I am a true believer in having a bulletproof process for raising money. When I first set out to raise capital for my company Loopd, I did not have a formula. I needed a precise plan, so I reached out to other successful CEOs in my network.
“The standard seed round will buy the company 12 to 18 months of runway as it looks to prove out early-stage milestones to raise a Series A before running out of cash,” says David Beisel, co-founder and partner at NextView Ventures.
I asked each person, “What are ten steps that you followed to raise your last round?” After reviewing several models, I created my own. These aren’t hard and fast rules, but rather tips and tricks you can use to raise you first seed round of funding.
Find a lead investor.
Find your first investor (i.e. your lead). Your lead investor should be a super angel with a large network, a respectable reputation and a burning passion for your company. This is the hardest, but most crucial step.
I personally met my lead investor, Tim Draper, while attending Draper University in San Mateo, California. Draper understood my vision to disrupt the large and outdated event industry. Your lead investor will help accelerate the entire fundraising process. So, take your time and identify the right person. They will not only set the terms for your round, but will also share the round with their personal and professional networks.
Define the terms.
Along with your lead investor, structure your seed round. “Angels, professional angels, ‘super’ angels, and early stage venture capitalists tend to structure their investments of seed capital in one of two forms – either through a loan or the purchase of equity,” as venture capital law firm Perkins Coie LLP explains.
For most seed deals, I would recommend using a convertible note. With this format, you don’t need to set a valuation for your company. You can protect your investors with a cap and reward them with annual interest. My first convertible note had average terms for a Silicon Valley hardware and software company. We had an interest rate of 5 percent, no discount and a $4 million cap to protect our initial investors.
A convertible note is a very fast process, but it doesn’t create real value for your shares until they completely convert. By contrast, a priced round is a simple format that involves a real valuation for your company based on the price per share and the number of shares issued for the round. This structure provides complete transparency for you and your investors, since they will be buying a number of shares based on their price.
A priced round will take longer to establish the correct paperwork, will cost more in legal fees and, in my opinion, is only worth it if you can receive a justifiably high valuation. I recommend aiming to give away between 18 percent to 22 percent equity in your first round.
Create an ‘angel’ dream team.
After securing terms with your lead investor, make a list of other angel investors you’d like to join your dream team. To find the initial set of investors, visit websites like CrunchBase, a comprehensive database of the startup ecosystem, and AngelList, a community of startups and investors to make fundraising more efficient.
Each investor should have completed deals with your lead investor and offer experience investing in your sector. My initial list of investors had co-invested with Draper on hardware deals. Once you have your investor list, narrow it down to 20 investors.
Ask your lead investor to go through the list with you. Identify and validate at least 10 key investors on your list and recommend 10 others who would be a good fit. This is a critical step, because there are thousands of active investors who don’t appear in search results. Together Draper and I were able to create a dream team of “super angels.”
These three steps will help you start fundraising and act as an initial foundation. Reach out to your network and talk to other entrepreneurs about the process and complete it based on your individual needs.
This article has been edited and condensed.
Brian Friedman currently runs Loopd, where he focuses on branding, marketing, business development, UI/UX design, product design, mechanical engineering, and manufacturing. A version of this post appeared here. Connect with @bfried9131 on Twitter.
© YFS Magazine. All Rights Reserved. Copying prohibited. All material is protected by U.S. and international copyright laws. Unauthorized reproduction or distribution of this material is prohibited. Sharing of this material under Attribution-NonCommercial-NoDerivatives 4.0 International terms, listed here, is permitted.