By Fernando Berrocal
Learning how to obtain “Seed Funds” for your startup is mainly attached to the preparation of an investment from third parties, which implies preparing your business to do so. It's not just about funds when it comes to preparing a business for seed funding. For example, there are legal problems, as well as other setup tasks such as recruiting an adequate staff, providing the information needed, and others are all included in this case.
Only once you've figured out how your startup will be formed and run, you’ll be ready to obtain startup capital through an equity round. It generally entails a lesser quantity of money, ranging from tens of thousands to several million dollars. A Series A investment round, on the other hand, may be for $5-10 million and is often reserved for businesses with shown growth or a large order book to persuade investors. Pre-seed capital covers the initial expenditures of launching a startup, and you can get it from friends, family, or other supporters rather than from profit-seeking independent investors.
Find out how equity is distributed:
Whether you have already had a pre-seed fundraising round or not, once you reach the seed funding stage, it is more probable that you will sell an ownership share in your business in exchange for the cash invested. You must now study how equity is distributed. Keep in mind that equity isn't simply something you provide to seed investors; it's also a controlling position in your business. If you are the only owner of your startup, you may potentially give away up to 49% while still maintaining control.
However, if there are multiple co-founders, your first ownership stake might be between 50% to 25%, depending on the number of business startup founders. If you sell a significant ownership share to a single investor, they might swiftly seize control of your business. This is more of a problem for smaller businesses that obtain most or all of their seed investment from a single investor, such as an angel investor, because all of these circumstances might result in the investor receiving a larger share of the startup's ownership.
How can a private equity investment profit?
Equity investors want to earn a profit on the money they put into your business as a start-up. There are two methods to achieve this in general: capital gains and dividends.
Capital gains are the most straightforward and apparent way to profit from a stock investment. To profit in this method, investors purchase a share in a company, keep it for some time, and then sell it when the business's value has increased. Because they are still in the early stages of development, new startups have a great chance to do so. New businesses, on the other hand, pose a greater risk since they are more likely to fail. If you can demonstrate that your business predictions, valuations, and market demand are all reasonable, investors will be more likely to believe that investing in your startup will pay off in the long term.
Dividends are a little more difficult to understand. They are a portion of the startup's earnings shared among investors based on the quantity of stock they own. This means that a shareholder with a 10% equity position will get twice as much in dividends as a shareholder with a 5% equity interest, and so on. This is also important for you as the business owner. You'll have to give up more of your income as dividends if you sell more shares during your seed stage. You should take this into account when calculating future profits and the quantity of money you will have available.
Know your Budget and Overheads:
It's all about balancing the money coming in with the money going out if you want to be successful in business. More money will be flowing out of your startup than coming in from revenues in the early days of a new enterprise.
This is when seed money comes in handy. The money from third-party investors works as a kind of bridging loan, paying those early expenditures until sales and orders generate enough income to cover expenses and earn a profit. When preparing to obtain cash through seed investment, it's a good idea to have a solid grasp of your corporation's budget as well as the projected overheads. Calculating the difference allows you to discover any funding issues and determine how much seed capital you'll need to close the gap.
Many early-stage businesses fail because the founder failed to correctly predict the business's costs. Remember to include everything in your business model, from the rent you pay for your office space to any salary you must pay to employees (including yourself), as well as other budget concerns. Estimate your overheads, such as utility costs, product development, and other necessary supplies.
Make sure you have a Long-term Strategy:
You'll be in a strong position to plan for the long term after you have a clear grasp of your budget, overheads, and the influence they'll have on your cash flow.
You can ensure that you raise the correct amount in your initial fundraising round by predicting farther into the future. That implies you only give out the right amount of stock and don't have to go back to your investors later to ask for more money. It isn't only a question of how much money you require. The amount you may raise is also determined by the value of your business.
Potential investors will be looking for a reasonable price for the stock interest they purchase. The ratio between the amount you intend to raise and the overall value of your business determines this. A long-term business strategy allows you to evaluate this worth not only now, but also in the distant future.
Consider the value of your Business:
If you want to raise money through an equity round, you need to think about how much your company is worth. When selling your company's shares, a correct valuation offers you the assurance you need to ensure:
- Investors receive a fair return on their equity investment.
- You must raise the entire amount of money required.
- You want to keep as much of your money as possible.
It might be more challenging to correctly evaluate your business in its early stages. You might not have as much proof as you think, such as signed contracts and verified orders, to back up your estimate. Before beginning an equity fundraising stage, you should also contact a lawyer. It's critical not to lose control of your startup, and an experienced lawyer can assist you to avoid some of the most typical beginner mistakes made by small businesses. The value of your corporation might eventually assist you in determining if the quantity of money you require is feasible.
To provide investors a fair deal, you'd have to give up too much of your stock if the seed funding to total valuation ratio is too high. You can determine whether this is the case and how to make your business sustainable by lowering costs or obtaining more cash in other ways by establishing an appropriate value.
Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.