Your startup will expect to go through several rounds of equity financing as it grows from initial concept to scalable business. Seed funding is early stage financing and the first significant investment your startup receives from external Investors.

It is usually provided by the Founders’ friends and family and angel Investors. Institutional investors, such as venture capital firms, will usually be unwilling to invest this stage. It is raised when the Founders are still developing the concept and after you have incorporated a company. This funding can be used to help the company with day-to-day costs and expenses and development costs.

The amount of seed funding can vary and is often in the range of around US$250,000 to US$2M. Smaller amounts may be raised as a bridge to future priced equity rounds. Larger amounts may be raised in a stand-alone seed financing round.

The investment is usually structured as convertible equity instrument or preferred shares. The structure you select will, to some degree, depend on your Investors’ investment preferences.

A convertible equity instrument gives the Investor the right to purchase shares in a future priced equity round, subject to certain conditions. Convertible equity documentation is increasingly standardised. The most popular documentation is the SAFE (Simple Agreement for Future Equity) and the KISS (Keep It Simple Security). These can be used as a basis and adapted for your startup's specific circumstances. This documentation is shorter and simpler than that used for later, larger investment rounds. This saves time and money, as there is less drafting and less negotiation.

Preferred shares will often carry a simple preferred right to be paid out first if the startup becomes insolvent. These re often referred to as “light-preferred” shares.

Seed investors may be subject to dilution from future investment rounds.