind when talking numbers. There are multiple ways in which this can be done:

1. Discounted Cash Flow Method: This method takes into consideration the free cash flow that will be generated in the future after accounting for instabilities and inflations and then discounting them to calculate the current value.
2. Market Comparables Method: This method takes valuation estimates with reference to other comparable companies and their market capitalisation.
3. Venture Capital Method: This comes into consideration when the investor is planning to exit the company in generally 3 to 7 years. In this method, the expected exit price is taken into consideration and then the current post-money valuation is calculated.
This does not always mean that a high valuation during the seed round is the best thing. For a high seed round valuation, the valuation for the next round will need to be even higher for investors to pay attention. Getting optimal seed funding would help start-ups reach growth stage sooner, but a lot of start-ups require follow-on rounds and need to have investment milestones in place. In such a case, reaching the next funding milestone becomes the goal of the company.
There are several factors and trade-offs that affect how much seed money start-ups should raise. Firstly, they need to think about credibility with the investors, the amount of progress they can make with that amount and the dilution of stake. To get investment, founders must give something away. When it comes to trading off shares or equity, an ideal situation would be giving up 10% of the company for seed money. In most cases, up to 20% dilution may be required but anything more than that at the seed funding stage is considered a big no-no, and exceptional.
To ask for whatever amount seems right, start-ups need to have a believable plan that will tell investors that their money has the potential to grow. Whether they raise the full amount or some portion of it, founders need to believe that their start-up will be successful.
When deciding what the right amount should be, calculate how many months they need funding for. This way, founders can get an estimate on the team growth and potential and add cover for other possible factors. There can be a lot of variation in seed funding which is completely dependent on the founder and his vision for the company.
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath


Answered a year ago

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