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1 min read

How to do a funding round on SeedLegals

Published:  Mar 24, 2024
Idin Dp
Writer
Idin Sabahipour

Copywriter

If you’re looking to raise investment for your company, you’ll probably have some questions.

Things like:

  • Where do I start with my funding round?
  • How do you figure out the legal documents?
  • What type of shares should I give the investors?

With SeedLegals, our agile fundraising helps you raise faster.

If this is your first time fundraising, it’s no problem – SeedLegals was made for you.

Our platform includes:

  • Videos to guide you through each step
  • A tool to help you map out various exit scenarios
  • A workflow that explains every deal term along the way

Whether it’s your first round or you’re an experienced pro, the platform has you covered.

Plus, you’ll get dedicated support from our team and access to our partner law firm to answer your questions.

This video by Anthony Rose, SeedLegals Co-Founder and CEO, covers everything from creating your term sheet to generating your tailored legal documents – all in one smooth workflow 👇

🎥Watch: How to do a funding round on SeedLegals

 

 

  • Read transcript

    Anthony Rose (00:01)
    How to do a priced funding round on Seedlegals. Hello, I’m Anthony, founder at Seedlegals. I’m going to show you how we’ve changed the way in the US founders can now be empowered and do a priced round.

    So currently founders raise with SAFEs because the cost of legals is insane and you’re thrust into the sausage machine of,  you know you’re not empowered, lawyers are sending word docs to each other, you don’t even know what you’re signing.

    And on SeedLegals, our goal is to change that and put you in control, you in the driver’s seat.

    And the formula works. In the UK, one in three of all funding rounds are done on SeedLegals. 50,000 companies on SeedLegals. We’ve proven the formula and we’re here to bring that into the US.

    Let me show you how it works. So what we’ve done is we’ve taken the standard industry NVCA documents and we’ve changed the way the documents are built.

    So we take you through the deal terms, and whether you send a term sheet to an investor, or they send one to you, you can use SeedLegals to close your round at a fraction of the time and cost of using a lawyer. Let me show you how.

    So we assume you’ve done some SAFEs. We’ve got a video on how to do SAFEs on SeedLegals, but it’s now time to do a priced round. So let’s do a priced round and let’s say that we’re gonna raise $5 million and that our platform will build everything you need for your round with us. Unlimited help and support on all the commercial, the product, the help that you need. And we’ve got a partner law firm, including some legal hours as well. So one stop shop for everything on your funding round.

    So let’s call it, let’s go through. So we’re gonna start by calling it a priced round and we’re gonna say it’s gonna close in February and we’re raising 5 million and let’s say on a 30 million valuation. Great. And if you want to create or extend the option pool, we can do that as well. Done!

    So the next step is now to add investors. And as I come across investors I can add them in my round and let’s say I’m going to add Jacque and Jacque is going to invest 100k and he’s not getting any discount. And by the way, if there were any convertibles to convert, maybe I’ve got lots of SAFEs. Great news! Nobody knows how to calculate the formula for how YC SAFEs convert. We’ve automated all of that.

    So I simply go to my convertibles table where all of my SAFEs that I’ve created, I can add them in, or could have done them on SeedLegals. And then the platform will automatically add them into the round. If I select them, work out the number of shares based on the cap, the discount and everything, and add them to the round. So I won’t add those now, but we can do that later. So the next thing is I’m now going to start my round.

    And I can buy flex on SeedLegals. I can pay for everything after the round with a small amount upfront, and now I’m all set. So, when you do a funding round, what usually happens is you’re going to say, I’m going to raise five million dollars, but it turns out you get to like three million dollars and then should you wait, should you just close the round. So we’ve enabled it to top up to be much easier to do. So you can raise with SAFEs ahead of the round, do a funding round and top up later.

    So let’s say that I am enabling top up and I’m going to say for the next six months after my round I can top up another few million dollars, so I can close a small round and keep going up to that five million dollars that I said I was going to raise and we’re getting all the permissions upfront. So it becomes super easy to top up afterwards. And we call that agile fundraising, raise before with SAFEs, do a funding round, top up later.

    So, next thing is, it’s going to take me through all the things that I’m going to want to design my company with the board and so on, or I’m going to negotiate with investors. So let’s say that I’m going to have a total of five directors, one of them is going to be appointed by the investors, I can list those and I can go through the board composition I would like. And I’m going to say investors need to keep at least a thousand shares in order to and we’re going to have John is going to be the investor for the investor preferred director. So the idea is as I’m going through these terms, I’m being as the founder educated it as to what my board’s going to be. I’m in control because I can see that my board, I’m going to set it so that there more founders than investors on the board, so that the founders control the board.

    And so each of the things that the investors are going to be negotiating with you, or are going to be wanting, you’re going to know what it means because you’ve gone through the deal terms, rather than being given hundreds of pages of NVCA documents, which frankly are indecipherable, to try and figure out what you’re committing to.

    So, the next thing is the investors, there’s often this concept of investor consent. So investor consent means if you want to sell the company or do a range of things, you can’t just do it because you feel like it as the founder, you need to get investor agreement. And that’s a percent of the investors, typically 51%. And so what we’ve done is we’ve gone with the defaults that we think are appropriate for you know, pre-seed slash seed stage round, maybe it will change later, you’ve got full flexibility, but if you go with the defaults, you’re likely to be in the right place, because every startup is different, that all funding rounds in the early stages are remarkably self-similar.

    There’s no point in spending tens, twenty, thirty thousand dollars, a hundred thousand dollars with lawyers, to end up statistically with pretty much the same thing, which is where we get to much faster on SeedLegals.

    So, the next thing is which of these actions are going to need investor consent? And we’ve started with the lease set, but if investors send you their term sheet and they say, we’d like investor consent on these points, well you just go on SeedLegals and you tap fees and then we build the documents to reflect that.

    So, and now how many shares?  Okay, so the next thing is some investors want to be called major investors and we’re to say. But as long as an investor has got more than 20,000 shares, that they’re a major investor, if they sell them and drop below that, then they’re no longer going to be a major investor.

    So the other thing is, an investor will often want a seat on your board. And that, of course, can be great. They can bring value, they can make connections, they can be helpful, but it can also be a bit like adding somebody onto the board that’s going to be the police. So you want to be careful about who you have on the board and what approvals that they have to agree to. And so now you can see over here, which things you are agreeing to and you’re being empowered to be in control of that.

    So you’re saying that, you know, paying a dividend and so on will need the preferred director approval, as opposed to the founders deciding it, and more. So you can decide and of course, if you’ve got any questions, hit the chat bubble and we’re here to help on all these things.

    So the next thing is in future rounds people want the ability to participate in the round. Who do you want to give that to? And an investor might say, only me. Maybe that’s unfair to the others. You might want to give it to all investors. And the other thing is some investors want a management rights’ letter. So if I say yes,
    we’ll build that for you, no need to go off on a big tangent to figure out what a management right letter. One click, it’s all sorted.

    So, now, are you going to do founder vesting? So one of the most dangerous things in a company is founder fallouts right at the beginning. And if you don’t have founder vesting, then one of the founders leaves, and now you’ve got three founders, ones left, 33 % of the company is now, you know, no longer with the company and the company’s uninvestable.

    So what percent of the founders stock you say? Well, we’ve said that none of it’s already vesting, we start investing from a fresh, we’re gonna have a 12 month cliff period, and it’s gonna vest over 48 months, and it’s gonna vest every month. Done! Sorted with my founder vesting. And, then you can say who gets paid dividends and if you don’t know what this all means, that’s okay. There a lot of things that nobody knows what they mean in the NVCA docs. The good news is there’s a standard on all of them in early stage rounds and we’ve picked exactly that.

    So the next thing is if an investor sends you their term sheet they might want exclusivity. So angel investors are not interested in exclusivity. A fund might be interested in exclusivity. They might say you can’t shop this around for the next 45 or 60 days. And if you want to add an exclusivity period you can do that. Anything longer than 30 days, you have to be careful, because the investor can just sit there and your business is on hold you can’t reach out to other investors, other than under the terms of the term sheet with them to solicit other investments, and then at the end of the 45 or 60 days they go, no, not really for us and you have to start all over again. So try to keep those exclusivity periods as short as possible, ideally seven days but maybe stretch to thirty, try to avoid longer than that.

    The other thing is, try to get the investors to pay their own legal fees. You shouldn’t be on the hook for fifty thousand dollars of their legal fees, you can pay developers, instead of paying lawyers. So, get the investors to pay their fees. Now occasionally, you’ll have the lead investor that will say, they insist on you paying their fees. And if so, you want to cap that to a certain amount. So I’m going to say we’re going to cap that to 20k dollars. Anything more than that, they pay themselves. And, you know, the higher you make the cap, the more their lawyers will be looking to make work for themselves. So try and keep that number lower.

    Now, the next thing is we’ve been surprised at SeedLegals to see how few founders and angel investors know about QSBS. QSBS tax benefits reduce the taxes, the federal taxes that investors pay and founders pay if they hold their stock for more than five years. There’s not very much you have to do to qualify for that, you have to know what it is, but by being able to tell investors that they’ll be able to get QSBS, you can make your company more investable than others who aren’t saying that. So get up to speed on QSBS, we’ve got, if you Google SeedLegal’s QSBS, you’ll find lots of articles from us on that, or hit the chat, and we’re here to help you with that.

    And so I can say, yes, including my documents, QSBS mentioned, sometimes investors will ask you to get key person or key man, as it used to be called, which will pay out if one of the founders gets hit by a bus. You can do that later stage, probably wouldn’t bother at the beginning. And if there are investor directors, they will often ask to be indemnified, if any liabilities come up and you’re probably going to have to agree to that if you want them on board. And now if you’ve got anything else to add into the term sheet, you can do that.

    And that was it. You now have your term sheet ready to send out to your investors. And the term sheet will have everything in the NVCA industry standard format. Everything can be e-signed on SeedLegals. You’ll share it with the investors. As they sign you’ll get browser notifications that they’ve signed and email notifications as well.

    Now really importantly on SeedLegals, our goal is you don’t need to read all of these legals, hundreds of pages, you can jump to the deal terms, as can the investors. So easily flip between the documents and the terms, and if the investor says, “Hey, I want the majority to be the investor majority, or be something else,” the good news is you can have a conversation with them right there on the platform and instead of going backwards and forwards with red line Word docs, everything is done on the platform, so you can close and agree way faster.

    So that was the term sheet. But now having the term sheet, what about all the rest of the documents, known as the long form documents and the warranties and the disclosures? Good news! We’ve automated all of that as well. So all you do is you scroll down, we’ll take you through the advanced terms. So you can typically click through these, these are typically going to be defaults, they’re all going to be pretty standard, and you’ll go right to the end. I mean, you can tweak things as you need and once you’ve gone through those, then you will build, or we will build on the platform, all the documents that are needed for your round. So you’ve got the stock purchase agreement, the investor rights agreement, the certificate of incorporation, the voting agreements, and all the docs that are needed.

    The other thing is as the investors send you their money and your bank details are put into the documents so they know where to send the funds, then there’s a very nifty investment tracker where you can set when the funds were received and then we’ve got all the information to date, the share certificates and so on as well. And at the end of that you’ll need board consent, you’ll need stockholder consent and that’s all there as well.

    And at the end you hit done. You hit the issue share certificates, the investments get converted into shares, it goes into the cap table, you’ll see everything in the cap table, and then you can even have some fun and model the exit scenario to see how much everyone’s worth on an exit of the company. And of course, SeedLegals platform builds the share certificates for everyone and they each get a beautiful share certificate that you can sign on the platform. And of course, when you’re ready to raise again, you just go back to the raise tab and you’re all set to top up a round or do another round or race with safes. So welcome to SeedLegals, the fastest and best and revolutionary new way to do a priced round. Anything you need, hit the chat bubble on seedlegals.com and we’re here to help. Thanks.

Looking for more fundraising insights? Check out these articles:

Learn how QSBS can give founders valuable tax breaks

Compare SAFEs, convertible notes, and priced rounds to find the right option for your startup

Understand how to raise investment online (while staying compliant)

If you have questions or need help with your funding round, speak to our team – we’re here to guide you!

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