A seed round is usually the first inflow of money into a startup company. With a seed round many companies obtain the financial means to go beyond proof of concept and onboard their first employees. This initial capital is great news because it means you are doing something right. But seed money comes with strings attached that should not be accepted outright. Keeping a cool mind and properly assessing the risk/benefit of the proposed terms under the guidance of a skilled attorney is of vital importance.
Importantly, seed rounds come in multiple flavors. They could be structured as convertible debt, convertible equity, seed round preferred stock, or even a sale of common stock. Although convertible debt has become pervasive at the seed stage, they are far from ideal for founders, especially if the round is capped. In addition to the structure of the round, the terms vary widely within a particular financial instrument, depending on whose law firm drafted the seed documents. What is common to all these financing documents though is that their terms are complex with profound commercial and securities law implications.
Startups often have a good amount of leverage in deciding how to structure their seed round. Needless to say, convertible debt is not always in the founders’ best interests.
