Seed money – often referred to as seed funding or seed capital – is an initial investment that entrepreneurs or founders use to start a business or a new project, and cover initial operating expenses. This type of funding is usually a relatively small amount of capital compared to other sources of startup funding.

Seed money can come from a variety of sources. These include the founders themselves, friends and family, angel investors and early-stage venture capital firms. The amount of seed money required can vary significantly depending on the nature of the business and its initial needs. Seed money allows entrepreneurs to move from the idea stage to a tangible business or product. From there, they can demonstrate the feasibility and potential of their business to attract further investment.

After the seed funding stage, a startup may seek additional funding rounds – such as Series A, B and C – which usually involve larger amounts of capital and may come from venture capital firms, private equity or other investors.

Below, we'll describe what early-stage founders need to know about how to raise seed money, including where to seek it, how to choose the right funding source for specific business goals, how to close the deal and how to spend seed money wisely.

What's in this article?

• How seed funding is different from other types of funding
  
• Why seed funding is important for startups
  
• Sources of seed money
  
• When to raise seed money for a startup
  
• How to raise seed money for a startup
  
• How to negotiate seed funding with investors
  
• Best practices for managing seed money
  
• How Stripe Atlas can help
  

How seed funding differs from other types of funding

Startups go through different stages during their lifecycle. While each stage of development (and the funding round that accompanies it) can vary by the individual startup, there are general traits that define each stage.

The seed stage is arguably the most volatile – and exciting – time for startups. Here's how seed funding differs from other types of funding that might come later:

• Purpose and use: Seed funding is primarily aimed at turning an idea into a viable business concept. This often includes conducting market research, developing the product and building a team. In contrast, later rounds of funding – such as Series A, B or C – focus more on scaling the business, expanding market reach, enhancing the product or entering new markets.

• Amount: Generally, the amount raised during the seed stage is much smaller compared to later funding rounds. The average seed round in January 2025 was just $4.4 million, compared to an average Series A round of $16.6 million. It's usually enough to prove a concept or reach a significant milestone. As the startup grows and shows its potential, it can attract larger investments in subsequent rounds.

• Type of investors: Seed funding often comes from the founders themselves, friends, family and angel investors. These are individuals or groups willing to take a risk on a very early-stage idea. In contrast, later stages attract institutional investors such as venture capital firms, which invest larger amounts of money into more established companies with a proven track record. Venture capital firms invested $368.3 billion across 35,684 deals globally in 2024.

• Equity and valuation: During the seed stage, the valuation of the startup might not be well-established yet. As a result, investors can receive significant equity for a relatively small amount of money. In later stages, as the company's valuation increases, it will give away smaller portions of equity for larger amounts of capital. Every deal is different, but as a general rule, founders should plan to sell approximately 20% of equity in the seed round.

• Risk and reward: Seed funding is typically considered higher risk because the business model and market fit may not be fully tested. But there is potential for high reward, as early investors often get a more significant equity stake. As the startup matures and moves into later funding rounds, the risk decreases, and so does the potential reward in terms of equity share.

• Terms and conditions: Seed funding agreements usually include fewer terms and conditions compared to later funding rounds. As startups grow and attract more sophisticated investors, the complexity of funding agreements typically increases, with more stringent terms and conditions.

Why seed funding is important for startups

While every funding round is important, seed funding may make more of an impact for startups than future investment rounds – even though the investment is often smaller. Seed funding can influence a startup's trajectory by:

• Validating the business idea: Seed funding provides the necessary capital to validate a startup's concept. This stage is about proving that there's a market need for the product or service, which is important for attracting future investors. Without seed funding, many ideas would never progress further.

• Building the foundation: This initial capital allows startups to set up important operations, hire key team members and begin initial product development.

• Facilitating early growth and development: With seed funding, startups can focus on early growth, refine their product or service and establish a customer base. This early growth demonstrates the potential to scale and for long-term success.

• Attracting future funding opportunities: A successful seed round brings in capital and validates the startup with future investors. It often leads to more substantial funding rounds such as Series A, as it demonstrates that the startup has moved beyond the concept stage and has a viable, growing business.

• Gaining partners and mentors: Investors in the seed stage often bring more than just capital; they can be invaluable sources of advice, industry connections and mentorship. This guidance can be useful for navigating the early challenges of running a startup.

• Allowing flexibility and autonomy: Seed funding usually comes with fewer conditions compared to later rounds. Startups have more freedom to experiment and pivot if necessary in this stage, without the pressure of large-scale investor expectations and intricate agreements.

• Establishing credibility: Seed funding is often seen as a stamp of approval, enhancing the credibility of the startup in the eyes of customers, partners and future investors. It's a sign that knowledgeable individuals or entities believe in the startup's potential.

Sources of seed money

Where early funding comes from will influence the first phase of the startup's life – and potentially affect its future. This is mostly due to significant differences in the terms of various funding agreements and what kind of relationship founders will have with the investors.

Before you start actively seeking seed money from any source, weigh up your options carefully. Make sure that you're choosing a funding source that maximises the benefits that you value the most, while minimising the drawbacks and risks that you're most averse to. Here's an overview of potential seed funding sources:

Angel investors

• What they are: Angel investors are affluent individuals who provide capital for a business startup, usually in exchange for convertible debt or ownership equity. They often are entrepreneurs themselves or retired business executives.

• Suitability: Ideal for early stage startups that need guidance and networking opportunities.

Pros

• Personalised attention and mentorship

• Flexible terms and less formal processes

• Valuable networking opportunities

Cons

• Limited funding capacity

• May have less business acumen compared to professional investors

• Possible conflicts in business direction or strategy

Venture capitalists (VCs)

• What they are: Venture capitalists are professional groups that manage pooled investments in high-growth startups in exchange for equity.

• Suitability: Best for startups with high growth potential and a clear path to substantial revenue and profitability.

Pros

• Access to significant capital

• Expertise in scaling businesses

• Strong networking opportunities

Cons

• Rigorous vetting process and competitive

• Loss of some control and equity

• Pressure to deliver high growth and returns

Crowdfunding

• What it is: Crowdfunding involves raising small amounts of money from a large number of people, typically online.

• Suitability: Suitable for consumer-focused startups, innovative products or companies with a compelling story or social angle.

Pros

• Access to a broad audience

• Validation of the business concept

• Nondilutive financing (in most cases)

Cons

• Time-consuming and uncertain

• Requires compelling marketing

• May face intellectual property exposure

Bootstrapping

• What it is: Bootstrapping is when entrepreneurs start a business with little capital, relying on personal finances and the company's revenue.

• Suitability: Best for businesses that can be started with minimal capital and founders who want full control.

Pros

• Full control over the business

• No dilution of equity

• Encourages lean operations and resourcefulness

Cons

• Limited resources can hinder growth

• Personal financial risk

• Can be slow to scale

Grants

• What they are: Grants are non-repayable funds or products that grant makers – often a government department, corporation, foundation or trust – disburse to a recipient.

• Suitability: Suitable for research-oriented, social, educational or eco-friendly startups, or those in specific industries favoured by grant programs.

Pros

• Nondilutive funding

• Adds credibility

• Can fund specific projects

Cons

• Highly competitive and stringent criteria

• Often limited in scope and scale

• Time-consuming application process

Comparing sources of seed money

When to raise seed money for a startup

You should raise seed money when you are clear on what your startup offers and what specific resources it needs to grow. You should have a functional business plan, a working prototype or minimum viable product (MVP) and straightforward ideas.

A company that's ready to raise seed money is generally in its early stages, but that doesn't mean it's the team's first day on the job. Before raising seed money, you should have put enough thought and practice into your business model to be taken seriously by potential funders and mentors. It's OK – great, even – to dream big at this stage, but pitches and business plans should be grounded. Startup owners should be ready to show potential investors that they've mapped out their plans based on realistic numbers and capabilities.

How to raise seed money for a startup

Startups must prepare before they contact their first potential investors for seed funding. Here's what you need to do at the beginning of the fundraising process:

• Refine your business idea: Before approaching investors, ensure your business idea is clear, innovative and addresses a genuine market need. This involves conducting thorough market research, understanding your target audience and developing a unique value proposition.

• Formulate a solid business plan: A well-structured business plan should outline your business model, market analysis, operational strategy, financial projections and long-term goals. This document will be a roadmap for your business and a persuasive tool for potential investors.

• Develop a prototype or an MVP: If applicable, develop a prototype or an MVP. This tangible representation of your idea shows investors that you've moved beyond the conceptual stage and have something that works and can be tested in the market.

• Build a strong team: Investors don't just invest in ideas – they invest in people. Assemble a team with diverse skills and experiences. Demonstrating that you have a capable team in place can significantly boost investor confidence in your startup.

• Incorporate financial planning: Have a clear understanding of how much funding you need and how you plan to use it. Be ready to explain your financial model and projections, showing a clear path to profitability or growth.

• Create an investor pitch: Develop a compelling pitch that succinctly explains your business idea, market opportunity, team and financials. Your pitch should be engaging, clear and concise, to attract the attention of potential investors.

• Identify potential investors: Research and identify potential investors who are a good fit for your startup. These could include angel investors, venture capitalists, incubators or accelerators. Understand their investment thesis and portfolio to customise your approach.

• Network and build relationships: Start building relationships within the startup environment. Attend industry events, join startup communities and engage on platforms where you can meet potential investors and mentors.

• Ensure legal and regulatory compliance: Ensure your startup complies with all legal and regulatory requirements. This might include incorporating your business, trademarking your brand or addressing any other industry-specific regulations.

• Prepare for due diligence: Investors will conduct thorough due diligence before investing. Organise all of your legal, financial and business documents so they are ready for review.

How to negotiate seed funding with investors

Potential investors will negotiate on their own behalf or on behalf of the investors in their fund. Here's how to successfully advocate for yourself during the negotiation:

• Understand the investor's perspective: Investors are looking for a return on their investment. They might love your idea, but ultimately they're assessing risk versus reward. Recognising this will help you frame your arguments and understand their counterpoints.

• Know your worth: Before entering any negotiation, have a clear understanding of your startup's valuation. Beyond the numbers, this includes your business's potential, the market and how much you've already achieved. Be prepared to defend your valuation with data and confidence.

• Listen to the investor: Good negotiation is rooted in effective communication. This means actively listening to what the investor is saying and responding thoughtfully. It's not about pushing your agenda – it's about finding common ground and a deal that benefits both parties.

• Be prepared to walk away: One of your biggest strengths in any negotiation is the willingness to walk away. This doesn't mean being confrontational, but rather being firm about what you need for your startup to succeed. If an investor's terms undervalue your company or don't align with your vision, be prepared to say no.

• Be flexible, within reason: While it's important to know what you want, being too rigid can be a deal-breaker. Have clear boundaries, but be flexible within your boundaries. This might mean negotiating on equity, the structure of the investment or other terms.

• Value long-term relationships: Remember, you're potentially entering into a long-term relationship with your investor. Approach negotiations with respect and the desire for partnership. The goal is not just to secure funding, but also to build a relationship that will support your startup's growth.

• Pay attention to the details: Pay close attention to the terms of the deal – not just the headline figures. This includes understanding clauses such as liquidation preferences, anti-dilution provisions and board rights. It's often worth obtaining legal advice to ensure you fully understand the implications of these terms.

• Communicate post-negotiation: After a successful negotiation, maintain open lines of communication with your investors. Keeping them informed and involved (to an appropriate degree) can build a strong, ongoing relationship.

Best practices for managing seed money

Once you've secured your seed funding, you need to decide how you use it. Revisit your business plan and let it guide how you prioritise your spending. Exercise frugality without compromising on quality. A significant portion of your seed money should be used to refine your product or service. When you're ready to invest in marketing, choose cost-effective, targeted marketing strategies that offer the highest return on investment.

When you're ready to grow the company, invest in talent wisely. Your team is your most valuable asset, so hire skilled individuals who share your vision, but remember that overhiring too early can quickly deplete your resources.

Maintain a cash reserve for unforeseen expenses or times when the business hits a rough patch. Monitor your cash flow to ensure your startup stays financially healthy, and reinvest profits into the business. If you hit a hurdle, seek advice from mentors or financial advisors, and be flexible and ready to change your strategy if necessary.

How Stripe Atlas can help

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