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Common Pitfalls of Raising Capital at the Seed Stage

Posted by Adam Blaier | Aug 06, 2019 | 0Comments

For startups, raising money at the seed stage can be difficult, but this is probably when your business needs money the most. If your startup finds a venture capitalist ("VC") or angel investor ("Angel") willing to invest in your startup at the seed stage, you should avoid these four common pitfalls that can derail the deal. The Law Office of Elliott J. Brown can ensure that you remain in compliance with state, federal laws while you seek funding for your startup at the seed stage and beyond.

Weak or No Team

Regardless of how great your ideas are, these ideas will never become a reality without a strong team to execute them. VCs and Angel's will want to know about you and your team. Assembling a weak team –or no team at all –will make your startup unattractive to investors, and you could lose the opportunity to get critical early-stage funding. Have a strong team in place before you start seeking investors.

A strong team includes people who have complementary skill sets and a passion for your business. Every person on your management team should have a unique job title and understand what they contribute. If your initial idea does not work, a strong team can pivot and continue to grow your business with new ideas, which gives investors the confidence to invest in your startup.

Founders With Unequal Equity

Investors will want access to your cap table to see that your team is financially motivated to make your startup succeed. At the seed stage, founders should have relatively equal equity in the business. Any major stockholders with more than 20 percent of the shares need to be an active part of the business. 

Presenting a Complicated Pitch

Your pitch deck should be succinct, focusing on how your product or service solves a specific problem, what your market is, and what your financials are. Include several scenario analyses so your investors can see that you have considered multiple outcomes. Spending too much time on other, less-important issues, may make the investors lose interest.

Presenting your pitch before you are fully prepared may also drive your investors away. Also, make sure you have your charter documents, equity agreements, and your financial records easily accessible so your investors can review them.

Over or Under Valuing Your Business

Overvaluing your business unnecessarily dilutes your investor's ownership rights, which can make your early investors unhappy if they discover this. Undervaluing your business means you give too much ownership to investors, leaving less for yourself and teammates. 

Hire an Experienced Startup Attorney

Finding VCs and angel investors for your startup can be difficult and time-consuming, but by avoiding common pitfalls, you could successfully raise capital at the seed stage. Your startup must follow all applicable state, federal, and securities laws while raising capital at the seed stage and beyond, and hiring an experienced startup attorney will ensure that you remain compliant.

Call the Law Office of Elliott J. Brown today at (732) 490-8200 or contact us online to learn how we can help your business today.

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Sample

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