Seed Capital

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What is 'Seed Capital'

Seed capital is the initial capital used when starting a business, often coming from the founders' personal assets, friends or family, for covering initial operating expenses and attracting venture capitalists. This type of funding is often obtained in exchange for an equity stake in the enterprise, although with less formal contractual overhead than standard equity financing. Because banks and venture capital investors view seed capital as an "at risk" investment by the promoters of a new venture, capital providers may wait until a business is more established before making larger investments of venture capital funding.

BREAKING DOWN 'Seed Capital'

Seed capital, venture capital, mezzanine funding and an initial public offering are the stages involved in financing startups. Seed capital is typically provided for market research, product development, prototype production or other early-stage operations. The business owner’s skills, business capabilities and track record, along with the product’s or service’s benefits, help determine how much seed capital investors may contribute to a startup.

Professional Angel Investors

Professional angel investors actively work with entrepreneurs in pooling resources and growing startups. These investors enjoy hands-on interaction while helping develop a company’s daily operations. Professional angel investors typically provide seed money through either providing a loan or by buying equity in the company.

When raising under $1 million, professional angel investors typically provide a seed loan. The paperwork is relatively straightforward and involves less-costly legal fees than seed equity. Interest rates tend to be lower, and the terms involve no restrictions. Also, future equity financing may be converted at a lower rate with a seed loan. In some cases, warrants may be issued so the professional angel investor may participate in company growth.

In contrast, when raising more than $1 million, professional angel investors typically utilize seed equity. Seed equity involves the investors purchasing preferred stock with voting rights and becoming co-owners of the startup. Seed equity transactions are more complex and expensive than those of seed loans, but may be viewed as more beneficial to investors when more seed money is needed.

Example of Seed Money

In April 2016, Google announced it was providing seed money to the Center for Resource Solutions for setting up renewable energy certification programs in Asia. The Center’s goal is helping businesses buy power from clean sources. The program was set to begin in Taiwan by establishing certificates for renewable energy. The funding came about as a result of Google wanting to power its global data centers, and eventually its operations, with renewable energy.

In December 2015, Google announced it was moving forward on five deals involving buying output from power plants in the United States, Sweden and Chile. Google obtained 2 gigawatts of renewable energy, expanding the company’s previous clean-power purchases of 781 megawatts of solar and wind power that will remain in effect for 10 to 20 years. The subsequent purchase in April added to Google’s power-purchase portfolio.

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