Unlike the pre-seed round where convertible notes or Simple Agreements for Future Equity (“SAFE”) are commonly used, Series Seed investors are purchasing preferred stock of the company and thereby becoming partial owners of the company. They are also entitled to key shareholder rights and additional shareholder rights specified in the Series Seed preferred stock documents.
Preferred stock differs from common stock, which most founders hold, because preferred stock comes with negotiated special rights or preferences designed to protect investors for the heightened risk they take on in investing in an early-stage company. Typically, the preferences in Series Seed Preferred Stock include some liquidation preference(s), a right to board seat, some participation rights and future rights, all of which will be explained in detail below.
Historically, purchasers of stock in seed stage startups were individual angel investors. There are a number of professional investors targeting only seed stage companies, including seed funds (e.g., SV Angel and First Round Capital), professional angels (e.g., Ron Conway), and seed funding platforms (e.g., AngelList). However, recently, more established venture capital firms that have only invested in Series A or later are investing in seed rounds.
One upside of the increased interest in seed rounds is that rather than having 50 investors that are investing a small amount, a few investors can cut larger checks and cover the entire round. From the entrepreneur’s perspective, it is preferable to have a few larger investors fill out the round rather than a large group of smaller investors. Having fewer investors means entrepreneurs can save time and effort in investor relationship management, which can be time-consuming and expensive.
In the Series Seed term sheet, the securities to issue are as follows:
Securities to Issue: Shares of Series Seed Preferred Stock of the Company (the “Series Seed”).
Thus the startup will be issuing preferred shares, which will have a number of preferences detailed below over the common shares held by the founders and employees of the startup