Startup Lawyer

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.

About the Author

Ryan Roberts is a startup lawyer and represents technology companies through all phases of the startup process, including incorporation, seed & venture financings, and exit transactions. Click here to learn more about his practice.

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