SUB CATEGORIES OF Funding Your Startup

Series Seed Financing Documents

The Series Seed financing documents are a set of open source documents used for angel and seed investments. The documents were published in 2010 by Ted Wang, an attorney at the law firm of Fenwick & West, reportedly in collaboration with sophisticated angel investors to facilitate seed financings and improving legal documents used for seed financings, particularly as compared with Convertible Debt. It is a noble effort by Ted and the more efficient startup legal matters become, the more money startups will have to commit to building their businesses and creating jobs. Legal fees for a typical venture financing transaction in Silicon Valley are $35,000 to $75,000 for the startup’s counsel and $25,000 to $50,000 for investors’ counsel. Legal fees for a seed financing in Silicon Valley with the Series Seed documents are $12,500 to $25,000 for the startup’s counsel and $10,000 to $17,500 for the investors’ counsel (even though documents provide for a flat fee reimbursement of investors’ counsel of $10,000). Of course, these estimates are ranges and the fees could be higher or lower for a particular transaction.

The documents have been revised a few times and are now posted on GitHub in an effort to provide for collaborative improvement and allow users to change the documents and create versions of the documents acceptable to them. Of course, having multiple Series Seed templates somewhat negates the point of standard documents for which a startup and its seed investors agree to use.

On the website, Ted explains that the documents are best suited for seed investments below $3 million and his hope is to avoid 100 pages of legal terms (Ted says the Series Seed documents are 30 pages in length), many of which are not applicable until later in a startup’s life. Ted explains that “The Series Seed documents [are] considerably shorter and simpler than the status quo investment documents, designed to keep the most essential terms for the transaction and postpone the other terms for a later fundraising round where such an investment would be warranted.”

As with the NVCA financing agreements, the Series Seed documents are intended to be middle of the road and fair to the startup and its seed investors. Unlike the NVCA financing agreements, the documents are intended to be simple and we believe that they are.

Ted says that Baseline, Charles River Ventures, SV Angel, First Round Capital, Harrison Metal Capital, Mike Maples, Polaris Venture Partners, SoftTech VC and True Ventures have agreed to use the Series Seed Documents in certain of the their deals. We do not have any information about how often these investors do use the documents for their seed investments.

Series Seed vs. Convertible Debt

Most startups at the angel and seed stage must choose between priced equity documents, such as Series Seed, and Convertible Debt documents. Here are some thoughts about the choice.

  • Convertible Debt financings are cheaper on average than Series Seed financings.
  • Convertible Debt financings are faster to close on average than Series Seed financings.
  • There is no valuation negotiation with Convertible Debt, other than the conversion price cap. Valuation negotiations are difficult for early stage investments.
  • Convertible Debt does not provide investors any voting rights until they convert their Convertible Debt into capital stock.
  • Convertible Debt documents are more flexible in allowing investors to subscribe over time in multiple closings, which is how capital is typically raised from individual angel investors.
  • With Series Seed, angel investors typically have the right to appoint one board member. With Convertible Debt, investors typically do not have a right to appoint one board member.

We believe Convertible Debt documents with a price cap are a better choice than Series Seed documents. The financings are cheaper and easier to close and are more flexible, and the conversion price cap protects investors and compensates them for some of the risk of their investment (which we think is fair). Our data suggests that a significant majority of seed financings are structured as Convertible Debt financings.

If a startup’s pre-money valuation is above $5 million or a startup is raising over $2 million, the startup should consider the NVCA documents rather than Series Seed, Series AA or Convertible Debt. The Series Seed documents are best suited for true angel/seed deals, which are typically up to $1.5 million of capital raised at valuations below $5 million. Many angel investors expect NVCA level documents in exchange for their investment, in which case, as mentioned above, those who write the checks tend to make the rules.

Comparison Chart Below is an excellent summary prepared by attorneys from Perkins Coie LLP that describes the differences between Series AA, Series Seed and the NVCA Series A documents.