What is a Seed Fund?
A seed fund is a term for the earliest capital-raising stage startups go through to help them get started in their business. It provides them with money they require for various costs, such as hiring key staff, developing products, and paying administrative expenses.
Read the rest of this article to learn more about seed funding, their various types, and how a lawyer can help you through the process.
What are Common Types of Seed Funds?
Seed funding can take various forms, such as the following:
- Crowdfunding. Companies use a crowdfunding platform to raise money for their project.
- Angel investors. These are investors who provide capital and guidance to startups in exchange for equity.
- Bootstrapping. This term refers to how entrepreneurs can invest their personal money to build the company’s capital.
- SAFE notes. This is a convertible debt instrument that gets transformed into equity at a startup’s next funding round.
- Venture Capital (VC). This is private financing courtesy of VC investors, who select startups that have the potential to scale quickly.
What are the Benefits of Seed Funds?
Making use of seed funding can help startups in various ways, such as:
- Providing validation. When a company acquires seed funding, it can feel validating that they have a strong business plan and idea. This can motivate them to continue investing in their growth.
- Attracting future investment. Once it secures seed funding, the company can find it easier to raise more capital in future funding rounds.
- Expert guidance. Gaining funding from angel or VC investors provides experience and expertise that can help companies to grow and network.
How Does a Seed Fund Work?
To start a seed fund for your company, you’ll follow these steps.
Prepare a Business Plan
It’s essential to develop your business plan before you find investors. This is the foundation for how you’ll explain what your business is about to investors, while showing investors that you’re serious about establishing and growing it. This will increase your chances of getting funding.
Find Investors
Once you’ve located the type of investor you want to work with, you’ll pitch to them to show them why they should invest with you. You might want to explain the skills on your founding team and show how they can benefit from the investment. Be willing to answer any investor questions.
Read the Term Sheet
A term sheet, which is a document outlining the terms of the investment, will be provided by the investor. It’s good to review it with a lawyer to check for anything that could be clarified or revised prior to finalizing the agreement.
To get a legal review of your term sheet, you don’t have to struggle to find a reputable lawyer. Online legal platforms make this an easier process. On ContractsCounsel, an online legal network connecting clients with lawyers who have been vetted on the platform, you can request a term sheet review by following these easy steps:
1. Go to the ContractsCounsel marketplace.
2. Post your project (it’s free). Include details about your request so you match with suitable lawyers.
3. You’ll receive multiple bids from lawyers directly on the platform.
4. Once you receive the lawyer bids, you should review the lawyers' profiles. There’s lots of info on the platform to help you choose the best lawyer, such as their location, client ratings, years of experience, and field of expertise.
5. Connect with a lawyer you think is best suited to your requirements and hire them.
Due Diligence
During this phase of the seed fund, investors will scrutinize the company’s financial wellbeing and operations. Transparency with investors is key to making the process successful.
Negotiation
Once investment agreements have been drafted, parties can negotiate the terms. Qualified lawyers can help you to negotiate contracts for more favorable provisions and to minimize your risks.
Completing the Round
Negotiations are completed and documents are signed, so investors can send the money and receive equity.
Investors Receive Rights
Depending on the agreement terms, investors will receive rights in the company, such as voting rights. The equity stake they have in the company is dependent on how the company grows, and could increase in value over time.
When an exit event occurs, such as an acquisition or initial public offering (IPO), investors can sell their shares to earn a profit.
How Can a Lawyer Help You with a Seed Fund?
Consulting a lawyer for assistance with setting up and managing a seed fund is valuable in many ways. Lawyers will help you with activities such as the following:
- Structuring seed funding rounds so that they’re legal.
- Advising company founders on choosing the best type of seed funding by considering their pros and cons.
- Drafting and/or reviewing essential documents required, such as term sheets and shareholder agreements.
- Explaining complex or dense terms you might not be familiar with, such as in documents, so you understand everything in the seed funding process.
- Negotiating funding terms with investors, should this be required, to maintain the company’s interests.
- Conducting due diligence to spot any risks involved.
- Confirming that the company is aligned with all laws and fundraising regulations, which you might not be aware of without a legal background.
- Assisting you after the fund closes, such as with ongoing compliance or securing future fundraising rounds.
Where to Find a Lawyer for a Seed Fund
If you need to hire a lawyer for a seed fund, you don’t have to cold-call law firms. You can connect with a lawyer on ContractsCounsel.
Search for lawyers based on data provided on the platform, such as the lawyers’ location, expertise, level of experience, and previous projects they’ve completed. You can also review their client ratings to select a lawyer who matches your legal requirements.
