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Knowing how much your startup is worth and how much equity to give away in seed rounds is challenging, and you will get different advice from different sources on the best course of action for raising a seed.
However, while every situation is unique, a few guiding principles can help you gain a better idea of how much equity you should be giving away and whether you are asking for too little or too much.
This blog will guide you on how much equity to give away in seed rounds and help you avoid the most common pitfalls startup founders can face.
If you have any questions, feel free to get in touch with the BaseTemplates Team!
Introduction: What Exactly is a Seed Round?
A seed round is a form of early-stage investment that is typically the first round of financing for a startup. Seed-stage startups may not have product-market fit yet and won't have gone through share dilution yet.
The company offers shares in the company to venture capital investors in exchange for capital to fund operations. These funds could either come from Angels (wealthy individuals), friends and family and/or institutional investors (an entity that pools money).
A seed round aims to provide startups with the resources to validate their business idea and build an MVP.
Seed rounds are usually small, ranging from $250,000 to $1 million, and often have convertible debt or equity features that allow investors to benefit from future rounds.
To learn more about how future rounds work, check out this blog from Investopedia that details Series A, B, and C rounds.
Why Knowing How Much Equity to Give Away Matters for Entrepreneurs
The amount of equity that a startup gives away during an equity round can have significant implications for the business’s future success and its founders.
The goal for an entrepreneur in a seed round should be to get enough startup funding to continue building their product and hit key milestones for their business, but not so much funding that they don’t have any control over their own business anymore or have a down round in the future. To learn how to maximise your chances of success of raising the best seed round possible for your business, check out our online fundraising course and pitch deck templates.
Giving away too much equity in a seed round could mean a lack of incentive for the founder(s) in the future. Every round leads to stock dilution, meaning the founding team could have no control or meaningful ownership over the business after a couple of rounds.
For example, a team of 3 equal founders gives 50% of their business away in a seed round (yes, believe it or not, those deals exist!). They then go through Series A, B, and C, giving away 25% in each round. By the end of their journey, the founders would be left with ~7% of the business each and give up control in the first round!
This shows why how much you give away matters. Not only does it impact your valuation, but if you’re going through the highs and lows of entrepreneurship, you want to make sure you have a large enough piece of your own business.
How Much Equity Should be Given Away in a Seed Round?
A general rule of thumb is giving away between 10-20% equity during a seed round. This may likely be to angel investors who are willing to put in checks right at the origin of a company during the early stages.
Early investors may want to take on a 10-20% return because they are investing in the company at its early stages, which comes with higher risk. Higher risk can mean a higher reward in startups, but in return for this, early-stage investors want more equity to get a reward. This can also help them influence company decisions, which may, in turn, increase their chances of a successful return on their investment.
What are the Risks of Giving Too Much Equity in Early-Stage Startup Investments?
When startups are looking to raise money, they often give away equity. This is a problem because it is the company’s most valuable asset - ownership percentage matters. The risk of giving too much equity away in early-stage investments is that the investor will have a lot of control over the company and could even force them out of business.
The risks of giving too much equity in early-stage investments include:
- Losing control: Giving away too much equity can lead to losing your voting control of the business you founded. This can lead to you being demotivated and disincentivised.
- Putting off future investors: Investors want to see founders who have incentive and aren’t controlled by early-stage investors. If a business is controlled by investors who aren’t involved in the company's day-to-day running, this can be a red flag and put off external investors from future rounds.
Seed Round Frequently Asked Questions FAQs
What is the difference between a seed round and an A round?
A seed round is a pre-seed investment in a company that has just been started. It is also known as the “first check”. Seed rounds usually range between $100,000 and $1 million and are typically financed only once by an investor.
An A round is the first round of significant investment in a company, often $3-5 million but sometimes up to $10 million. It usually follows the seed funding stage and is a crucial step in delivering on more ambitious company goals.
How much equity should I give away at seed round?
Aim to give as little as 10% of your business away in a seed round, but you may consider giving away up to 20% for the right investors. You should avoid giving away more than 25% in a seed round.
A recent founder I spoke to turned down a £250k seed round offer for 60% of his business, so horror stories exist! After this, he started his own SEO agency to bootstrap a SaaS Squarespace SEO plugin - so there are other options available if you can't get the right seed round.
How is equity diluted?
Your equity will typically be diluted equally by how much the investor gets during funding rounds. For example, if an investor receives 20% of your business in return for a £500k investment, existing shareholders dilute to 80% before the series A funding.
Investors' stock in a round will typically be preferred, which has higher priority than common stock. To learn more about preferred stock, check out this blog.
Conclusion
Raising any funding round is never straightforward, and every situation will be unique to each startup. Many resources can confuse things, so we have added a list below of places you can go for further reading.
- Y Combinator: A technology startup accelerator that has launched over 3,000 companies, including Stripe, Airbnb, and Doordash. YC has a fantastic startup school blog.
- Future VC: An internship and development programme to help people learn more about and get into VC.
- Seedrs Academy: “The best guides, tools, and resources to help founders grow their business, raise capital and successfully crowdfund.”
Hopefully you now have a good understanding of how much equity to give away in seed rounds, but feel free to get in touch if you have any questions!
