Startup Lawyer | Don’t Go Crazy with Complex Rounds of Seed Funding
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Don’t Go Crazy with Complex Rounds of Seed Funding

Posted 21 Oct 2008

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.

4 Comments
  • FN
    Posted at 00:25h, 29 October Reply

    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

  • FN
    Posted at 19:25h, 28 October Reply

    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

  • Ryan Roberts
    Posted at 08:51h, 29 October Reply

    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.

  • Ryan Roberts
    Posted at 03:51h, 29 October Reply

    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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