Loading the player...

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.

RELATED TERMS
  1. Venture Capital

    Venture Capital is money, technical or managerial expertise provided ...
  2. Startup Capital

    Startup capital is money required to launch a new business, whether ...
  3. A Round Financing

    When startups pursue the next level of funding after seed capital, ...
  4. Equity Financing

    If a company needs capital to support its growth, it might seek ...
  5. Alphabet Rounds

    Alphabet rounds are the first rounds of financing for a startup ...
  6. Capital Funding

    Capital funding is the money that lenders and equity holders ...
Related Articles
  1. Investing

    The Risk And Rewards Of Investing In Startups (GOOG)

    Investing in startups is a very risky business but can reward investors greatly if and when they do pay off.
  2. Tech

    How To Keep Your IOTA Cryptocurrency, MIOTA, Safe

    IOTA's network was recently hacked and $4 million of its cryptocurrency, MIOTA, was stolen. Here's how to avoid that.
  3. Retirement

    Should You Use a 401(k) to Fund a Start-Up?

    There are pros and cons to using your 401(k) to fund a start-up.
  4. Managing Wealth

    When Your Business Needs Money: Angel Investors

    If you have a promising business that needs a boost, you may be able to put your faith in these wealthy investors.
  5. Small Business

    Who are Venture Capitalists?

    Venture capital investment firms can provide the seed money for high-risk, start-up companies. People called venture capitalists run these firms, and make the investment decisions.
  6. Small Business

    How To Use Crowdfunding To Start Your Business

    It may be difficult to raise enough money needed for a start-up. However, there's always the option of pooling together funds with a group of people.
  7. Small Business

    Does Your Startup Need Venture Capital Money?

    Venture capital funding provides capital to grow a business. However, entrepreneurs will also lose some control over business decisions.
  8. Small Business

    Small Business Financing: Debt Or Equity?

    There are two sources of financing for small businesses: debt and equity financing. This article explains both.
  9. Trading

    5 Ways to Get Funding For Your Billion-Dollar Idea (FB)

    Understand how current billion-dollar companies gone about funding. Learn about five funding strategies to fund a billion dollar idea.
  10. Investing

    How Social Venture Capital Is Changing the World

    Learn what social venture capital is and the ways in which it differs from traditional venture capital. Identify two leading social venture capital firms.
RELATED FAQS
  1. What exactly is a startup?

    Do you want to form your own startup when you have a new business idea? Here is everything you need to know about the startup. ... Read Answer >>
  2. What is the difference between financial capital and economic capital?

    Read about the differences between types of financial capital, which companies use to raise money, and economic capital models ... Read Answer >>
  3. Why would a company use a form of long-term debt to capitalize operations versus ...

    Learn about the different consequences of using long-term debt versus equity to raise capital for business activity, and ... Read Answer >>
Trading Center