External seed funding for beginners!

Posted on 3rd January 2015 at 4:10pm by Carl Reader in Business

External funding is often confused with angel investment / venture capital, and although some angel investors / VC’s might offer seed funding, it is important to differentiate these when considering funding strategies for your business.

Typically, a seed funding round would be in exchange for equity, and because of the inherent risk of a start up, often the valuation can look extremely low from the entrepreneur’s perspective. It’s vital to remember that this is probably one of the riskier personal investment strategies from the investors perspective, as they may have little or no involvement in the business, and hence no control of the destiny of their investment.

When entering into such an arrangement, it’s vital to agree on the key terms of the deal, including whether the investors capital is repayable in any way, whether there is to be any “salary” for the entrepreneur before the profit is divided, and the general nature of day to day conduct between investor and entrepreneur. It’s also wise to agree on a structured exit strategy, with a pre-determined valuation mechanism, so that both parties have certainty of how the relationship will finish.

If you do consider seed investment, make sure that you take professional advice so that the investment can qualify for any relevant tax reliefs from the investors perspective, which will make the deal more attractive for them. Also be sure to take advice on the structure of the deal from a corporate finance expert, to prevent it from causing problems down the line if subsequent angel / venture capital funding is your intention.

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