Choosing the right seed financing instrument can feel complicated, especially in the early days of a startup. In this post, we’ll break down the fundamentals of seed-stage funding into direct, actionable guidance tailored to founder needs. Whether you’re bootstrapping, raising from friends and family, or engaging with super-angels, you’ll come away better prepared to navigate your options and set a course for growth. Montague Law, with over a decade of experience supporting entrepreneurs, is here to help answer questions and guide you through the documents at any stage of the process.
Table of Contents
- The Seed Stage: Setting the Foundation
- Types of Seed Investors
- Seed Round Size and Structure
- Common Seed Financing Instruments
- Choosing the Right Instrument
- Conclusion
The Seed Stage: Setting the Foundation
Most companies start by “bootstrapping”—using their own money or small loans from friends and family to develop an initial product or proof of concept. If all goes well, founders often raise a seed round to quit their day jobs, hire talent, build a product that customers love, and ultimately prepare for a future institutional financing (like a Series A).
It’s common to have multiple seed rounds before reaching a traditional VC-led funding event. During these early days, founders must be strategic, flexible, and open to different sources of capital—often from less-traditional but more approachable investor groups.
Types of Seed Investors
Seed investors come in various forms, each with different expectations and levels of sophistication:
Friends and Family
These are personal contacts who invest early based on trust and the founder’s vision. While they might be less savvy about terms and valuations, they offer critical early support and belief in your mission.
Angels
High-net-worth individuals looking for promising startups. Angels may bring industry connections, advice, and introductions to other investors. While some angels are experienced, others are less familiar with standard market terms, requiring more education and patience.
Super-Angels
These are professional early-stage investors who operate much like micro-VCs. They typically have more deal experience, invest in numerous startups, and understand common market terms, making the negotiation process more efficient.
Seed Round Size and Structure
Seed rounds vary widely in amount—anywhere from $50,000 to around $2 million. Larger “seed” raises may start to resemble a Series A, but labels matter less than practical realities. It’s also common to have multiple closings, adding new investors over time rather than in a single transaction.
Common Seed Financing Instruments
Four primary tools dominate seed financings:
1. Convertible Notes
These are debt instruments that convert into equity (usually preferred stock) down the line. They often include a maturity date, interest rate, and conversion discount or valuation cap. Convertible notes defer the tricky valuation discussion until a future round, making them popular with inexperienced investors and founders who want to keep things simple early on.
2. SAFEs (Simple Agreements for Future Equity)
SAFEs are a YC-originated concept designed to be simpler than notes. They’re not debt and have no maturity date or interest. Like notes, they convert into equity upon a future financing at a discount or valuation cap. SAFEs avoid some pain points (no maturity date to worry about), but lack of a deadline can sometimes leave investors feeling less protected.
3. Convertible Preferred Stock (Series Seed)
This is a priced equity round—like a mini-Series A with simpler terms. It provides immediate clarity on valuation and ownership percentage. While more complex and costly to set up than notes or SAFEs, it often appeals to more sophisticated investors looking for concrete terms and less uncertainty.
4. Common Stock
Offering common stock is the simplest but least common approach. Common stock lacks investor protections found in preferred rounds. It can also negatively impact 409A valuations (and thus equity incentive pricing), making it less founder-friendly in the long term.
Choosing the Right Instrument
When selecting a seed instrument, consider:
- Investor Sophistication: Less experienced investors often prefer simpler instruments like convertible notes or SAFEs. More experienced investors might prefer preferred stock to set clear terms upfront.
- Investor Preference: If a key investor strongly favors a specific instrument, it might be worth going that route to streamline closing.
- Cost vs. Amount Raised: Larger raises can justify the complexity and legal expense of a preferred round. Smaller raises often lean towards notes or SAFEs.
- Time and Momentum: Quick closes are critical. Simpler, standardized documents (like SAFEs) can help you close faster.
- Market Cycles: In a founder-friendly market, simpler and more flexible terms are often easier to secure.
Conclusion
Early-stage financing is about more than just finding cash. It’s about finding the right structure to maximize speed, minimize friction, and keep everyone aligned for the long haul. At Montague Law, we are committed to serving as your founder-friendly partner, ready to discuss these instruments in detail and guide you to the best choice for your startup. We’re here to help you walk through the documents, answer your questions, and set you up for success as you move forward.
