Unicorn (gag) Seed Round

Josh Felser
May 6, 2015 · 4 min read

It’s not rocket science

Dear Founders,

I have been asked twice in the last week to opine on what a kick-ass seed round should look like from a founder’s perspective. What’s the ideal valuation, size, angel vs vc, passive vs active, note vs priced, etc? Envelope please.

The Lead. Lets start at the top of the funnel. Who you select to help you build your company at the seed stage is by far the most critical funding decision you will make and it drives everything else. It’s important because the right investors will be extensions of your management team and the wrong ones, well you are stuck with them and their bad or ineffectual behavior for years!

The right Lead invests for a living and has enough capital to get you through the “grey morass”, should you need a seed extension. I’m biased toward serial founder types but there are also savvy, nurturing seed investors who aren’t operators by trade but behave like them. Can you imagine starting a company with your Lead? Maybe not 100%, but you should feel like it’s a possibility. The phone rings, your Lead’s pic appears, you answer it quickly because you’re interested. If you send that call right to voicemail, well you made the wrong investor decision. Backchannel, backchannel, backchannel with other entrepreneurs and angels about the potential Lead. The best Lead will be a critical arrow in your Series A quiver providing validation, intros and advice to get you through this increasingly tight funding funnel.

Play 20 questions with your Lead. Do you have any competitive investments? What’s your investment min/max? Why are you excited about our company? Will you help us syndicate our round and who is on your short list? Where do you think we’ll struggle and how will you help us? How much time will you devote to us each week? How do you like to communicate? What’s your decision-making process and how long will it take? Do you lead bridges/seed extensions? How will you help me with my Series A? What’s your mediocre superpower?

The Followers. Round out your Lead with 5–10 angels and even later stage VCs who are both demonstrably passionate about your business and have the functional skills you need for your business. I include later stage VCs in this group because the best of them act like active angels and have something to prove to win your Series A. Signaling risk is totally overdone at the seed/Series A stages.

The Terms. First you pick your Lead and then negotiate the f*ck out of the terms if they aren’t already standard seed. If the terms are non-standard, it does beg the question about whether the investor should be your Lead in the first place. Valuation is the most contentious term (whether its priced or a cap), which at the end of the day is just plain stupid. Not saying you shouldn’t negotiate but it will matter less than you think in the long run. If you are successful you won’t remember it and if you are struggling you will be happy it was lower when you attempt to raise more capital. Make it high, but don’t be greedy. Remember that you’ll have to double the post-money to have a successful Series A.

Do a founder-only board so you have control. Boards are overvalued at the seed stage anyway. Your relationship with your Lead shouldn’t be “forced”. More time for that in later rounds.

Make sure the Founders have double trigger acceleration of their equity in the event of a change of control. If you get acquired and the company fires you, the notion that you could lose all your unvested equity is plain crazy.

Raise what you need for an 18 month runway, assuming zero revenue: no more, no less. If you are delivering the goods, you’ll raise your A in 12 months with a six month cushion.

These days you can do a priced round for about the same cost and speed as a capped note. I hate the overhang of a note because it kind of feels like you are procrastinating. Notes make a lot more sense for small sub 500k rounds, where the impact on later stage valuations is limited.

All other terms should be vanilla standard, series seed doc-like. Don’t accept anything else.

Manifest. Its really simple. Find a great Lead surrounded by value added angels to invest in a priced round at a valuation that creates a little ajita for all parties.

You got this!

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