How much should you raise in seed round?
The general rule of thumb for seed rounds is that founders should target giving away between 10% and 20% equity.
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%. In any event, the amount you are asking for must be tied to a believable plan.
| Pre-Seed Funding | |
|---|---|
| Funding Amount | Within $50 – $250k range |
| Investors | Usually self-financed or from friends, family, and other non-institutional investors. |
| Result | The result of a pre-seed round is a product that can generate traction in the market. |
Raising seed stage funding is a major accomplishment for a startup. Seed stage funding is the initial surge of capital into the business. At this point, a startup is largely an idea and will have little to no revenue. This stage is generally when a product and go-to-market strategy are being built and developed.
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.
The general rule of thumb for seed rounds is that founders should target giving away between 10% and 20% equity.
Figuring out how to raise a seed round is intimidating if you've never tried to seek outside investment before. If you are comfortable giving away a stake in your company and have reached a stage where you can prove the growth potential within your idea, you may be ready to start the process of raising seed capital.
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.
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.
To identify if your company is currently in this round of funding, your company valuation during seed funding should be around $5-$15 million. This round of funding typically lasts around 12-18 months before you move on to Series A and B funding rounds.
What percent of seed companies make it to Series A?
In fact, less than 10% of companies that raise a seed round are successful in then raising a Series A investment. A Series A investment provides venture capitalists, in exchange for capital, the first series of preferred stock after the common stock issued during the seed round.
The TLDR; seed investors shoot for a 100x return; Series A investors need an investment to return 10x to 15x and later stage investors aim for 3x to 5x multiple of money. This translates into portfolio returns from 20% to 35% targeted IRRs.
From an analysis of startups that raised their most recent seed or pre-seed funding in the U.S. between 2011 and 2018, we found an average of 1 in 3 startups went on to raise either a Series A or later-stage funding rounds in any subsequent year.
Founders typically give up 20-40% of their company's equity in a seed or series A financing. But this number could be much higher (or lower) depending on a number of factors that we will discuss shortly.
But what is a fair percentage for an investor? When it comes to angel investors, the general rule is to offer approximately 20-25% of your business earnings.
To reiterate: The chart above does not suggest that around 92 percent of companies are acquired after raising a Series C round. It shows that, of the companies in our data set that were acquired and have raised venture financing, around 92 percent of those raised through Series C.
We discuss the maths behind the 25,000 shares here (in the context of preemption), but the good news is that the SeedLegals platform takes care of all the maths for you! In this funding round, each founder has been diluted by 10% each = 20% overall. And that's all there is to dilution in early stage funding rounds!
I advise teams to target $1.5mm as a minimum. This number will grow if round sizes and economics continue to grow. You should raise a Seed 12-18 months before Series A. (Some teams do a Seed+ or Seed II between Series A and Seed.
Today's seed rounds are almost comparable to Series A rounds from a decade ago. 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.
About 60% of companies that reach pre-series A funding fail to make it to Series A, so the success rate is only 30%-40%. We can name such successful examples of pre-seed funding startups in 2021: Copy.ai.
How many start ups fail?
Startup Failure Rates
About 90% of startups fail. 10% of startups fail within the first year. Across all industries, startup failure rates seem to be close to the same. Failure is most common for startups during years two through five, with 70% falling into this category.
Additional insights from the data:
The three main data points I found interesting are: – Within 3 Years of being founded, 83% of startups raise their Series A, and 66% of these startups go on to raise a Series B.
Your balance sheet will reflect the seed money as your equity (ownership) in the company. It isn't income. Income is money that comes into the business as a result of sales or interest on invested money. Your seed money is investment capital, and you're the investor.
If you are a seed stage founder — you should pay yourself a salary that will most closely focus your energy on the business. If you pay yourself too much, you won't be incentivized enough to get the company off the ground. You'll also be burning unnecessary cash out of the business.
If it is a small enough amount of money, you'll be able to pay them back over time even if the venture fails. If the venture succeeds, you can pay them back quickly and you have not given up any stake in the company.
If your company is early stage and has a valuation under $1M, don't ask for a $5M investment. The investor would be buying your company five times over, and he doesn't want it. If your valuation is around $1M, you can validly ask for $200K-$300K, and offer 20%-30% of your company in exchange.
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.
In reality, less than 1% of startups get investment capital.
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.
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 much do founders get diluted each round?
In exchange, the VCs now own 25% of the company, leaving the original founders with 75%. That portion might be diluted even more should the VCs demand a further percentage be put aside for future employees. In this case, the VCs want 10% of the founder's stake to be put into an option pool.
20% Shareholder means a Shareholder whose Aggregate Ownership of Shares (as determined on a Common Equivalents basis) divided by the Aggregate Ownership of Shares (as determined on a Common Equivalents basis) by all Shareholders is 20% or more.
Once your business turns a profit, the silent partner receives 20% of the net profit.
...
Option pool.
| Series A | |
|---|---|
| Founders | 60% |
| Series A investors | 25% |
| Employee option pool | 15% |
| Total | 100% |
Between 2000 and 2021, the average length of time between receiving an initial venture capital investment and the IPO of the respective company in the United States was 5.7 years. In 2021, VC-backed companies went public approximately 6 years after securing their first VC investment.
Given these statistics, it's much better to join a company after their Series A or Series B round. You don't have to go through the high probability of failure, your base salary is going to be higher, and the company has probably established a scalable business model to potentially allow you to cash in on your equity.
How much money is involved in seed funding? 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.
With most startups, the general rule is to offer approximately 20-25% of your business earnings to an investor. That's assuming that the investor is pitching in when the business is still new.
We discuss the maths behind the 25,000 shares here (in the context of preemption), but the good news is that the SeedLegals platform takes care of all the maths for you! In this funding round, each founder has been diluted by 10% each = 20% overall. And that's all there is to dilution in early stage funding rounds!
Typically, these investors are individuals willing to invest anywhere between $10,000 and $150,000 of their own personal finances because they feel loyalty and affection for the founders or are motivated by their startup idea. This type of early-stage financing is commonly referred to as a "friends and family" round.
How long should a seed round last?
To identify if your company is currently in this round of funding, your company valuation during seed funding should be around $5-$15 million. This round of funding typically lasts around 12-18 months before you move on to Series A and B funding rounds.
The TLDR; seed investors shoot for a 100x return; Series A investors need an investment to return 10x to 15x and later stage investors aim for 3x to 5x multiple of money. This translates into portfolio returns from 20% to 35% targeted IRRs.
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.
20% Shareholder means a Shareholder whose Aggregate Ownership of Shares (as determined on a Common Equivalents basis) divided by the Aggregate Ownership of Shares (as determined on a Common Equivalents basis) by all Shareholders is 20% or more.
Equity Share
Equity shares are the percentage of a company that an investor or person owns. This means the investor will be the owner of that much portion of the company. So, if an investor's equity shares are 10 percent, they own 10 percent of the company.
Investors claim 20-30% of startup shares, while founders should have over 60% in total. You may also leave some available pool (5%), but don't forget to allocate 10% to employees. Based on the most outstanding skills of co-founders, define your roles clearly within the company and assign job titles.
At a typical venture-backed startup, the employee equity pool tends to fall somewhere between 10-20% of the total shares outstanding. That means you and all your current and future colleagues will receive equity out of this pool.
In exchange, the VCs now own 25% of the company, leaving the original founders with 75%. That portion might be diluted even more should the VCs demand a further percentage be put aside for future employees. In this case, the VCs want 10% of the founder's stake to be put into an option pool.
Angel investors usually take between 20 and 50 percent stake in the companies they help. Sometimes the exact amount is determined strictly by negotiation. However, frequently angel investors use a company's valuation as a measure for how much ownership they should take.
Similar to investing in the stock market, angel investing has its own language with terms like “cap table,” “dilution,” “drag-along rights,” and “pro-rata rights”. Part of being an effective investor is learning this language so you can communicate with other investors and founders.
How big is an angel round?
A typical angel investment round might be $100,000 to $250,000, raised from 3-5 people. On rare occasions, angel investments could also be as high as $1m. Larger amounts are typically raised through angels investing in groups and syndicates, who pool their finance and their business skills.
