☕️ Navigating Seed Round Costs + Strategy

April Tech Breakfast Club Dates Announced (Back to the Gundo)

Author

Morgan Barrett
March 18, 2024

👋 Hi, Breakfast Club Members!

I’m recovering from SXSW - shoutout to Brett Perlmutter from Bulletpitch for cohosting Tech Breakfast Club with me.

I’m excited for LA and NYC Tech Breakfast Club this week. We’re getting hundreds of signups but only have 50 spots - sorry! Priority goes to founders with traction (and if your early stage startup is crushing it and I’ve overlooked you - let me know). I’ll do some bigger events coming up in New York for Tech Week.

I’m excited for long time Tech Breakfast Club member Calvin Chen (founder of Kopia) to present at YC Demo Day.

Also, thank you to Clerky (how the best startups get legal paperwork done) for sponsoring this newsletter. Respond to this newsletter if you’re ready to form your startup - TBC members (you) get $100 off Clerky’s already low price for setting up your company.

MIAMI, NEW YORK, LOS ANGELES
Tech Breakfast Club Event Signups

Teaming up with Litquidity to celebrate the launch of Lit VC in Miami April 8th - during Miami Tech Week. (Not a breakfast)

Tech Breakfast Club NYC April 18th with Kylie Bourjaily from InnoCrew and Laura Hamilton/Wil Hagen from Partner Path.

El Segundo Tech Breakfast Club April 24th

YC Demo Day April 3rd
Calvin Chen & Kopia

Calvin is cracked - he sold his first e-commerce software startup in high school for $9m. Now he’s built the leading diffusion model for virtual try-on, closing $30k in ARR since launching a week ago. He’s a sales machine. I like his Stanford dropout cofounder, Aadi, too.

If you invest in e-commerce software, I’d be happy to connect you.

And if you’re watching Demo Day - be sure to cheer on Kopia.

Clerky 🤝 Tech Breakfast Club

Whenever a founder comes to me for legal services and I find out that they’ve incorporated with Clerky, I breathe a sigh of relief. I love Clerky and trust their documents. As a lawyer, it saves me a ton of headaches if you just use Clerky and get formation done right the first time.

I’m beyond excited to announce that Clerky and Tech Breakfast Club are partners. When you’re ready to start your company, email me (or reply to any TBC newsletter), and I’ll invite you to a special Clerky portal - as a Tech Breakfast Club member, you’ll save $100 on Clerky’s already reasonable fees.

I’m secretly a lawyer
Seed Round Costs + Strategy

When it comes time to raise your seed round you have a couple choices to make.

You can use SAFEs. SAFEs are certainly cheaper to close on and negotiate. Their downside is uncertainty. They don’t harden economics or governance rights the way an equity round does. In a lot of cases that’s completely fine but many startups, especially in this post-ZIRP economic downturn, are feeling these downsides.

If you need to raise more money in hard times, you’ll run into the harsh anti-dilution mechanics of the YC SAFE that impose significant dilution on founders. Doing a bit more thinking and structuring up-front could save potentially tens of millions of dollars (in the long run) worth of dilution.

A SAFE round probably runs $2.5k to $5k in legal fees if you’re using a lean boutique like Optimal (double that for a legacy big law firm).

A seed equity round using the NVCA docs runs around $25k-$45k (2x that at a firm like Cooley or Gunderson). Most of this cost comes from the more complex negotiation, structuring, drafting, etc.

There’s a third option, though. Simplified seed equity rounds involve less negotiating so typically range from $15k-$25k (if using a lean boutique).

Besides the additional cost (which may well be worth it, depending on context) some of the most common objections to seed equity rounds are:

It’ll take months to close – not true, they can go from term sheet to close in 2 weeks. A month is reasonable.

You have to close all investors at once – not true, you can do rolling closings.

You have to give investors a board seat – not true, you don’t.

Where you land on deal structure has millions of dollars in implications long-term and is worth deep consideration.

About Morgan
Morgan, besides running Tech Breakfast Club, is a Startup Lawyer at Optimal, an elite lean boutique startup law firm repping clients funded by a16z, Sequoia, Kleiner, Accel, and countless other VCs. He works with clients from formation to exit, in collaboration with Optimal’s partners.

What do you like better? Interviews with founders? Legal Stuff? A mix? Let me know - reply to the newsletter