Working to close a small seed round prior to your accelerator’s pitch day usually falls somewhere between a moderate distraction and a huge pain in the asymptote. It’s not worth the effort to close during this time period, especially if the seed round is for a very small amount. While seed round angel investors (those close to the accelerator) usually let startups set the terms (convertible note, priced round, etc.), this choose-your-own-adventure works against your startup prior to in the lead up to pitch day.
Spending time with your lawyer is cool — but not right before demo day
Rather than focusing on matters related to the accelerator program, shipping code or closing on customers immediately prior to the pitch of your life, you end up spending time with your lawyer discussing things like the pro’s and con’s of a convertible debt round versus a priced round, series seed versus series aa, price caps and liquidation preferences. Then more time with the potential seed round investor. Then time with your lawyer. Rinse and Repeat.
While I love talking about the mechanics of price caps and liquidation preferences, I’m not thrilled about discussing them with you two weeks before demo day…especially if the angel investor is investing a small amount (e.g. $20k or less).
Could Lead to Increased Transaction Costs
Sure, your startup can set up the convertible debt round for “Up to $500k” and close on the small amount of financing with the angel investor prior to demo day. But what happens when a new investor wants to invest $125k, with some changes to the terms of the offering? At best, your startup will have to amend your current transaction documents which just adds to total transaction costs.
A positive signal could be interpreted as a negative signal
Some startups find value in closing a small piece so they can have a slide at demo day that says “We’ve closed on $X,000 of funding of our $Y,000 round”. While this type of slide may seem to signal momentum, be careful as it may also signal that your startup is having difficulty closing the round. Especially if your round is less than 50% closed.
At worst, get a verbal commitment to close fast after demo day
Prior to demo day, if a seed round angel investor is bringing a small amount of financing, obtain no more than get a verbal commitment to invest. It can be painful to hold off on getting some capital to extend your runway a couple more months, but if you lose a potential angel investor over the course of 2 weeks, then that angel investor probably wasn’t going to invest to begin with…or not until someone invests a significant amount. Of course, I’m not averse to a client raising money. But if you must raise a small amount prior to demo day, make sure it is very quick and easy.