Creating a startup comes with a lot of initial costs. You may need to purchase supplies and equipment, pay for a variety of services, and even fund employment costs. This poses an interesting problem because the business has to keep growing even before it starts earning money. This is why fundraising from early-stage investors is so critical to the development of your business. Rest-assured, a great startup attorney can not only help you navigate investment documents, but also give you the business legal advice you need to get your seed fundraising efforts up and running.
What is Seed Capital?
Seed capital refers to an initial investment used to get a business going. This is considered a more relaxed way to fund your business and usually comes from personal assets, friends or family members. Typically, the money is invested in exchange for equity in the company but doesn’t require the same level of contractual demands as other investors. It’s essential that you properly secure seed funding to help establish the business and attract venture capitalists later on.
Seed Fundraising Legal Requirements
While seed funding is less formal, you should still follow proper legal protocol to get the best results and protect your company’s interests. The type of deal you want to put in place will significantly influence which documents you should have. Here are a few of the most common fundraising legal documents:
Convertible Term Sheet: Convertible term sheets are ideal for companies that have an early-stage investment of under $1 million. The terms associated with this document include interest rate, date of maturity, optional conversion upon maturity, price cap, etc.
Simple Agreement for Equity (SAFE) Agreement: This structure outlines that investors will have shares in the company at a future date. This is an excellent solution for businesses that are at the pre-revenue stage. It’s also attractive because it’s relatively simple, doesn’t have to include valuation or share prices, and it doesn’t involve maturity dates. Plus, you can even put in special deals or discounts to early investors.
Keep It Simple Security (KISS) Agreement: This document is intended to make investing options short and sweet. There are two types of KISS agreements: a debt version and an equity version. The debt version accrues interest (5%), provides a maturity date of 18 months and converts to preferred stock if the company raises $1 million in the next qualifying round. KISS equity securities have an 18-month maturity date and an automatic conversion into equity at the next round of financing if $1 million is raised. Startups are usually attracted to KISS equity securities because they do not have an interest rate.
Promissory Note: This document clearly states the terms of which you plan to repay the investment. It will include cost and the date of repayment.
Seed Funding Legal Help
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