Build Your Cap Table

Complete Guide to Raising Seed Capital

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12 Minute Read
Posted by Wade Myers on March 14, 2022

Entrepreneurs may have a big dream and a great plan, but it also takes capital to launch a successful venture. Learn what it takes to raise seed capital: the requirements you must fulfill; the process to use; the types of investors to approach, and how much time it will take.

Quick Background. I’m an entrepreneur who has raised around 65+ financings for startups (my own and others), I'm an active angel investor with 25 current investments, and I manage 3 Venture Capital funds.

I have the opportunity to co-lead a local pitch competition and meet regularly with other angels to swap leads and talk about our latest investments, I’ve also had a chance to directly pitch 4 billionaires (two invested, but two did not), and I get pitched several times per week by entrepreneurs looking for seed rounds of $500k - $3m from me directly or from my VC fund.

8 Rules of Thumb for a Successful Seed Capital Round

Given everything mentioned above, here are a few thoughts about the process, the funnel, the lead angel, other angels, the structure, and the timing of raising seed capital.

1. You Need a Lead.

Need a Lead

If you can start out your financing with an enthusiastic, well-known, actively-involved lead angel, then it is usually all downhill from there and you will likely get your round closed in a couple of months (this a number of “months” thing, not a number of “weeks” thing). If you start off with only small angels of $50k each, you will almost never get your round raised.

Ideally, the lead angel joins your board and is also your main mentor to help you navigate the next few years of your life, help get you fully funded, etc. A good lead angel will always be one of your biggest fans and tell everyone they know about this deal they just invested in. Here’s a recent example of lead angels evangelizing the companies they’ve invested in:

Last week I met with the Chief Investment Officer of a family office at a local eatery to swap leads. He spent the first 30 minutes of our meeting excitedly describing his most recent startup investment while I devoured 2 baskets of chips and salsa. That’s enthusiasm. He wasn’t necessarily trying to get me to invest, he was just a typical enthusiastic lead angel investor.

When he took a breath to gulp down his Margarita, I went into detail about my current favorite angel investment (I’m the lead angel and on the board of a new startup that is still in stealth mode). Each of us was the lead investor in our deals - and we were telling everyone about them.

2. Speed of Execution Matters.

Execution Matters

Whenever I’ve had a clear lead angel, my round usually moves fast. What happens when you don’t have a lead investor? It can be a frustrating and agonizing process where you burn up each small check as you get it and it only lasts long enough to live until the next small check. Here’s one of my personal experiences with slow death:

I was an investor in one startup that actually was able to survive for several years with a monthly burn rate of around $75k/month by begging for $50k and $100k checks every month prior to finally shutting down. They never got a lead angel or Venture Capital firm to invest. And because this went on for several years, they kept raising the valuation.

They were raising capital at a pre-money valuation of a staggering $30m the last time I checked in prior to them going belly up. Imagine the agony of raising nearly $10m (which is what they had raised over all of those years) in $50k increments. That process literally ate up the majority of the CEOs time and left very little time to actually execute. Their revenue never topped $500k/year in the six years I was invested prior to them shutting down for good.

3. Angels Flock Together.

Angels Flock Together

Once you have that enthusiastic lead angel, you will usually get more angels fairly easily. Here are a couple of quick examples:

Two weeks ago over breakfast with a good friend, he and I both committed to investing in each other’s real estate deals within just 15 minutes of small talk while we were waiting on our omelets. We are basically swapping investments and leveraging each other.

Several years ago one of my business school classmates called me to tell me about a recent angel investment and confidently told me that I needed to hurry up and invest. I wired funds the next day without ever reading anything about the company. It was good enough for me that my friend was recommending it.

I was a contributor and a case study example in the book on angel investing published by Prentice Hall titled Winning Angels: The 7 Fundamentals of Early Stage Investing. Here’s an example of how the angel network of influence played out in my startup that was profiled in the book.

I initially incubated the profile startup inside of a previous startup and then spun it out separately. I had two angel/seed rounds in the subsequent startup. The first was $600k that took about two months to close and the second was $3.6m seed round that also took about two months to close (I opened that round immediately after closing the initial $600k round):

First Round - $600k, 8 Angels, 2 Months to Close:

Founding Angel:

  • Profile: Partner in a Venture Capital firm that invested in my initial startup and that ended up incubating the startup in this example
  • Connection to my startup: He was the older brother of a good friend of mine that seeded my initial startup and enthusiastically helped me launch this new startup as my co-founder
  • Amount invested: None in this next startup, but had a substantial equity position as my co-founder

Angel #1

  • Profile: Well-known local high net worth entrepreneur and investor investing through his family office, former CEO of two publicly held firms that he had built and exited.

  • Connection to my startup: Business associate of my Founding Angel; they had been co-investing in startups for 20+ years

  • Amount invested: $150k

Angel #2

  • Profile: Local entrepreneur that had built and recently sold a startup for $50 million and was in the middle of his next startup (I also invested in his second startup and was on his board)

  • Connection to my startup: I met this angel via an entrepreneur friend from church that was also in the middle of launching his own startup. Angel #2 and I were both advising our mutual friend and then and ended up investing in each other.

  • Amount invested: $50,000

Angel #3

  • Profile: CEO of a global retailer, former top Fortune 500 executive, and former McKinsey partner

  • Connection to my startup: On the board of Angel #2’s startup along with me, where we got to know each other well

  • Amount invested: $100k (he also invested another $150k in the next round)

Angel #4

  • Profile: Local angel investor that had been an investor in Angel #2’s business that he recently sold

  • Connection to my startup: Introduced to me via Angel #2

  • Amount invested: $100k

Angel #5

  • Profile: Former partner in Angel #2’s business

  • Connection to my startup: Introduced to me via Angel #2

  • Amount Invested: $50k

Angel #6

  • Profile: Recently retired Chief Marketing Officer of a major division of a Fortune 500 financial services firm

  • Connection to my startup: Introduced to me by my Founding Angel

  • Amount invested: $50k

Angel #7

  • Profile: Top ten partner at Accenture, the world’s largest IT services firm

  • Connection to my startup: Introduced to me by my Founding Angel

  • Amount invested: $50k

Angel #8

  • Profile: Partner of a $500m hedge fund

  • Connection to my startup: Close friend and business school classmate

  • Amount invested: $50k

Second Round - $3.6m, 29 Angels, 2 Months to Close:

Here’s an example of how the influence of the angels in my First Round played out in my Second Round. To keep this short, I will highlight just two of the angels in the First Round and how they impacted the next round:

Angel #3 Introductions Led to These Investors:

  • CEO of Fortune 500 company: $100k

  • CFO of Fortune 500 company: $50k

  • Vice Chairman of global investment bank: $100k

  • Retired CEO of Fortune 500 company and prominent angel investor: $100k

  • High-profile publicly-traded tech CEO and his COO: $200k

Angel #8 Introductions Led to These Investors:


  • Several senior partners for Wall Street’s top three investment banks: $850k
  • Several hedge fund partners: $725k

That’s how lead angels operate. They flock together. They are enthusiastic. They bring in other investors. They swap deals.

4. Angels Can Lead to Series A and B and Beyond.

Angels Can Lead to Series A and B and Beyond

Incidentally, those partners from the top three investment banks all jockeyed for prominence in hopes of leading an eventual IPO and one of those investment banks invested $25m in our Series A and Series B, all of which can be traced back to my initial angel investors and the web of relationships that led to a total of $75 of capital that was eventually raised for this one startup profiled here.

5. Seed Rounds Generally Follow a Pattern.

Seed Rounds Generally Follow a Pattern

I’ve noticed a pattern that looks something like this in terms of the funnel and the number of investors (using a $2m seed capital raise example):

Seed Rounds

Note that you may not get a lead as sizable at $500k in a $2m raise, but many times a $100k - $250k lead angel will lead in influence as much as in the amount of capital.

In addition to the above, there are always one or two guys that can only put in $10k or $25k that beg you to be able to put in less than the minimum. I always let them in, knowing that they may turn into future, larger investors, plus it’s nice to be able to say you are oversubscribed. (Be sure your SEC filings allow you to take more than you are targeting to avoid multiple filings).

6. Lots of False Positives.

False Positives

The amounts of the raise, of course, will vary, but there is usually a breakdown similar to the above in terms of the distribution of the size of investment as well as the funnel metrics. Trust me, many potential investors will look you dead in the eye and say “I’m in”, but then never return a call. And, if you are able to track them down, they will give you a lame excuse. Some typical excuses I’ve received after an initial enthusiastic commitment:

  • “I’ve taken a hit in the public market”
  • “My wife decided to redecorate”
  • “I’ll have to run it past my wife and haven’t had a chance to discuss it yet”

7. Network, Network, Network.

Network

You can see through some of my experiences shared above with just one of my startups that networking is critical. And not just networking with investors, but also networking with other entrepreneurs with a genuine interest in helping them. I rarely meet an entrepreneur I don’t instantly like and respect (knowing how difficult it is to be an entrepreneur) and it almost always leads to something good when I invest some time with them.

8. Try to Avoid Raising Seed Capital from Friends and Family

Friends and Family

One of the first places many startup entrepreneurs start when raising capital is to look to their friends and family. But I’d caution you prior to taking that step.

This is how raising seed capital from people you know typically works:

  • Typically an entrepreneur’s friends and family that invest will get common stock in exchange for a non-controlling interest in the company

  • These types of investors usually have very vague expectations

  • A typical example might be the situation of your aunt Sue who has a lot of money and thinks of you as her favorite nephew. She gives you a check for $50,000 and says “good luck” to you.

Key Advantages


  • The advantage of friends and family investors is that it’s the easiest capital for a startup to raise because these are people that know you well

  • This kind of investment is best for small amounts of capital

Key Disadvantages

There are three primary disadvantages with these types of startup investors:

  • This is a very informal process and it can be an uncomfortable “ask” – you may feel like you are begging and they may feel unduly pressured into investing because of their relationship with you

  • Your relationship with your friends and family will absolutely change when they go from being merely "Aunt Sue" or your college roommate, to being an investor. Suddenly, they are always bugging you every time you communicate. Your startup will seemingly never launch fast enough, grow fast enough, or sell fast enough to suit them. You cannot go back again to merely being the nephew or the college friend.

  • Another problem is that this is almost always a “no win” situation. Here’s why: Let’s say your Aunt Sue invests $50,000 in your startup in exchange for 10% of the company and you go on to build the company and sell it for $10m and give her a check for $1m.

While she will be very happy, all of your other family members will be mad that you didn’t “let” them invest. Of course, that’s easy for someone to say or think after the fact – but they will. And it will create hard feelings. Every time Aunt Sue enthuses about her success, it will only rub it in for the others at your family gatherings. On the other hand, let’s say things don’t go well and Aunt Sue loses all of her money. Now she’s mad at you at every family gathering and you are no longer her favorite nephew.

And just seeing the two of you in the room reminds everyone else in the family that you lost her money. And it’s the same with friends. Imagine how uncomfortable your reunion gatherings will be with your college friends. Either someone is mad that they didn’t invest or mad that they did. You can’t win.

Avoid taking money from family and friends, but if you do, treat them as a professional investor and not just family. Only approach those with both business savvy and deep pockets; the last thing you want to do is take money from family and friends that really cannot afford the risk.

How to Write Out the Terms for My Seed Capital Raise

Seed Capital Raise

While Series A preferred venture capital investors are typically calling the shots and pricing the deal for a venture round, in the early stages of raising seed capital from investors, (whether the capital is in the form of regular seed capital or convertible debt), entrepreneurs are typically presenting the terms at which they are raising the round.

This is usually the case because seed rounds are often composed of half a dozen or more angels. If there is a lead angel that is putting in more than the others and is taking on a leadership role of shepherding the investment - such as a board seat - they will likely step forward to negotiate the terms and “price” the round.

When you start socializing your seed round, you will definitely want to put a stake in the ground on your terms. I recommend that you present a very clear summary of the terms that answer most questions in one fell swoop. It is very frustrating to have to drag out the details of a potential investment one deal point at a time.

Here's an example of what I mean regarding a nice summary view of the deal terms of the seed round that you should consider including in your pitch deck for prospective angel investors:

Overall: 

  • Total outstanding shares: 2,850,000
  • Selling in this raise: 1,000,000
  • Price/share: $1.50

Valuation:

  • Pre-money valuation: $4.3 million
  • Raising: $1.5 million
  • Post-money valuation: $5.8 million

Security:  Common Stock

Minimum investment: $25,000

Ownership post-raise (fully diluted):

 
  • Founders and Management: 54.0%
  • Investors in previous rounds:% 20.0%
  • Investors in this round: 26.0%
  • Total: 100.0%

One of the features I built into the Pro Forma is an integrated Cap Table and Investor Return Summary (with proceeds waterfall) that clearly shows investors of all classes what your plan looks like for them. I built that in to make it really easy to discuss and negotiate the capital raise terms and settle on a mutually-agreeable deal.

Pitch with confidence.

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