How Do I Write Out the Terms for My Seed Capital Raise?
Q: I’m putting together my pitch deck and frankly, I have no idea how an entrepreneur would typically present their “ask” in a seed round. Can you provide some example language?
A: While Series A preferred venture capital investors are typically calling the shots and pricing the deal for a venture round, in the early stages of raising seed capital from investors, (whether the capital is in the form of regular seed capital or convertible debt), entrepreneurs are typically presenting the terms at which they are raising the round. This is usually the case because seed rounds are often comprised of half a dozen or more angels. If there is a lead angel that is putting in more than the others and is taking on a leadership role of shepherding the investment - such as a board seat - they will likely step forward to negotiate the terms and “price” the round.
When you start socializing your seed round, you will definitely want to put a stake in the ground on your terms. I recommend that you present a very clear summary of the terms that answer most questions in one fell swoop. It is very frustrating to have to drag out the details of a potential investment one deal point at a time.
Here's an example of what I mean regarding a nice summary view of the deal terms of the seed round that you should consider including in your pitch deck for prospective angel investors:
Total outstanding shares: 2,850,000
Selling in this raise: 1,000,000
Pre-money valuation: $4.3 million
Raising: $1.5 million
Post-money valuation: $5.8 million
Security: Common Stock
Minimum investment: $25,000
Ownership post-raise (fully diluted):
Founders and Management: 54.0%
Investors in previous rounds: 20.0%
Investors in this round: 26.0%
One of the features I built into the Startup Financial Model is an integrated Cap Table and Investor Return Summary (with proceeds waterfall) that clearly shows investors of all classes what your plan looks like for them. I built that in to make it really easy to discuss and negotiate the capital raise terms and settle on a mutually-agreeable deal.
The Alternate Scenario is super helpful as well because it allows entrepreneurs to quickly answer an investor's questions on a sensitivity analysis such as "how sensitive is your plan to your aggressive sales forecast?" You can enter a scenario with sales off by 25%, for example, and run an alternate scenario and see it side-by-side with your main scenario, all the way down to the expected investor return multiple and cash proceeds for both scenarios. Pretty slick.