Memo on how to raise and retain the most control for seed stage companies.
Ok - you are raising a seed round. How do you ensure that you retain as much control as possible without getting the wool pulled over your eyes by investors?
Well, the first thing to realize is that investors do this every day. There is an informational asymmetry that they will use to their advantage. You will need to have your wits about you.
The second thing to realize is that this is a very special time in the company's history. Changes you will want to make later to the cap table will probably be impossible to make. So don't mess it up! However, with a little advice, you will be fine.
Here's what we managed to pull off, and what I recommend you do.
- [ ] Raise the seed round on a YC SAFE. Understand caps are basically treated as valuations. Raise as little as possible (1-2m) Don't sell more than 20% of your company if you can help it. A SAFE is better than a priced round at this stage because a priced round will cost you $40k in legal bills and won't let you do the following:
- [ ] Do NOT add to the board.
- [ ] After the round is closed, ask your lawyers to institute founders shares. This is only possible at this point because nobody else is on the cap table. Founders shares will give you 20x voting rights such that you can never be outvoted.
- [ ] Race to profitability (or cash flow positive) and stay there
- [ ] After a year or so, write your own term sheet and ask all the SAFE holders to convert. You have leverage here as they will want to be on the cap table.
And that is how you will control your destiny!