Pre-seed funding is frequently the initial fundraising step, preceding seed investment and following phases. During this phase, investors offer funds to businesses for product development in exchange for stock. This stage may follow even earlier fundraising stages, such as bootstrapping or first angel investment rounds.
How much pre-seed equity should I offer?
However, I desire a greater value; how much ownership should I give up at seed? Currently, valuations are becoming quite frothy in both the equities market and the cryptocurrency market. This is undesirable and will result in poor founder-investor ties.
- Just read about valuation “corrections” that are already occurring as a result of cooling public markets at the beginning of 2022.
- There are founders in the United States that raise $10 million to $20 million with essentially just a concept, but it does not imply you should follow suit.
- For starters, you’re not in the United States (yes, even if you can meet investors there, geography does important), and unlike the vast majority of entrepreneurs, you have no history of demanding such a value.
Suppose angel investors are willing to offer you a $10 million value since X firm in the United States was in the news and received the same valuation. In a year, you must at least quadruple the valuation to $20 million, based mostly on your idea, and hope that sufficient development is made.
Remember that many of these early investors will not lead your next round of funding! So, will conventional VC funds provide this valuation? Keep in mind that what you read in the news is not necessarily reflective of reality — high, aspirational valuations (especially in later stages) stated in the press do not take into account the actual transaction circumstances at play.
Investors have a variety of levers they may pull to strengthen their upside or downside protection, and part of the negotiation process for a later-stage round valuation will involve determining how these are to be set. For instance, an investor may be more comfortable investing $100 million at a valuation of $1 billion if they know that in the case of a departure, they will receive two times their investment before anybody else — the infamous liquidation preference provisions are making a comeback.
If the firm was hypothetically sold for $300 million, the founders would receive $200 million and investors would share the remaining. These kind of phrases are extremely unusual in pre-seed (they shouldn’t even exist), but they become increasingly prevalent in series A and beyond. Valuation strategy is an essential factor to consider.
Don’t blow your value out of the water simply because you can — raise only what you need and strive for a reasonable dilution of 10-20%. Dilution ranges we’ve seen are:
- =10% for modest pre-seed rounds, with investors and accelerators generally investing between A$100,000 and A$200,000.
- Between 10 and 20% for seed rounds that raise between $200k and $2 million.
- 20-30%+ is typical for bigger Series A+ ammunition. We believe this is too much dilution for seed-round entrepreneurs
- if you’re raising a lot of money, you should expect to give up a lot in the beginning.
Does seed money require repayment?
No! This is a grant, not a loan, thus there is no obligation to repay it.