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Funding Guides Published:  Nov 18, 2022 7 min read
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Seed funding: the essential guide to growing your startup

All fired up and looking for fuel? Seed funding gives founders capital to get their industry-shaking idea out of their heads and out into the market.

In this post, we explain how a seed round works, what it’s for, where the money comes from and how to get it.

What is seed funding?

A seed funding round provides the capital a business needs in its early stages to go from an idea to a real product or service.

The seed round is usually the first official funding round, when the company sells shares to outside investors in exchange for equity.

This method of equity-based fundraising is what separates startups from other early-stage SMEs. The idea is that the company will ideally take on a lot of external money, scale very quickly and return huge value to their backers (investors) within a relatively short timeframe.

By convention, startups raise money through a series of formal funding rounds, corresponding to the company’s development stage and with a set target raise amount. As the company grows and requires more capital to fund further growth, it progresses from pre-seed to seed to series A, B and so on.

Each funding round typically only gives the startup enough capital to get to the next stage, where it then raises further capital for growth at a higher valuation or prioritises profitability.

Before the seed round, founders usually ‘bootstrap’ the startup themselves or raise money from family and friends under much less complex deal terms than an independent angel investor or VC would expect. Find out more: Seed round vs bootstrap.

Typically, startups use seed capital to get their product or service to market and validate or refine their product-market fit.

What’s the difference between seed and Series A funding?

The difference between seed and Series A funding is that seed funding is used to develop and launch a minimum viable product (MVP), while Series A funding helps a startup with proven traction scale.

Companies seeking seed funding need capital to prove that they have the potential to hit product-market fit. Companies seeking Series A funding have proved that point and are on track to reach profitability.

Our guide to startup funding goes into more detail about the different rounds and sources of funding.

What is seed funding used for?

As the name suggests, seed funding provides the resources a company needs to get started and grow.

Some examples of what startups spend their seed funding on include:

  • Market research
  • Making key hires to build the core team
  • Research and development
  • Product development to create a minimum viable product (MVP)
  • Product testing
  • Planning and launching a go-to-market strategy
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Prior to raising your first round, you’ll need to prove to potential investors that your idea has merit and is truly worth risking their capital on. That’s why it’s important to approach potential customers first, discover pain points and then use that to inform the product or service you’ll look to build. From there, the goal is to use the first investment to turn that idea into a tangible MVP that you can further user-test. The second investment allows you to then form a go-to-market strategy and start scaling.

Jonny Seaman

Fundraising Expert,

SeedLegals

How much do companies raise in seed funding?

Our research shows that UK startups raise between £50,000 to £250,000 in their first pre-seed round and £500,000 to £1.5 million in their seed round, on average.

The amount you raise will depend on your business’s needs and how much you can convince an investor to part with.

With equity financing, remember that your target raise is only one side of the equation. To take in capital, you have to give out equity in your company. It’s a delicate balance to strike – juggling your need for cash while keeping control of your company.

The general rule of thumb for funding rounds is that founders should expect to sell between 10% and 20% of the equity in their company.

To set a share price for investment, you need to agree a valuation with your investors. For insights on the strategy that goes into deciding a figure, see How to value your startup and how much equity to give away.

Essentially, you want to raise enough to get you to the next round and build enough traction for a larger raise – usually about 12 to 18 months. The reason to give yourself a generous runway is that time on the funding trail is time taken away from the actual work of building your business.

If you can’t hit growth targets and other important KPIs, you’ll find conversations with your next set of potential investors significantly harder.

Agile funding gives you more flexibility
We’ve made it quick and easy to bridge the gap between funding rounds. With SeedLegals, you can raise before a round or top up after - without negotiating a new valuation. It’s a quick way to take in funding any time you need it. Find out more about the agile funding revolution.

How long does it take to get seed funding?

A funding round is a serious time investment at every stage. First you need to find potential investors and win them over with your pitch. Then, even getting from an informal ‘yes’ to issuing share certificates can easily take between three to six months.

That’s if you don’t raise a funding round through SeedLegals. Our automated workflow, instant document generation and intuitive sign-and-share steps cut down that six-month timeframe to just six weeks, on average. We even completed a £2,000,000 funding round in just nine days and a £60,000 raise in a matter of hours!

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Plus, we offer SeedFASTs and Instant Investment as part of our agile funding model. These are quick ways of raising funds from investors with simplified terms, so you don’t need to go through all the steps of a traditional funding round.

Where to find seed funding

The right investors offer more than just money to your business at this crucial stage. They can be an invaluable source of expertise, advice, contacts and credibility.

Sources of seed funding include:

Incubators and accelerator programmes – These are essentially structured courses designed to hothouse promising businesses. In return for an equity stake in your business, they’ll provide you with cash and/or other resources, such as office space and mentorship.

At the end of the programme, you’ll have the opportunity to present your startup to VCs and angel investors at a demo day. Even if that doesn’t launch you to the next funding stage, it can be good to get your face and name in front of influential investors who might be interested in coming aboard further down the line.

Angel investors – Elusive but valuable if you can get them, angel investors are individual private investors. Eligible startups in the UK can apply for a very attractive tax incentive (SEIS) to sweeten the deal for angels.

Crowdfunding – If your product is a good fit, you can raise funds directly from your customer base. Since most likely you’ll be raising relatively small amounts from a large group, crowdfunding can be very time-intensive. And something to be aware of – you’ll need to raise some funds yourself from your own investors before you can go live on the platforms.

Early-stage VCsVenture capital firms can have high and restrictive expectations of a fast return and may not be right for you at this early stage. While they can offer a huge amount of cash, it might not be worth the significant time investment to pursue VC funding when you’re in the seed phase. To learn more about what VCs expect and how to balance the pros and cons, head over to Are you ready for VC funding?

You can find much more detail about how to approach each of these potential seed investors in our how to find startup investment article.

How to get ready for your seed round

Even before you set up meetings with potential investors, it pays to make sure you have your house in order. No investor wants to put money into a chaotic company with an unsteady legal footing.

1. Sort out your cap table

Your cap table (capitalisation table) shows who your company’s shareholders are and how many shares they own. If this is your first raise, it’s important to make sure the founder equity is agreed and reflected in your cap table and on Companies House before investors see it.

Read more: What is a cap table and why do you need one?

2. Create an option pool

If you plan to offer your team share options as a recruitment or compensation tool, remember that you’ll need to create an option pool. It’s important to set aside the equity you’re reserving for your team by including an option pool in your cap table before you allocate shares to investors. Otherwise, you’ll dilute your investors’ stake and they won’t be pleased.

For more detail about the process and how to size your pool, see Startup equity: how much to give employees.

3. Get your legal documents in order

Investors will do their due diligence on your company and poke around your financial and legal affairs to assure themselves you’re a safe-enough bet.

To help you get your company started on the right track, we’ve put together this list of the 10 essential legal documents for UK startups. It’s not everything your investor will want to see, but having these documents in place will help show you’re serious about growing your company in a structurally sound way.

4. Apply for SEIS Advance Assurance

The UK early-stage startup ecosystem runs on SEIS funding. The Seed Enterprise Investment Scheme (SEIS) gives individual investors – aka angel investors – generous tax benefits when they invest in small, seed-stage businesses.

Not every business qualifies for the scheme – and the ones who do are dramatically more appealing to angels. You can apply to HMRC in advance of your funding round, submit supporting docs and get confirmation that you meet the requirements. This process is called SEIS Advance Assurance – sometimes shortened to SEIS AA – and it’s quick and easy to do on SeedLegals.

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5. Draft your Term Sheet

A Term Sheet summarises the key deal terms that will impact you and your investor. It’s not legally binding – the Term Sheet is a negotiation tool that comes before the final signatures and locked-down terms.

In our experience, rounds close faster and often more smoothly when founders come to the negotiation table with a Term Sheet already prepared. This slowly changes as the rounds get larger and VC funds start leading the deal, but in your first raise, the company is usually expected to prepare the Term Sheet.

Find out what goes into a Term Sheet and how to draft one: UK Term Sheet jargon explained

Tips for pitching your seed-stage company

To get to a sit-down meeting with an investor, you need to perfect two things:

  • a compelling elevator pitch
  • a concise pitch deck

Your elevator pitch should make your value proposition clear in 30 seconds or less. In a nutshell, why would a customer choose your product over anything else in the market?

After your elevator pitch has grabbed their attention, the pitch deck is where you can go into detail (but not so much that you go over 20 slides).

Here are the main areas you’ll want to cover in your pitch deck:

  • the problem you’re going to solve
  • the solution you’ve developed
  • the market opportunity you’re going to capitalise on
  • your financial projections – be careful not to over-promise while still showing ambition
  • the achievements you’ve reached so far – like growth metrics
  • your team – how the founding team are uniquely qualified to deliver the targets you’ve set

For more information, see Raising seed: how to create a winning investor pitch deck.

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At the beginning, creating your pitch tends to be more of an art than a science, at least at the pre-revenue stage. At this point, your pitch will be built on the size of the potential market, the credentials of your team and, of course, an element of storytelling. Once you are making money, there are a multitude of metrics you can use to inform the pitch and traction numbers, such as ARR (annual recurring revenue), MoM Growth (month on month growth) and intangibles such as award wins and articles.

Jonny Seaman

Fundraising Expert,

SeedLegals

On SeedLegals, you can create an investor-friendly Pitch page to share in just one click. It’s quick to set up and you can track page views and investor interest, as well as share documents in our confidential Data Room.

Got an investor! What’s next?

Congratulations! It’s no mean feat to get an investor to provide seed capital. Now you need to get the legals sorted to legitimise the investment, work out all the details and issue the shares.

The main funding documents you’ll need for your funding round are:

  • Term Sheet
  • Previous Investor Consent
  • Preemption Notice
  • Shareholders Agreement
  • Articles of Association
  • Disclosure Letter
  • Board Resolution
  • Shareholders Resolution
  • SH01 Form

With SeedLegals, you can generate all these documents instantly and they update automatically whenever you make any changes.

When you’re ready to complete your round, all parties sign online and your documents are stored securely on SeedLegals.

For a complete list of everything you need and how SeedLegals can help, see our guide to closing your round on SeedLegals.

Talk to the funding experts

Our team of funding specialists are standing by to help you with your funding round queries and conundrums. Don’t know if you need a full seed round or if you could get what you need with a simple SeedFAST? Book a slot and let us help.


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