Glossary
What Is Seed Funding?
Updated · Team Fonda
Short answer
Seed funding is an early round of investment that a startup raises once it has a first product and some sign that customers want it. Investors give the company money in exchange for a share of ownership, and the company uses it to find a repeatable way to win and keep customers.
Key takeaways
- Seed comes after pre-seed and before Series A.
- Investors want evidence of demand: users, revenue or strong engagement.
- Post-money valuation = pre-money valuation + amount raised.
- The share you sell is the amount raised divided by the post-money valuation.
What seed funding means in plain words
The name comes from planting: this is the money that lets a young company start to grow. By the seed stage you have usually built a working product, even a simple one, and have some customers using it. What you do not have yet is a reliable, repeatable way to get many more.
Seed money pays for that search. Typical uses are a first few hires, product work based on customer feedback and early marketing tests.
How a seed round works
Seed investors include angel investors, seed funds and some larger venture capital firms. A round can be raised on a SAFE or as a priced round, where investors buy new shares at a set price and the terms are written in a term sheet.
Formula
Post-money valuation = pre-money valuation + amount raised. Investor ownership = amount raised / post-money valuation.
Pre-money is what the company is agreed to be worth before the new money goes in. The difference between the two matters a lot, and it is explained in pre-money vs post-money valuation.
A worked example
This is an illustration with made-up numbers, not a typical round. Say you and your co-founder each own half of the company. You raise $1,000,000 at a $4,000,000 pre-money valuation.
| Before the round | After the round | |
|---|---|---|
| Company valuation | $4,000,000 (pre-money) | $5,000,000 (post-money) |
| You | 50% | 40% |
| Co-founder | 50% | 40% |
| Seed investors | 0% | 20% |
Example only. Investor share: $1,000,000 / $5,000,000 = 20%.
Your share fell from 50% to 40%. That drop is called equity dilution. If investors also ask you to set aside shares for future employees, your share falls further. Try your own numbers in the equity dilution calculator.
What seed investors look for
- Traction. Growth in users or revenue over several months. See traction.
- Signs of product-market fit. Customers who stay, come back and tell others.
- Early unit economics. What it costs to win a customer and what that customer is worth.
- A large enough market. A bottom-up estimate, explained in how to calculate TAM, SAM and SOM.
- A plan for the money. What milestones this round pays for and what they prove.
Why it matters for a first-time founder
Seed funding sits a long way into the journey: after you have tested the idea, launched something and found your first customers. If you are still at the idea stage, the useful step now is to find your first 10 customers, because that is the evidence a seed round is built on.
Investors will ask for a deck and often a written plan. A business plan with sourced market numbers gives you the answers to their standard questions in one place.
Common mistakes
- Fixing on valuation and ignoring the other terms. Board seats, investor rights and the size of the employee share pool also shape what you keep.
- Forgetting earlier SAFEs and notes. They convert into shares at this round and add to your dilution.
- Raising with only a few weeks of cash left. A founder who must close has little room to negotiate. Check your runway first.
- Spending the money on growth before customers stay. Paying to pour users into a product they leave is costly.
- Signing without a lawyer. Documents and rules differ by country. Have a startup lawyer read everything.
Frequently asked questions
How much of my company do I give up in a seed round?
It depends on how much you raise and at what valuation. The share sold equals the amount raised divided by the post-money valuation. Work it out for your own case before you start talks, so you know what each offer means for your ownership.
Is seed funding a loan?
No. Seed investors buy a share of the company, or the right to one later. You do not repay the money if the company fails, but the investors own part of whatever the company becomes.
What comes after seed funding?
The next named round is Series A. It is raised once the company has shown it can win customers in a repeatable way and needs money to do so at a larger size.
Can I skip seed funding?
Yes. Many businesses grow from their own revenue and never raise a round. Raising makes sense when the money lets you reach something that profit alone would take far too long to pay for.