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Seed Funding
Introduction
“The seed round is the bridge between having a good idea and building a business that the world takes seriously. Get it wrong, and you may not get another shot.” – Matt Glynn
When it comes to funding a start-up business, the Seed Round is often the first real test. It’s when outside money comes in, valuations are set, and founders begin trading ownership for capital. Done right, it validates your business and sets you up for institutional backing. Done wrong, it can lock in bad terms, cause unnecessary dilution, or cripple governance before you’ve even found your footing.
What is a Seed Round?
The Seed Round is the first significant external financing round after initial capitalisation. Its purpose is to give enough runway to a business for it to demonstrate traction in its markets before larger rounds (Series A, B, etc.).
Forms of seed funding can include:
◼️Equity investments – investors buy shares at an agreed valuation.
◼️Convertible instruments – convertible loan notes or SAFEs that defer equity holdings.
◼️Hybrid structures – mixes of equity, loans or strategic partnerships.
Why This is Important
This is an important stage of the start-up journey because:
◼️Validation: It’s when investors decide whether your idea is investable.
◼️Runway: Provides the capital to test, adapt, and grow your product and business model.
◼️Valuation benchmark: The first meaningful price tag is put on your company.
◼️Governance shift: Founders move from total control to sharing power with investors.
◼️Investor signalling: A successful seed attracts bigger institutional interest.
Consequences of Not Addressing This Issue
Legal Implications
- Risk of signing shareholder agreements with unfavourable veto or liquidation rights.
- Poorly drafted convertibles can cause massive dilution at conversion.
- Failure to meet securities law or filing obligations risks fines or invalid issuances.
Founder Relationship Issues
- Misalignment over how much equity to give away can split founding teams.
- Disputes over board seats or investor rights can derail progress.
- Lack of clarity on dilution leaves founders feeling cheated later.
Commercial Implications
- Weak fundraising terms undermine credibility with future investors.
- Insufficient capital raised can stall growth before traction is achieved.
- Overpromising to investors creates reputational risks if targets aren’t met.
Operational Implications
- Complex instruments can drain management time in negotiations.
- Poorly structured funding creates uncertainty in hiring and expansion planning.
- Governance obligations may overwhelm inexperienced founders with admin.
Biz Valuation Issues
- Overvaluation at seed can kill later rounds when traction doesn’t match.
- Undervaluation means unnecessary founder dilution from day one.
- Inconsistent or informal terms reduce transparency in the cap table.
What You Should Be Doing
1. Choose your seed model wisely: angel, micro-VC, accelerator, SAFE/convertible, or strategic investor.
2. Understand valuation impact: avoid over or underpricing your start-up.
3. Get governance right: negotiate rights, board seats, and veto powers with caution.
4. Stress-test legal documents: shareholder agreements, convertibles, and cap tables must be watertight.
5. Raise enough runway: ensure funds cover at least 12–18 months of growth milestones.
6. Align the founding team: agree on dilution and investor expectations before signing.
The above are just a few of the steps you can consider taking. There are many more things that need to be done to ensure the associated risks are effectively and pragmatically dealt with.
Real-World Case Studies
Airbnb (2009) – Convertible Notes with Discount and Cap
Airbnb raised $600,000 in its 2009 seed round via a convertible note from Sequoia Capital and Y Combinator. The note had a 20% discount and a valuation cap, ensuring early investors were protected when equity converted later.
Lesson: Terms like caps and discounts aren’t just financial mechanics - they decide who wins or loses in future rounds. Getting legal advice here prevents unexpected dilution and disputes.
Dropbox (2007) – Convertible Note with Conversion Discount
Dropbox raised $1.2 million in 2007 through a convertible note led by Sequoia Capital. The note carried a 20% conversion discount, rewarding early risk-taking investors when the company closed its Series A.
Lesson: Even “standard” terms can have lasting impacts on ownership. Proper legal structuring ensures conversion terms remain fair to founders and aligned with growth.
Spotify (2015) – Risky No-Cap Convertible Note
Spotify raised significant seed capital through convertible notes with a discount but no valuation cap. The investor took a commercial risk, that ended up working out well for all parties. Things could easily have swung against founders if investor-friendly terms had dominated.
Lesson: There is not a single set of T&C that works for all start-ups. The deal struck must work for you, your company and your investors - legal guidance helps strike that balance.
PAAs (People Also Ask)
PAA: What is the purpose of a seed round?
To provide early external funding for achieving product-market fit and demonstrating traction.
PAA: How much equity should founders give away in a seed round?
Typically 5–25%, but depends on valuation, capital needs, and negotiation leverage.
PAA: What legal documents are critical at seed stage?
Shareholders’ Agreement, Subscription Agreement, board and shareholder resolutions, updated Cap Table, and any convertible note/SAFE terms.
PAA: What happens if a seed round is badly structured?
Future investors may walk away, founders can face unnecessary dilution, and disputes may arise over governance.
PAA: What’s the difference between a seed round and Series A?
Seed = cash to prove product-market fit. Series A = cash to seriously scale growth.
Final Thoughts
The Seed Round is often where founders first face the hard reality of giving up equity to grow. It’s a balancing act between raising enough capital, protecting founder ownership, and offering fair terms to investors. As the case studies of Airbnb, Dropbox, and Spotify show, the legal structure of a seed round can echo for years.
This is not a stage to “wing it” - good legal advice can save your start-up’s future.
How GLS Can Help You
◼️ Drafting & negotiating seed funding agreements
◼️Structuring convertible notes and SAFEs
◼️Shareholder agreement review and negotiation
◼️Cap table modelling & dilution scenarios
◼️Advising on investor rights (veto, liquidation, anti-dilution)
◼️Compliance with securities regulations
◼️Cross-border fundraising structuring
◼️Governance advice & board setup
◼️Dispute prevention between founders and early investors
◼️End-to-end legal support for your fundraising journey