The financial terrain of the world today is dynamic and evolving rapidly, requiring you to be strategic and intentional about decision-making. The past several years have shown that investing in equities and joining startups can be excellent ways to make money without working. However, if you do not do it correctly, you could join a startup at the wrong time or join a startup that won’t work out well for you. This article brings perspective to the question: what are the pros and cons of joining a pre-seed, seed, or series A startup?
It is important to note that when it comes to startups and funding, there are five distinct levels: pre-seed, seed, series A, series B, and Series C funding or round. The concept behind these rounds is that startups are named and grouped around their funding stage. Not all startups go through all five funding rounds, and different benefits are attached to getting equity from a startup in any of the rounds.
Let’s delve into the pros and cons of joining a pre-seed, seed vs. series without further ado.
What is Pre-seed Funding or Startup?
Pre-seed funding or a startup at the pre-seed round is a startup that is at the idea and conception stage. At this point, the company may not have started operations, but plans would have begun to be implemented to give the company a headstart. Any amount of money invested at this point in the company or startup is tagged as “pre-seed” funding.
The pre-seed funding round is usually the minor funding round because, at this point, the founder is only looking for capital to get the startup running. Usually, they can raise pre-seed funds by themselves or talk to close friends and relatives. Little paperwork is involved in this funding stage as the startup’s establishment could still be hanging in the balance.
Another way founders raise money for their startups in this stage is through crowdfunding platforms. Although, depending on how intentional the founder is, you could get equity from a pre-seed startup. However, founders are advised not to begin giving out equity at this point in their business lifecycle. If you can get a founder to sign you up for a percentage of equity, ensure it is appropriately documented and legally binding.
The Pros of Joining a Pre-Seed Startup
The following are some of the merits of joining a startup at the pre-seed level:
It offers more autonomy.
Joining a pre-seed startup allows you to function as you want to. Investing in a startup at this stage offers you the freedom and leverage to work in a way that suits you.
High Reward
Being a part of the company when it is just starting gives you a shot at enjoying a significant portion of the company’s profit when it is established.
Critical Player Status in the Company
Being a pre-seed investor gives you a voice in the company. As you grow with the company, your relevance increases, and if you sit on the board, your years with the company can be an added advantage.
The Cons of Joining a Pre-Seed Startup
While the benefits of joining a pre-seed startup may sound and look mouthwatering, here are some disadvantages of joining a startup at the pre-seed stage;
Slow Feedback
It takes years to learn whether your investment decisions were right or to confirm your hypotheses. The earliest investors wait for the longest for a definitive outcome.
Dominated by Series A, B, or C Investors
Angel and pre-seed investors are usually dominated when high-paying investors come along during the startup’s growth. This can cause a subtle form of dominance.
High Risk
As a pre-seed investor offers high reward prospects, it can also have an extended spectrum of high risks. When you invest in a pre-seed startup, you have no idea if the company will be profitable or not, so you have a choice: enjoy the high rewards or suffer the increased risks.
What is Seed Funding or Startup?
A startup in its seed round is raising money to officially begin business operations. Private investors provide this stage of financing, and they do so usually in exchange for an equity stake in the company or a share in the profits of a product. The seed round, or funding stage, is often seen as the first official stage of funding for startups. In this stage, a startup must offer something in exchange for investments, either in equities or shares.
The Pros of Joining a Seed Startup
Being the first official funding stage of a startup’s lifecycle, some of the advantages of investing in a seed startup include:
Less risk in comparison to pre-seed startups
When a business gets to its seed startup stage, you can be sure of having fewer risks. There is a little more certainty with investing in a seed startup than with a startup still at the imagination and conception stage.
A significant percentage of equity
In the seed stage, many founders are generous with equity, usually because they are ignorant or desperate to get the funding they need. As a seed stage investor, you can get a significant percentage of a startup’s equity and enjoy an elaborate portion of the control.
Business growth and scaling adventures
This may not be advantageous to most people, but it is suitable for others. Investing in a seed startup comes with many challenges and opportunities; if you are up for them, it could be a great adventure.
Recognition
When you join a seed startup, your work in the brand will reflect in a greater context. If you stay with the company for a long time, you will better appreciate your work, and your input will be valued more. You would become recognized not because of your name alone but your contributions.
Exposure and learning
Being a seed startup offers a lot of exposure and learning, unlike when you invest in companies at series B and C funding stages, where you only have to sit on the board of directors.
The Cons of Joining a Seed Startup
Slow feedback on investments
The seed startup stage is not too far from the pre-seed location. Most companies skip the pre-seed step and just jump to the seed stage. Whichever you invest in, seed or pre-seed, it will take a long time before you are sure you made the right or wrong investment.
It could result in a severe economic downturn.
A budding startup will not be as productive as a stable company, which is normal. You should expect some economic downtime as a seed investor.
Struggle to balance work and life
All hands are usually on deck at the beginning of a startup’s lifecycle, and angel investors can have a hard time balancing working to grow the startup and other aspects of their life.
Grossly uncertain
Seed investing is termed the riskiest form of financing. Investing in a startup at the seed stage is difficult, as an investor is merely investing in a company or idea and is not sure if it will produce the dividends the founder promise.
What is a Series A startup?
A series A startup has completed its first official funding round and has achieved certain milestones. Series A funding is the second stage for startups according to the four official levels of startup fundraising and the first stage of venture capital funding. One of the significant differences between series A funding and seed investing is that the former deals with raising money from venture capitalists and not just individuals.
As usual, a company gets or attracts funding from investors in exchange for equity. However, companies can offer preferred shares, and venture capitalists can also make such requests. The concept of preferred shares is that a company will give VCs a fixed percentage of dividends. Due to the large scale of the investments that may go on at this stage, it is typical to find a VC demanding a particular fixed compensation.
Let’s go into details of what benefits you stand to gain by being a series A investor.
The Pros of Joining a Series A startup
Less risk
As discussed in this article, Series A startups offer the least risks among the three levels of startup funding. At this point in a startup’s life, they know what steps to take and the numbers back up whatever projection they postulate. It is hard to imagine a losing situation when you invest in a startup that has passed the pre-seed and seed funding stages.
More equity
As a venture capitalist investing in a Series A, you have a chance to enjoy more preferred shares from the company. Your investments in the company will give you a chance at earning higher equity.
Dominance and control
Venture firms investing in a startup often enjoy more control because their preferred shares or equities give them more dominance than the average seed investor.
Clear expectations
A startup that has reached the series A stage of funding must have built some authority and a good understanding of the market. Such a company will have the numbers, skills, and human resources to take it from where it is to where it wants to be with the right amount of funding. On this note, it is easy to trust investing in a series—a startup.
Consistent revenue
A series A investor will enjoy the fruits of founders, angels, seeds, and pre-seed investors. They are investing in the startup when it is experiencing a flow of revenue. Their investment will further improve the company’s revenue generation, and since they have a higher equity stake, they will enjoy more income.
Leverage on the existing network and large teams
As a series A investor, you can leverage existing networks and enjoy the opportunity to work with large teams. There are many benefits of working in an environment like this, and you can enjoy increased security working in such conditions.
Cons of Joining a Series A Startup
While there are significant points under the benefits of joining a series A startup, certain demerits are worthy of note. They include:
Not much room to explore.
As a series A investor, there is not enough room to explore as everything is set already. You can only go by what is already working for the startup.
Long-term security concerns
Nothing is certain even at this stage. While looking at how much VCs invest in startups at this stage, there are reasons for concern over the security of their investments.
Overall, investing in a Series A startup is better because of the lower risk, better certainty, and equity percentage you can enjoy at this stage. For a breakdown of the pros and cons of joining a pre-seed, seed, or series A startup, see the table below:
Frequently Asked Questions
What is the difference between a seed and Series A startup?
Seed funding is the first official investment for a startup; private investors provide these funds for a share of the startup’s equity. While the series A startup has passed the seed stage, achieved several milestones, and is ready for its first stage of venture capitalist investments.
What is the best stage to join a startup?
The best stage to join a startup is when the company is at series A or any step above. At this stage, investors enjoy more equity, fewer risks, higher rewards, better job security, and dominance. If you ever had to join a startup, joining when it is in series A is the best time.
What is the difference between pre-seed and seed investment?
Pre-seed investment can be defined as investments that are put into a startup at the ideation and conception stage. At the pre-seed stage, investors only invest in the startup’s idea and may not be offered equity. On the other hand, seed investment is the first official investment in a startup where investors enjoy equity from the company for their contribution.
How much equity should I give pre-seed investors?
Pre-seed investors are usually family and friends. While their contributions are essential, your startup is still too young to begin giving out equity. Avoid the equity percentages when you are still at the pre-seed stage. If you have to give equity to pre-seed investors, it should be within the range of 5% to 10% of equity.
Is it safe to join a Series A startup?
Joining a series A startup is safer than joining a startup at the pre-seed or seed stage. Series A startups offer more security, fewer risks, and better equity than pre-seed and seed investments. However, most series A startups fail more than they succeed. There is no guarantee, but in terms of priority, you will do better by joining a series A startup.
Should I join a seed stage startup?
If you want to enjoy more financial gains, adventures, opportunities, and exposure, you should join a seed-stage startup. One red flag with joining a seed stage startup is the economic instability you may have to undergo. Most of the time, seed stage investors must let go of their salary and profit to ensure the company stays on track.
Conclusion
The primary benefit of joining a pre-seed or seed company is that you can earn a more significant percentage of equity for the time, money, and effort invested. If you have the chance to join a pre-seed or seed startup, it is worth considering. However, joining a series A startup holds more advantages than the other two.
It is essential to note that the best time to join a startup is when you believe in the company’s vision and are sure that investing in it is a great idea. All startups have the same potential of failing or succeeding, and it does not depend on what stage the startup is at.
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