How to Close Your Seed Funding Round

Foreign. So let's assume you've done everything really well. You have a term sheet. Congratulations. There's still a part of the process that you need to go through. So we don't count the money until it hits our bank account, until the moolahs and the kula. That's kind of the jokey thing that everyone says. Once you get a term sheet, you're going to want to know what you should negotiate. I would say in general, my best advice is find a really good attorney. Attorneys see these things all the time. They know what's market, what's off market. So you want to go with counsel that has deep experience in backing and supporting venture backed companies. When it comes to negotiating a term sheet, of course everything is negotiable. I wouldn't recommend negotiating everything. What I suggest is working with your counsel to understand terms within your particular term sheet that you're going to want to focus on and negotiate those. Don't try to negotiate everything. One of the things that we encourage companies at a seed stage to do is really put in clean terms. When we talk about clean terms, we all may mean different things, but what you want are features that will not compound in later rounds and cause pain. So for example, participating preferred features that allow new investors to get certain rights that go on in perpetuity. And when you bring on investors later on, they're going to want the same or better rights. So when you are at a seed stage at the very early part of your journey, just understand that anything that you do off market today that isn't clean is going to have ramifications later on because everybody in terms of your future investors are going to want the same or better deal. So we encourage you to start with clean terms. The cleanest terms are actually very easy to find. The MVCA has a list of sample documents on their website that are both investor and founder friendly. And that structure, especially at the seed stage, is the best to implement early on. So there are different types of ways that we see seed stage companies get funded. There are price rounds. When you send a price round term sheet, it generally takes 30 to 45 days to close. And there is a legal process and hundreds of pages of documentation that eventually gets filed with a state agency to really formulate the backbone of the governance structure of your company. There are other structures that are faster in terms of close time. A simple agreement for future equity or a safe or a convertible note. Those are often used to get capital quickly. And offering a structure that is well known to early stage investors. Once we agree on the structure in terms of a cap on the valuation or a discount on the future valuation, we can sign those agreements quickly and wire funds within 10 days. The most important thing about understanding the different ways that you can get financing is they all have benefits and they all have things that you just need to think about and contemplate. I would say for a price round, you're putting in a lot of structure and foundation early in your company. And provided that it's durable, it really sets you up for success. It's more work, takes more time. And if time is a factor in your determination of whether you use a safe convertible or do a price round, you want to think about the amount of time you need in order to close a transaction. Safes and convertibles are easier in terms of close time. They offer slightly less structure, and you aren't beginning that process of really providing the foundation for how your company is going to be governed and built. So very often in a term sheet, one of the terms will be how long we're going to work to close this transaction. And we do that on an exclusive basis. So when you sign a term sheet, you are agreeing with the investor that you're going to work on closing that transaction for the amount of time specified in the term sheet. And again, it's typically 30 to 45 days. If over the 30 to 45 days, you aren't seeing a lot of progress in terms of conversations between your counsel and investors counsel and the process is dragging, that's a red flag. If during the process the investor tries to change the terms of the signed agreement, that's also a red flag if your investor is pushing out the timeline after you've signed a term sheet. So let's say that they specified 30 days to close and you're now on day 60. Obviously, that's a red flag. So that's why we recommend working with outside counsel, your existing investors, your existing board, if you have one, to really understand what the terms are in your term sheet. And if provided you're getting good advice and you've got the right people around the table, you should be fine. Remember, it's not over until the moolahs and the kula.