Founders: How well do you really understand seed-stage financing?

I’ve fundraised a lot. Tactically, fundraising is a skill like any other. You get better the more you do it. But practicing gets you nowhere if you don’t have a strong foundation in understanding a fundraising round’s core components.

As a founder, you will understand less than investors when it comes to fundraising. For investors, negotiating with founders is their full-time job. For founders, fundraising is just a small part of building a business. Understanding the basics of venture financing can help founders raise on better terms.

We’ll cover:

  • How financing works: SAFEs versus equity rounds,
  • How much to raise
  • How to arrive at your valuation

How financing works: SAFEs versus equity rounds

Venture financing takes place in rounds. The first stage is the pre-seed or seed round, then a Series A, then a Series B, then a Series C, and so on. You can continue to raise funding until the company is profitable, gets acquired or goes public.

We will focus here on seed-stage funding — your very first funding round.

SAFEs

Post-money SAFEs are the most common way to raise funding. These documents are used by Y Combinator, angel investors, and most early-stage funds. You should raise on post-money SAFEs using standard documents created by YC. Standard documents have consistent terms that have been drafted to be fair to both investors and founders.

By using the standard post-money SAFE, your negotiation can focus on the two terms that matter:

  1. Principal: The amount you want to raise per investor.
  2. Valuation cap: The value of your business.