Category: Seed Funding (SAFEs and Convertible Notes)
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SAFE Seed Financing Documents
TL;DR: In a typical SAFE round, the core document is the SAFE itself, plus board and stockholder approvals and basic closing paperwork. The document that quietly causes the most future pain is the side letter (usually pro rata rights or MFN), so treat it like a real deal term. If you use the YC post-money…
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Glorified Employees
Standard seed financing terms have moved well beyond the Bay Area, but they still vary by region, network, and investor experience. Most seed investors should protect their investment with reasonable governance and information rights. The problem starts when a seed investor, whether in Dallas or Denmark, treats your startup like a distressed asset and insists…
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Accelerator Documents for Startups Should Be Easy
Documents in the startup ecosystem evolve. For example, convertible note documents are more complex now compared to 5 years ago (e.g., price caps and price cap regulators). Most of the evolution has to do with real-world experiences of investors and startups. Other times complexity can be chalked up to “deal over-engineering.” Some accelerators are guilty of…
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Should Your Startup Close a Small Seed Round Prior to Accelerator Pitch Day?
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…
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The Rolling Close
Unlike Series A Rounds, most seed rounds do not have every investor fund on the same date. Logistics can play a role, but the bigger driver is that many startups are still meeting, pitching, and adding angels over time while the round is already in motion. Therefore, most startups implement a rolling close structure to…
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Price Cap Liquidation Preference Windfall Regulators
Most convertible notes have a price cap as a feature term. Depending on the delta between the price cap and the pre-money valuation of the qualified equity financing, the convertible note investors could receive a windfall in terms of liquidation preference. That is, the investor’s liquidation preference could exceed its original investment amount. The Potential…
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Convertible Note Transaction Documents
It’s a common misconception that the ‘convertible note’ is the only legal document used in a convertible debt financing. I often receive emails from entrepreneurs asking for a ‘sample convertible note’ which I assume they are planning to use on their own. In addition to the convertible note, a startup will also need to draft…
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Convertible Note Interest: What is the Range?
While most startups and investors focus on convertible note terms like the discount and price cap, one important but overlooked term is convertible note interest. Since a convertible note is in fact a debt interest, it follows that the convertible note investment should accrue interest. However, startups should be mindful that but the rate of…
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Avoid Offensive Liquidation Preferences
In most equity financing rounds, an investor will ask for (and get) a term called a liquidation preference. A liquidation preference is the amount that must be paid to a preferred stock holder before any sale proceeds may be paid to the holders of common stock (i.e., founders, option holders, etc.). The amount of the…
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Top 5 Worst Seed Round Terms For Startups
Here’s a list of the top 5 worst seed round terms that cause harm to startups at the seed financing stage and therefore should be avoided: 5. Control “Control” of a startup can manifest itself in various forms such as equal (or investor-favorable) representation on the board of directors or a requirement of obtaining seed…