Seed Round Equity: Everything You Need to Know
Seed round equity refers to the equity accumulated during the earliest stage of funding.3 min read
Seed round equity refers to the equity accumulated during the earliest stage of funding. Usually, seed rounds come from family members and angel investors, which dilute the founder's ownership percentage by an average of 15 percent.
Understanding Seed Round Equity
For every corporate success story like Uber, Google, and Airbnb, there are many more companies that flop before they ever get off the ground. In fact, 65 percent of invested startup venture capital returns less than the original amount invested. Despite these figures, startup companies need to raise capital early to rent office space, purchase equipment, hire employees, and grow their business. That initial capital raised by a startup company is called seed capital.
While founders can lose anywhere from 10 to 25 percent ownership of the business, raising seed capital is an important step in getting any business off the ground. As a business owner, you can expect further ownership dilution during each round of funding.
Why Raise Seed Capital?
Without the finances necessary to start a business, most companies will flounder before ever opening their doors. Most startups require more money than the founders themselves have on hand, and while funds from friends and family can help, outside investors are almost always necessary.
When you're willing to raise seed money from outside sources, your business can grow faster and achieve profitability in less time. Seed money gives you competitive advantages when it comes to:
- Hiring key staff
- Marketing the business
- Targeting sales
- Maximizing public relations
Unfortunately, fundraising isn't easy. The process of raising seed money is complex, arduous, and time-consuming. It's your job to persuade potential investors that your idea is a good one because they only write checks based on compelling presentations and achievable visions. To raise the amount of money you need to get started and grow your business, you must have:
- A mission
- A story
- A reputation
- An idea
- A product or service
In many cases, having a product that investors can see and use simply isn't enough. They need to know how your product meets a need in the current market and whether it has potential to grow.
Ideally, you should aim to raise as much seed capital as you possibly need to reach profitability so that you don't have to go through further rounds of fundraising. When done right, you can reinvest future profits back into the company without seeking additional outside investors.
That being said, most companies will need to go through another round of investing. If you can't raise enough money to avoid further investment pitches, you should at least raise enough capital to get to your next fundable milestone 12 or 18 months down the road.
Benefits of Seed Round Investing
The term “seed round” refers to investments in which no more than 15 investors provide early funds to start a new company. Seed funding typically ranges from $50,000 to $2 million and is used primarily for early product development and market research. Investors receive convertible notes, preferred stock options, or seed round equity in exchange for their investment.
There are several benefits to seed round investing:
- Extra time to develop their business model
- Extra time to connect with business partners
- More capital and lower dilution for future investment rounds
- More flexibility for changing course based on market demand
Think of seed round investing as planting a seed. The seed money helps root the company with a solid foundation, but trees don't grow overnight. They require that tiny seed to grow, but it will take some time before the tree reaches its full potential. Similarly, seed round investing supplies a startup business with the capital it needs to build a good foundation.
Business owners should understand the basics of venture financing before attracting investors. Venture financing occurs in rounds, which are traditionally referred to as:
- The seed round
- Series A
- Series B
- Series C
- And so on
Seed round equity refers to an equity round which sets a company's valuation and per-share price. New shares are then issued and sold to investors. Equity holders have certain rights to the company's profits and can even receive liquidation proceeds once the company's debts are paid. In some cases, equity provides the holder with voting rights, making seed round equity an attractive option for investors.
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