How much should I ask for pre seed funding?
| Pre-Seed Funding | |
|---|---|
| Purpose | A startup requires pre-seed funding to validate its hypotheses related to problem, solution, and the offering. |
| Funding Amount | Within $50 – $250k range |
| Investors | Usually self-financed or from friends, family, and other non-institutional investors. |
How much pre-seed funding should you ask for? Amounts raised during a pre-seed round tend to be much lower than investments in seed and Series A funding phases. On average, startups that secure pre-seed capital receive approximately $500,000. You may be eligible for more or less depending on the investment avenue.
If you can manage to give up as little as 10% of your company in your seed round, that is wonderful, but most rounds will require up to 20% dilution and you should try to avoid more than 25%.
Seed funding is usually between $500,000 and $2 million, but it may be more or less, depending on the company. The typical valuation for a company raising a seed round is between $3 million and $6 million.
Generally speaking, most seed rounds today are around $1-$4 million. One study found that the median seed investment amount for 2020 was $4 million, 4x the median from 10 years prior. Of course, this can vary greatly depending on your industry.
The general rule of thumb for angel/seed stage rounds is that founders should sell between 10% and 20% of the equity in the company. These parameters weren't plucked out of thin air, they're based on what an early equity investor is looking for in terms of return.
Investors in the pre-seed round are typically friends and family or business angels, with investments ranging from $50,000 – $200,000 for a 5% – 10% equity stake. They provide you with enough runway to develop your MVP.
Also, angels will typically want a sweetheart deal on valuation because they're giving you checks early-on and taking on the most equity risk. From what I've seen, a good angel round company can raise at a $1 - $3M pre-money valuation, $3 - $5M pre-money is great, and $5M+ is excellent.
Post-money valuation = Terminal value ÷ Expected Return on Investment (ROI) Pre-money valuation = Post-money valuation — Investment.
Startup financial advisor David Ehrenberg suggests that 5 to 10 percent is a fair equity stake for CEOs who join the company later. Research by SaaStr backs up this suggestion. The average founder/CEO holds roughly 14 percent equity at the company's IPO, while an outside CEO holds an average of 6 to 8 percent.
How do you approach pre-seed funding?
- PRE-SEED FUNDRAISING GUIDE: INTRO. 10 Tips for First Time Founders Raising a Pre-Seed Round. ...
- Build something worth investing in. ...
- Simple sells. ...
- Go where founders go. ...
- Move to Silicon Valley (if you haven't already) ...
- Focus on affinity groups. ...
- Ask for intros from your investors. ...
- Be patient, but also move as fast as you can.
Seed capital rounds: (founders, F&F, employees and angel investors): expect anywhere from 10 percent to 25 percent as a normal range, with a median 15 percent dilution to be realistically expected. Series A round: 25 percent to 50 percent dilution is the typical range.
Steinberg recommends establishing a pool of about 10% for early key hires and 10% for future employees. But relying on rules of thumb alone can be dangerous, as every company has different cash and talent requirements. More important, Steinberg says, is understanding your hiring needs.
In 2020, the median Series A was $13.0M, up 5% from $12.4M in 2019. This remains true as well of valuations. Median Series A pre-money valuation was $30.3M, up a modest 1% from $30.0M in 2019. In 2020, 57 companies closed a Series A financing greater than $20M, up by almost 3x from 20 in 2015.
Pre-money valuations generally form the basis of what a VC's share in the company is determined to be worth, based on how much they invest. If I invest $250k in a company that has a pre-money valuation of $1M, it means I own 20% of the company after the investment: $250k / 1.25M = 20%.
Pre-seed funding rounds should provide enough money to start and sustain a business for up to 12 months, or until it is in a position to attract seed funding. This is not a hard and fast limit – some companies wait longer than a year to raise their seed, while others raise again in just a few months.
Cutting the data specifically for companies that are seed funded, our data shows that CEO founders of startups that have raised seed financing pay themselves, on average, $119,000.
The largest growth appeared among companies who raised between $5-10 million – among this group, average CEO salaries jumped 12% from $145,000 in 2018 to $162,000 in 2019. Startups with $10 million or more in funding saw their average Chief Executive's pay rise 8% from $160,000 in 2018 to $173,000 in 2019.
Q: Is 1% the standard equity offer? 1% may make sense for an employee joining after a Series A financing, but do not make the mistake of thinking that an early-stage employee is the same as a post-Series A employee. First, your ownership percentage will be significantly diluted at the Series A financing.
According to the U.S. Small Business Administration, most microbusinesses cost around $3,000 to start, while most home-based franchises cost $2,000 to $5,000. While every type of business has its own financing needs, experts have some tips to help you figure out how much cash you'll require.
How much stake should I give to investors?
There are, however, a number of words of wisdom to take on board and pitfalls for a business to avoid when taking their first big step. A lot of advisors would argue that for those starting out, the general guiding principle is that you should think about giving away somewhere between 10-20% of equity.
