The Anatomy of a Seed Deal (Part 2)

Ignite is a UK based accelerator with programmes across Manchester, Newcastle and London. We work with angel investors to back the best early-stage tech companies and support them throughout their journey.

This is the second part in our Anatomy of a Seed Deal series (Part one is here). Our aim is to show what seed deals across the UK look like, giving founders and investors the ability to make more informed decisions.

We asked founders to share details of their seed rounds with us, and we’ve since had details of nearly 50 deals shared with us, including valuations, terms, fees, costs and more. We’re now using these results to help answer the questions we’re mostly commonly asked by founders.

You’ve got a great team, you’re disrupting a legacy industry with your first product, your early customers are using the beta every day and now you’re ready to raise your first ‘Seed’ round of investment!

All you need to do is figure out how much to raise, not get screwed on the valuation, make sure you don’t give away all your rights as founders and try not to spend too much time or money on the paperwork.

Where do you go to get advice on this? You can talk to investors, but they obviously have their own agenda on what a ‘good’ deal looks like. Other founders who’ve been through the fundraising process are usually happy to share their experience, but you’re only getting one point of view — and no two deals are ever the same.

To help founders and investors better understand what’s going on we’ve collected the details on nearly 50 seed deals directly from the founders who raised them, and have used them to provide guidelines on what to expect when raising your first round.

(Note: We’ve cleaned the data, removing a handful of deals that were below £50k or above £2m as they were outside what we considered to be seed deals.)

How much can I raise?

The largest amount raised was an impressive £2,000,000, but as you can see from this graph that is definitely not the norm! Nearly a third of the deals were between £100,000-£200,000, and two thirds were below £500,000.

This is a huge range to be covered by the label ‘Seed Deal’, and it does seem that we’re seeing two sub-categories emerging — the ‘Early-Seed’ round which is anywhere from £100,000 to £500,000, and then the ‘Large-Seed’’ deals of £500k+.

Whatever you’re raising needs to be enough to get you to a milestone, either breakeven or when you’ve proven enough to raise your next (hopefully larger) round.

“It’s tempting to go for the biggest round you think you can get, but now I think: raise small and raise fast (fund-raising is disruptive), you can always go again and you don’t need as much as you think you do.”

Typically this will need to be enough to last you 12–18 months, and will depend a lot on what you’ve already been able to achieve.

What valuation should I raise at?

Unsurprisingly the range of valuations was as wide as the amounts being raised, with a pretty direct relationship between the investment and the company’s valuation.

“Valuation doesn’t matter as much as smart money + good terms”

In terms of equity no one gave up more than 30%, and half the deals saw the investors taking between 16–25% which we’d consider to be standard terms. As you would probably expect it seems like the valuation was far more dependent on the stage the company was at than the amount being raised.

However for those companies raising over £500k the range was much tighter with the smallest equity taken being 19% and the largest being 29%, with all but one deal being between 23–29%.

So if you’re raising under £500k then your valuation is going to depend a lot on what stage you’re at, how much you’ve already proved, and how good your negotiating skills are. However if you’re raising over £500k then you’ve got a much smaller range of possible valuations and your investors are likely to be looking for around 25% equity.

When should I raise?

We asked all the founders what stage their company was at when they were raising, to see if there were any obvious links between the size of investment and stage. However what we found was that there are pre-launch and pre-revenue companies raising over £1m, and there are companies generating £10k+ MRR raising smaller seed rounds.

“ Vision is more important than traction, but traction does get your foot in the door”

We didn’t ask what sectors these companies are in, what technology they’re developing or who the founders are — and I think most investors would agree that these are the most important factors when considering an investment. Obviously the more you can prove before you start to raise the better your chances are, and I don’t know many investors who’ll put money in just on the basis of an idea.

Should I raise from Angels or VCs?

Given that a lot of our data came from companies who had been through an accelerator (thanks again to Wayra and EF for sharing this out with their cohorts) it’s not surprising that so many of the deals had angels involved. However the extent of this really surprised me with all but two of the deals having at least one angel involved, and half the deals being exclusively angel rounds.

A common assumption is that angels focus on the smaller deals, but there doesn’t seem to be any correlation between the size of round and the number of angels being involved. In fact one of the largest deals shared was a 100% angel round.

Talking to investors about this it seems that it’s normal for most of the rounds that they’re seeing, and it’s definitely a strong signal for any VCs when they see angels making a commitment to the round. The smallest angel proportion we saw from these results was around 10%, so if you’re raising £200k you should really be looking for at least £20k from angels.

“Getting an angel to put up 30% of the raise gave us chance to negotiate favourable terms with the VC”

In my opinion the most important factor to consider is what value any investor is going to add to your business beyond the money. As one founder puts it:

“Some Angels are knobs, other Angels are great”

However angels can provide more than just validation for other investors, they can help to close the round by getting everyone moving in the right direction and taking some of the strain off you.

“Find a lead angel quick if you’re doing an angel round — They’ll catalyse it all”

What terms are the investors going to ask for, and is there room for negotiation?

I was impressed by how standard most of the terms were that investors were looking for — with nearly every deal featuring pre-emption, tag along/drag along, and creating the option pool pre-investment. This last one is often contentious with founders as it means that the option pool only dilutes them (and any pre-seed investors) rather than the seed investors. One founder was so convinced that this is the only way their feedback was:

“Option pool pre-investment naturally, no investor will want to do it post.”

However this obviously isn’t the case, as a number of founders mentioned that they had been able to negotiate the creation of the option pool post-investment, arguing that incentivising new hires with options benefits both the founders and the investors.

There doesn’t seem to be any relationship between the amount raised and the terms asked for, but a number of deals featured 1x Liquidation preference, board seats for investors and tranching of the investment.

“ They tried to get preference rights and a seat on the board but we negotiated this out of the deal, and negotiated a clause to accelerate our vesting upon a 750k round”

The overriding feedback from all the founders is that pretty much everything in a deal is negotiable. The key advice is to have open communication, be honest about why you’re concerned about particular points, and try to understand where they’re coming from. Remember that a successful deal is good for both sides.

“Just being prepared to stand ground on a few key issues actually helped the process and meant investors treated us with more respect”

There were a few more obscure terms that investors asked for including rights to equity in any future business if started within 12 months of closing the existing business (whether in a related sector or not), and one set of founders were asked to provide a £10k personal guarantee if they were found to have made any outright lies about the business (I’m not sure how that one was to be enforced!).

“ We removed the liquidation preference with negotiation. At seed level the argument is that you make it or you die so no need for such a stupid clause”

How long will it take to raise the money?

“Takes longer than you think to get the money in the bank (despite how many times we are told it)”

“It takes longer than expected.”

“Will take much longer than expected”

“Raising is a fulltime job. Always takes longer than you thought.”

“I was way too optimistic about how long it would take”

This was by far the most commented on part of the whole fundraising process. We asked how long, once the investors had agreed to come on board, it took to close the round and get the money in the bank — and the results were pretty consistent with most rounds being closed in 1–3 months.

Obviously there are some deals that took longer, and some that were closed incredibly quickly. There wasn’t any obvious relationship between the size of round and the time to close, so it looks like however much you’re raising you should always assume that it will take 3–4 months, and if it closes quicker then consider it a bonus!

How much will I have to pay for legals?

The cost of legal fees was relatively standard with more than half the companies paying less than £5000 for their paperwork.

However there were some companies who paid a lot more, including two companies who paid over £20,000, and several companies who got their legal work done pro-bono after striking a deal with the lawyers. As with every other aspect of raising even your legal fees are negotiable!

“£30k :( should have gone fixed fee up front. However our lawyers helped greatly negotiating better terms so happy overall”

“We paid £5000. It was high because of a lot of changes. Should have been half that”

“Find a really good lawyer (a partner at a respected firm) but then be aggressive about price. They want you for future deals not this one. So be pushy.”

When you compare the legal fees paid to the level of investment raised it’s not surprising to see that it’s mostly the smaller rounds who paid the lower fees. In fact three quarters of the company raising over £500k paid more than £5,000 in legal fees.

This might be explained by the fact that a number of founders had agreed a flat fee with their lawyers of 1% of funds raised .

As with your investors it is really important to choose good lawyers, and this can be trickier than you imagine:

“The big firm of solicitors put juniors on the deal, the small firm of solicitors put associates on the deal. The small firm changed the quote, the big firm over ran the “fixed quote” because the juniors didn’t know what they were doing”

So find a highly recommended lawyer, negotiate as hard as you can with them, and make sure that the price agreed is the price they stick to!

Conclusion

For founders I hope that the most obvious point from all of this is that you can (and should) negotiate every element of raising investment. Whether it’s the valuation you’re raising at, the terms of the deal, or the costs you’re being charged for the legals — there is room for negotiation!

In general the range of investment amounts is now too big to all be classed as a Seed round. Only a few years ago anything over £1m in the UK was classed as a Series A, and Seed rounds were £150-£250k. There’s now two very distinct sizes of seed round, those below £500k where the range of valuations is very wide, and deals over £500k where investors are taking a more substantial stake in the company (and the associated costs are higher too).

This data is all designed to give you a yardstick to compare your investment offer against — you’re likely to have at least some angels in your round, you’ll give up between 15–25% equity, you probably shouldn’t need to spend more than £5k on legals, and pre-emption rights are standard across all deals.

However there is no ‘one size fits all’ round, and it’s impossible to compare like-for-like. Every company is different, so it’s more important to find the right investor who believes in your vision, and who will support you through the next 5–10 years than to worry about a few percent of equity.