Partners Michael Barron and Andrew Hamilton and associate Zachary Zemlin discussed seed financing and early-stage financing for startups.
Key Takeaways
Considerations When Structuring
- Who are the investors and what are their preferences?
- How much capital is being invested?
- What are the costs?
- What is the timing?
Possible Deal Structures
There are different options to consider for the specific form of seed financing a company may seek:
- Common Stock
- The most basic form of equity, with low transaction costs and generally no special “investor-style” rights
- Series Seed Preferred Stock
- A form of preferred stock equity generally used for venture capital and sophisticated angel financings prior to an “A” round (the company and the investor(s) agree on a pre-money valuation)
- Convertible Debt
- A debt security that may convert into an equity security; an often-used option, particularly in smaller and earlier raises when a pre-money valuation is not possible or desirable
- SAFEs
- A “Simple” Agreement for Future Equity with some equity-like features often used for incubator financings, very early financings, and very small financings (when a pre-money valuation is not possible or desirable)
- Others include:
- Founder Preferred Stock – possible path to early liquidity for a founder
- Rule 506(c) Financings – can publicly advertise an equity offering but need to qualify investors as being “accredited investors”