Startups Stack Exchange Archive
What’s the difference between “seed” funding and “series A”?
- posted by: MaxB on 2017-05-29
- tagged:
funding,venture-capital,seed,fundraising,board - score: 2
Is there a fundamental difference between “seed funding” and “series A”? What’s the DEFINITION?
The following seem to be oft-repeated but incorrect definitions:
-
Source of funding (friends and family vs. pros): Counterexample: Y-combinator calls its funding “seed”.
-
The amount (less than vs. greater than about $1M): Counterexample: a company I know that raised $3M and called it “seed”.
-
First round vs. second: Counterexample: any company that skipped “seed” and only raised “series A”. Likewise, I think there are companies that raise multiple “seed” rounds.
Are there any differences in how the law treats the two rounds, or how the board seats are distributed?
(This question is about USA/California, if that makes any difference)
Answer 12824
- posted by: Ted Taylor of Life on 2017-06-11
- score: 3
Great Question!
Thank you for asking.
I will try and answer your questions first. I will quote them and answer below
Are there any differences in how the law treats the two rounds, or how the board seats are distributed?
FROM LEGEND Wilson Sonsini Goodrich & Rosati lawyer Partner YOICHIRO TAKU
How do the sample Series Seed financing documents differ from typical Series A financing documents?
- Board seat
- The Certificate of Incorporation gives the Series Seed a board seat, while the common get two board seats.
- What are the primary rights that are missing from the these documents that would be in a typical Series A financing?
- In the Series Seed documents, there are various terms that are missing that one would typically expect in a company-friendly Series A term sheet.
- In the Series Seed documents, there are various terms that are missing that one would typically expect in a company-friendly Series A term sheet.
Go to his post for more incredible insight.(Blue Text Above)
Standards
This industry, just like finance, has its own internal standards and their are no "set" definitions or standards like the IEEE, FOR DEFINITIONS OF FINANCING UNLESS THE FIRM/PERSON REQUIRES YOU TO FILE A FORM D.
What is a Form D?
- Form D
- an SEC filing form to be used to file a notice of an exempt offering of securities under Regulation D of the U.S. Securities and Exchange Commission.
Example of Form D : See Item 9
- Depending on firm, may not want other firms to know about your firm yet ( stealth) because Form D's are public records
- The main purpose of the Form D filing is to notify federal (and state) authorities of the amount and nature of the offering being undertaken in reliance upon Regulation D.
What is the IEEE?
EACH VC FIRM,ESPECIALLY IN CALIFORNIA,HAVE DIFFERENT DEFINITIONS OF WHAT A SEED ROUND IS.
Examples
The definition of a seed investment will vary somewhat depending on whom you ask. It would not be unusual for someone to refer to a larger friends and family financing as a seed financing. However, the term seed financing usually denotes a company’s first round of financing from third party investors who regularly invest in startup companies. These investors are typically individual angel investors, formal angel organizations or even venture capital funds. Seed investments are usually made through a mix of equity and loans, or sometimes convertible loan notes (often with a cap on the conversion value – see also The (Troublesome) Convertible Note Cap), simplified (short form) “series seed” financing documents or (often if led by a VC) “full” Series A style investment documents (see below). The structure selected for the investment will depend on investor preference and the availability of tax incentives, and will be influenced by the amount raised. As a general matter it is fair to say that the larger the amount raised, the more likely that the investors will use more formal and detailed investment documents. Subject to the caveats above, investment amounts under USD/EUR 1,000,000 or so > will often use convertible notes or Series Seed investment documentation.
..how the board seats are distributed?
Source of funding (friends and family vs pros): Counterexample: Y-combinator calls its funding "seed".
- This is true. The Y-Combinator in itself gets a pretty decent stake in your company (I have no idea if their portion of equity is dilutable, I would assume not) for tremendous resources at your disposal to help you succeed.Because of their proven track record, they essential give startups seed money , but receive a series a equity stake in terms of the valuation of the company (not 20%+ like series A) and I think it justified because of how good their reputation is. With that being said all startups have different needs and other incubators out there exist as well.
..."seed"
- They can call it whatever they want and it really should be called a seed on steroids because:
- They have arguable the best incubator in the country because of their network, knowledge and proven track record in the areas of expertise(I know they are fluent in software) As always each startup/person should do their homework to see how good they their track record is. Historically, very hard to evaluate track record because returns of firms are not public.
- Y Combinator May Be Worth One Billion Dollars. Here’s The Math
- Diane Mulcahy from Harvard Business Review ...." Myth 4: VCs Generate Spectacular Returns"
Stephen Forte on Difference Between Series A and Seed
Differences in 'Definitions' over Time
Investopedia on Series A and Seed
Seed
Series A
Answer 12736
- posted by: Veloz Techform on 2017-05-29
- score: 2
By definition seed money or seed capital is the money an investor would put in your young business in exchange for equity stakes in your company. In most cases you would raise the seed money from your family, friends or people you know personally and this money would go towards covering the initial expense of your company.
On the other hand, the Series A round, usually goes into expanding your business, running a comprehensive marketing campaigning and also being aggressive with the pricing. Here you need to keep in mind two important things – Pre-Money Valuation which is what your company is valued at which is 3 million (as per the Seed Funding example) and the Post Money Valuation which is Pre-Money Valuation plus what you raise from the investors. Let’s assume you are able to get a funding 1 million through Series A Funding your valuation would now stand at 4 million.
Answer 12817
- posted by: itay on 2017-06-09
- score: 1
Seeds funding is the first fund you get for your startup, This money should help you in the initail stage of the startup, In many times seed fund helps the startup to get few employees, build and launch an early product.
Series A funding, usually will come after you have the early version of the product and you need to optimaize it. Typically, In series A funding you will raise more money then from seeds funding, and the money should help the company to figure out a business model and ways to optimize the product.
Answer 12818
- posted by: DukeZhou on 2017-06-09
- score: 1
Q: Are there any differences in how the law treats the two rounds?
- No
The distinction is merely semantic, and any material differences are merely contractual. (i.e. the terms of the deal are decided between the investors and investees.)
Q: Are there any differences in how the board seats are distributed?
- Possibly
Again, this is purely contractual. It all comes down to what the different rounds of investors want in return for their investment, and the perceived value and health of the company.
(If the startup is doing well, the investee has all the power, but if the startup is struggling, the investors have all the power and their stipulations will be draconian.)
What investors are going to be interested in from a legal standpoint is the operating agreement or by-laws, and the terms of any deal are solely between the investor and investee.
What the government cares about is the type of corporate entity for tax purposes.
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