What’s the best structure to raise seed capital?

TLDR: Most startup companies use convertible notes or SAFEs to raise their initial capital.

In most cases, the best way for a company to obtain its first outside capital, or seed investment, is by issuing simple debt or debt-like securities, such as simple agreements for future equity (SAFEs), that require little to no negotiation between the company and the investor.

Convertible promissory notes and SAFEs are the most commonly used securities for raising the Company’s initial capital. There are fairly standard versions of these documents that have gained acceptance among the venture community in the U.S. These forms are generally viewed as providing a fair balance between company-friendly and investor-friendly terms. A leading startup accelerator, Y Combinator, has posted forms of SAFEs on its website which can be downloaded and used by founders. However, because SAFEs are newer, some investors may be less familiar with SAFEs in which case convertible notes may be the best path forward.

Once the company and the investors have agreed on the business terms, such as the investment amount and any key economic terms, a company can frequently use these instruments without having to significantly negotiate the finer legal points, which allows for savings on legal fees and quick closings. Companies should be aware of the need to comply with the terms of the documents, such as obtaining board approval and also make any necessary securities filings, etc.

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