I have a personal contact that has shown interest in giving me seed money for a start-up. I am getting my package together to pitch the concept, and have virtually no idea what the investment deal should look like. Is it usually a flat out loan that I would pay back with interest? Do these investors typically ask for a stake? If so, what metrics do I use to divide ownership and/or royalties?
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Seed money comes in a number of different forms. It usually involves a stake in your company. I'd encourage you to avoid any outside funding if it is at all possible for your startup. My attorney gave this advice in the late 90's when money was excruciatingly tight and the couple of hundred thousand an angel was offering seemed liked the answer to every problem I had. I stayed independent and a decade later I view this as one of the best strategic decisions I have ever made. There are issues of independence, direction, external controls, expectations, financial performance pressures... there's a ton of strings attached to seed money. A lot has been written on the topic so I'd encourage you to Google the issues/options, do some reading, and consider your choices carefully before accepting seed money for your startup. |
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In the US at least, seed rounds are standardized. You can quickly get up to speed by reading Venture Hacks debt vs. equity post, and learn about convertible notes and priced rounds. Whatever you do, do not invent your own custom mechanism. Trust people who have been doing seed investments for decades, details of the terms are important and tricky to get right. Don't stray from the beaten path. |
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