Startup Funding Stages: What Is a Seed Round?

The seed round is an essential aspect of the startup ecosystem, without which many promising startups would struggle to get off the ground. As an entrepreneur or founder with an early-stage company, seed-stage funding is likely a critical lifeline to help you develop your ideas into a viable business.

Fortunately, the average size of seed deals has ballooned in the past decade as more investors realize the value of getting in at the budding stages of a company. For example, Instagram started with $500,000 in seed funding and is now estimated to be worth over $100 billion.

Other famous companies like Airbnb, Dropbox, and Stripe also benefited from seed funding in their infancy.

Here’s what you need to know about this fundraising stage.

What Is a Seed Round?

Seed funding, as the name suggests, is often the first investment a startup receives, helping to "seed" the company with initial capital.

It is characterized by smaller investments from a variety of investors, such as angel investors, venture capital firms, or crowdfunding platforms. Internal funding from the founder’s or partners’ personal savings is also considered seed funding.

What is seed round capital used for? Its primary purpose is to provide the startup with enough capital to develop a minimum viable product (MVP) and reach the next stage of development.

Seed funding is often used to cover expenses such as market research, product development, and hiring key personnel before moving on to subsequent funding rounds.

Seed Funding Contracts

There are typically three types of contracts involved in seed-stage funding:

• Equity funding: This involves investors taking an ownership stake in the business in exchange for their investment. Since this is an early stage in the startup's development, investors may take a larger equity stake for the amount invested.
• Debt funding: In this case, investors provide funds as a loan to be repaid with interest after a specific time period.
• Convertible debt: Usually used when startup valuation isn't possible, this contract allows investors to convert their investment into equity at a later stage when the startup's valuation is established. If this is not possible, the investment is treated as debt and repaid after a specific time period.

Ultimately, whatever seed round options a startup chooses depend on its needs and circumstances, including the type and nature of the business, present and future plans and requirements, and the founders' ability and experience.

The Pros and Cons of Seed-Stage Funding

While seed funding can provide critical early-stage support, both founders and investors must be aware of all sides of the coin to determine if it is right for them.

What are the seed round advantages and disadvantages?

Pros

• Early-stage support: Seed funding provides startups with the financial support they need during the critical early stages of development.
• Validation: Securing seed funding is often a validation of the startup's idea and increases credibility with future investors.
• Expertise: Seed investors often bring experience, expertise, and connections to the table, providing startups with valuable resources and guidance.
• Flexibility: Seed funding allows startups the flexibility to experiment with their business model without the pressure of meeting strict revenue targets.

Cons

• Dilution of ownership: Accepting seed funding means giving up a portion of your company which could lead to conflicts down the road.
• Time-consuming: The seed funding process can be lengthy and time-consuming, taking valuable time away from other important aspects of the business. This is where a private securities trading platform like PreIPO® can help.
• Risk of failure: Seed funding is typically provided at a high-risk stage of the startup's development which could result in a loss of investment and time for both the startup and investors.

For investors, the seed round stage offers an opportunity to reap significant returns, as some companies experience rapid growth and have the potential to go public or be acquired. For example, PreIPO Corporation’s seed round offers savvy investors the chance to take part in the growth of a platform that is changing the future of private equity investments.

‍

‍