The issuance of preferred shares for seed financing requires legal assistance not only in establishing the necessary legal documents, but also in ensuring compliance with the Federal Securities Act of 1933 and all government securities laws (Blue Sky). An early-stage business should not find money below the valuation of the previous cycle. I encourage the founders to raise enough money in each seed funding to be sure that the company will be funded long enough to have a realistic chance of providing all the KPIs needed to complete a future funding round. The term “seeds” means that seed capital is a start-up investment. Seed Capital supports the company until it can generate money or until it is ready to invest more. This is often a small amount, since business is still in the idea or conceptual phase. Because a seed capital investment is such a high risk, this type of financing is often exchanged for a stake in the company, although with less formal contractual overhead than standard equity financing. Seeds are often used to finance a company`s preactivity, such as research and development. The left column of the table lists the (some) provisions that have been agreed over seed cycles that are important to us, either because they allow us to put more money in or sell them when the founders/key operators sell. On the other hand, legal clauses generally only become relevant when things are not going well — they protect investors from the flip side of the law.
The middle column is – of course – the middle way, where we do not see any particular bias in both directions. Why this “selectivity”? Well, it`s not because we`re a charity or we consider beer more important after signing (although, of course, it`s important:-). On the contrary, we consider the agreements reached in a substantive cycle as the legal basis for cooperation, hopefully long and close, between the founders and investors. Since the most important thing for this relationship is to develop its full potential, mutual trust is not to benefit from unilateral optimization of contracts (which contrasts with one-off transactions such as the full sale of a business where the parties separate before drying the ink). In the grand scheme of things, the “gain” of a particular clause, which is marginal to us, quickly becomes a Pyrrhic victory, if it even leaves the trace of an acid taste in the people who are the main reason for our investment. We hope this will provide an approximate and comprehensive framework for what we (and many other investors) think of certain conditions for seed transactions. You may be wondering why we would de facto “pull down our pants” and reveal our “Giveaways”.” But that`s the thing: we don`t see the shareholders` pact as a classic trading situation in a starting round where each party is tactically thinking about how to create leverage to look generous in certain respects, to gain as much as possible.