Don’t Go Crazy with Complex Rounds of Seed Funding

I loved Pitch Camp. Flip Flops. Free donuts and pizza. Hours of “unauthorized” advice from the angel investor, venture capital, and journalism communities. It sure beat the heck out of any legal conference I’ve ever attended.

At Pitch Camp, a fund’s partner told the crowd that he turned down a startup simply because the startup’s capital structure was ridiculous. Think several classes of stock with several valuations. Basically, the fund didn’t want to spend time chasing down all the shareholders and otherwise untangle the mess. I can’t blame them.

Keep in mind that even the best legal documents won’t get you funding. It is all about your product, your team, and your pitch. But a poorly-structured seed investment (or a series of them) can help ensure your startup company won’t get funding. Seed funding (friends & family and angels) should be conducted in a manner that will facilitate a later financing, not prevent one. And that’s even if you don’t anticipate needing venture capital.

Personally, I like the convertible note approach to a seed round. Your startup can get capital without having to deal with the valuation issue. If your startup decides to give equity in exchange for seed capital, I suggest limiting the equity investment to your startup’s common stock.

Startup IssuesAngel Investors

4 thoughts on “Don’t Go Crazy with Complex Rounds of Seed Funding

  1. Well written. I saw a guy on TheFunded going on about some complex structure and was thinking what you wrote here. That said, I'm not a fan of convertible debt. http://www.altgate.com/blog/2008/06/5-reasons-con

  2. Well written. I saw a guy on TheFunded going on about some complex structure and was thinking what you wrote here. That said, I'm not a fan of convertible debt. http://www.altgate.com/blog/2008/06/5-reasons-con

  3. There are definitely pros and cons of using convertible debt or equity in seed rounds. It's not for all startups or situations.

    Nice blog, btw. I just subscribed.

  4. There are definitely pros and cons of using convertible debt or equity in seed rounds. It's not for all startups or situations.

    Nice blog, btw. I just subscribed.

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