Standard seed financing terms have moved beyond the boundaries of the Bay Area, but they haven’t completely reached all parts of the globe. Of course seed investors should look to protect their investment, but some seed investors (whether in Dallas or Denmark) may look at your startup as a ‘distressed investment’ and seek terms that are harsh relative to those typically found in standard seed financings.
When a seed investor throws down control terms like multiple investor board seats and/or investor protective provisions to the point where the founders can’t use the bathroom without investor approval, startup founders transform from majority stockholders to glorified employees. And at a small seed financing ($100k to $250k), it’s even worse for the founders because they are usually taking a pay cut (even with the small seed round) relative to what they could be earning if they wanted to work in a big building with a cubicle farm.
What should you do if faced with the prospect of becoming a glorified employee via seed investment? Probably not take it. But don’t come down hard on the potential seed investor. While the seed investor might not work for you now, consider pointing the investor in the right direction and showing him or her the types of deals that are typically closed. Who knows, maybe the investor will eventually change tune and future founders will benefit. Pay it forward.