How to choose the right deal terms for your SeedFAST / Advanced Subscription Agreement
The process of fundraising is changing as more and more founders are using agile funding strategies instead of hoping for a big funding round every 12-18 months. At SeedLegals we’re leaders in that movement, we took the traditional 12-18 month funding round cycle and innovated, allowing founders to raise funds as they need them.
With SeedLegals, startups can raise funds strategically by either raising money before a funding round, using our SeedFAST and/or by doing a rolling close round to allow for subsequent top-ups of further investment when needed using Instant Investment. Gone are the days of having to wait 12-18 months for your next cash injection.
Raise ahead of a future funding round
Lining up investors to fill a round is not an easy task and sometimes you just need to take a few cheques in advance to get you there. The good news is that SeedLegals can help. SeedFAST is our branded SEIS/EIS compatible advanced subscription agreement that allows you to get investment ahead of a future funding round. The investment will convert into shares when you reach that point.
However, seeing as your investors will only get their shares in the future and there is no 100% guarantee of you being able to close off other investors, they technically take a bigger risk by investing via SeedFAST ahead of the round. They’re often compensated for that additional risk through a discount on the price of their future shares and/or by setting a valuation cap.
Discount, Cap Valuation & Low Valuation
Discount on the next round valuation
When you’re doing a funding round, the SeedFAST investors will typically (but not always) get a discount on the price per share paid by investors in your next round. We analysed data from 300 SeedFASTs done on SeedLegals to see the most common patterns, to help you make the optimal choices for yours.
In most cases founders offer a 10-20% discount to their investors. But we also see SeedFASTs where no discount is given, often if the investor entering into the SeedFAST is an existing investor who is helping with funding before the next round, effectively protecting their earlier investment.
The Valuation Cap is the maximum valuation at which the SeedFAST will convert in a future round. If your valuation in the next funding round is higher than this, then it will convert at the cap regardless, allowing your investor to take the benefit of the lower valuation. The cap protects investors in the situation where you eventually hold a round at a very high valuation, otherwise leaving your SeedFAST investors with very little equity in return for their investment.
For SeedFASTs done on SeedLegals, we usually see cap of around £1M to £3M, indicating that the most popular use of SeedFASTs is before the company’s first funding round, or perhaps before the 2nd.
The above graph shows that founders who set 0%, 10%, and 20% discounts in their SeedFASTs set caps of £850K, £2.75M and £2.375M respectively. The insight is that at a lower company valuation it might be acceptable to give your investors a lower discount for the next round, whereas as you progress towards Series A and a SeedFAST is needed, then the discount offered to the next round tends to be greater.
But each deal is different. You might think that your cap valuation or discount should be higher or even lower, and that’s totally fine, provided you have thought about what stage of its lifecycle your company in, who the investor is that you hope will sign, what your current valuation is, and of course mapped out the conversion scenario’s on your SeedLegals cap table first.
If no funding round occurs or one closes that does not meet the threshold of a “qualifying” round (the amount to be raised in a qualifying funding round is agreed in the SeedFAST agreement) before an agreed date which is called the Longstop Date. This must be less than 6 months to remain SEIS/EIS compatible but can be longer if your investors aren’t looking to claim this tax relief. The SeedFAST will then automatically convert at the Low Valuation. The Low Valuation should therefore reflect a realistic company valuation if you don’t do a new round, so it’s often set at the price per share offered in your last round, i.e. the post-money valuation of your last round. It’s also typically somewhat lower than Cap, which makes sense if you think about it, if you didn’t hit your target your investor should get a sweeter deal.
Valuation Cap vs. Low Valuation
One of the most common questions we get asked by founders creating a SeedFAST is what should the relationship be between the Cap (if you set one) and the Low Valuation. Basically, the difference between the scenarios of things going brilliantly (new round at a really high valuation, SeedFAST investor converts at a capped valuation), or things not going so well (no new round, SeedFAST times out and converts at the Low Valuation).
So, we were super-interested to see what the data showed, and the answer is that founders, in cases where they do apply a cap (which is optional), generally either:
set the Cap to 2X the Low Valuation – i.e. the “things are going brilliantly” scenario has them value the company at 2X the “things not going so well” scenario, or
set the Cap and the Low Valuation to the same value, meaning that the SeedFAST is thought of as a fixed-price agreement, as it will convert at the same valuation in both cases (or of course less, if there is a new round, but at a lower valuation than the cap).
We hope this data and insight is useful in helping you set up your next SeedFAST optimally. If you need more, let us know!