If you’re a founder looking for seed funding, it can often take longer than you think. However, there are some ways you can speed up the process and close the seed round more quickly, and here’s our top tip to close the round.
To accelerate the process, you can use a convertible or SAFE note and change the discount over time. A convertible note is a financing tool that converts into stock at the next round of financing. A conversion discount rewards investors who put money into your startup by giving them the right to convert at a lower price, in percentage terms, than the price paid by the next round of investors. You might offer your seed investors a 20% discount. If that seed investor had a $1 million convertible note with a 20% discount, and your startup went to Series A and the stock price was $1 per share, the noteholder would convert the note at $0.80 per share. So the noteholder receives 1,250,000 shares.
By starting your seed round with a discount and slowly moving that discount down, early investors get a better deal. You’re creating incentive to invest early.
You can also do this with the valuation cap. The valuation cap often takes precedent in those situations when there’s a big up round, with the company increasing in value. The valuation cap entitles investors to stock at the lower of the valuation cap or the pre-money valuation in the next round. So if a seed investor has a note with a $2 million valuation cap, and the Series A investors decide your company is worth $4 million and pay $1 per share, then the seed investor’s note converts as if the price had actually been $2 million. By dividing $4 million by $2 million, the noteholder gets an effective price of $.0.50 a share. That means the noteholder can get twice as many shares as the Series A investors for the same price.
To speed up the seed round, you can start the valuation cap low, and then move it up over time as more investors come in.
Create momentum to close your seed round
This helps entice investors to put money in now or early, instead of waiting. If they love your company, they should be putting money in now, not waiting to see who else invests. And so this little trick actually will really help you close the round. A strong pre-seed investor can also help you have more success, by helping make introductions and being a positive reference. Remember you still need to craft a strong pitch deck – Kruze Consulting has extensive information about putting together your pitch deck and what should go in it. With that in hand, you can start approaching investors. If you need more information about seed funding, please contact us.
