The Art of Pre-Seed Fundraising

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Available as a one-hour recorded seminar here, beta price $50.

Venmo or PayPal – $50 for lifetime single user access, including updates – Subject: Pre-Seed Seminar

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While focused on founders, the seminar is also useful for:

  • Angel investors new to the game
  • Early employees looking to better understand the $ situation of their startup
  • Legal, finance, and consulting professionals looking to develop expertise in this area

Table of Contents

Part I – How to Select & Approach Pre-Seed Investors

When contemplating startup funding, the common questions and topics are about which VC firms to approach, how to organize a pitch deck, how to calculate a TAM, what valuation to seek. Such questions generally are far too granular and premature, particularly in the early stages. Far more important questions are “what are my strengths in terms of generating social capital in an ecosystem that is new to me”, “what is my current social capital”, and “how do I synergize the two”?

Part II – Why F&F is the Best Place to Start

Friends & Family is often the best option for pre-seed because it is a more level playing field for you as the founder. Even if you decide not to raise from F&F, the exercise of thinking it through is useful, because you can easily construct an intuition about how this might go, but you have much less intuition about how to deal with VCs. You might even be able to turn active angels and VCs into your F&F, at least for the transaction of your pre-seed. I don’t have data to support this, but in my experience startups that start with F&F overwhelmingly have a higher success rate than those that don’t. While this is likely both cause and effect (raising from F&F helps a founder & founders who raise from F&F have other positive factors going for them) you can tap into BOTH advantages by utilizing the following advice.

Part III – MFN is the Ideal Pre-Seed Investment Term for Founders

An MFN agreement (most-favored nation) for pre-seed makes life for the founder much easier. In the example of Google’s pre-seed, which we will discuss, the MFN was done as a handshake (we will take whatever terms you later set), but such MFN terms can and are written into SAFEs and convertible notes- YC has a pre-written MFN version of its SAFE). I am not saying that in all, or even a majority, of cases, founders will be able to achieve MFN terms. But it is worth trying.

Part IV – Valuations in a Nutshell & Using a YC-SAFE Agreement

Before 2013, the instrument used for pre-seed and seed funding was the convertible note, which is essentially a loan that converts to equity upon Series A. A convertible note is orders of magnitude simpler to transact than a Series A preferred equity round, and thus was used to save expense of small financings. In 2013 YC created an even simpler instrument called the Simple Agreement for Future Equity (abbreviated as “safe” but more commonly capitalized as “SAFE”). The SAFE dispenses with the formal construct of the loan as the basis of the instrument and thus is essentially a convertible note minus the loan, interest, and maturity date.

In terms of valuation, the terms “pre-money” and “post-money” are at their core pretty simple, but the YC-SAFE uses them in convoluted ways.