Seed and Series A Startup Financing

Seed round funding, also known simply as seed funding, is one of the main sources of finance for a new business. Seed funding raises initial capital needed to turn a startup into a real business venture that can establish itself well enough to qualify for other venture capital funding rounds.

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Startup seed funding is the earliest funding that a business can get. Entrepreneurs use the capital at the pre-revenue stage in order to develop an idea into an operational company.

The seed funding round is high-risk for investors because it is given before investors have a project to evaluate. For this reason, startup seed funding generally comes from a variety of sources including angel investors as well as the founders’ personal contributions and loans or investments from family members and friends. Typically, the investors invest the seed money in the startup in exchange for an equity stake in the company or a convertible note (ie. debt financing). There are several options to obtain seed capital including: 

• Debt. Debt financing for seed rounds comes usually from bank loans or loans from friends and family. In addition, angel investors and venture capitalists like to issue loans to startup companies instead of making equity investments. 
• Equity. The company sells equity shares to investors in exchange for capital. The investor receives a share of ownership and future profits, among others. 
• Convertible Notes. Convertible notes are a financing vehicle that allow startups to raise seed capital while delaying valuation of the company until a later date. Convertible notes are typically structured as loans that convert into equity upon maturation. 
• Crowdfunding. Crowdfunding has grown in popularity as a source of seed capital.

We advise and execute various fundraising legal documents including convertible term sheet, simple agreement for equity agreement, promissory note, debt and equity issuance and keep it simple security agreement. 

In a Series A fundraising the company usually sells convertible preferred stock to investors in exchange for capital. The preferred stock provides investors with a number of rights and by far the most important is the right to convert preferred stock for common stock at some point down the line. Other rights can include veto powers, board seats and liquidity preference.

We advise and execute pertinent legal documents for Series A funding including term sheet, amended and restated articles of incorporations, preferred stock investment agreement, investor suitability questionnaire, investors’ rights agreement, shareholder & board written consents.  

A term sheet is a non-binding agreement that lays out the terms of the agreement the parties agreed on. An amended and restated article of incorporation is likely required if investors acquire preferred stock in the company.

The preferred stock investment agreement, or stock purchase agreement is a binding agreement and formalizes the relationship between the investor and startup by setting forth very specific terms related to the deal’s purchase price, representations and warranties, indemnification, and closing conditions.

Among other requirements, the completion of an investor suitability questionnaire shows that the investor is in fact accredited, which allows the company to file a private placement exemption with the SEC. The company’s in-house or outside counsel should prepare the shareholder and board written resolutions. 

For startup companies, we counsel on convertible notes, debt and equity financings, negotiate favorable term sheets and other pertinent documents in connection with seed and Series A financing.