Angel and pre-seed money: how it works
Angel and pre-seed money buys a share of your company's future, so the first decision is not how much to raise but how much of the company you are willing to sell, and on what terms. The terms are usually simpler than founders fear and more important than they think.
General education, not legal, tax, or investment advice. Talk to a startup lawyer before you sign financing documents.
Who invests at this stage
Angels are individuals investing their own money, often operators who know your market. Pre-seed funds are small firms that invest before there is much revenue. Both are betting mostly on the team and the problem, with whatever early evidence you have.
The common instruments
Early rounds usually use one of three structures.
- A SAFE (simple agreement for future equity): the investor's money converts into shares at the next priced round, usually with a valuation cap or a discount.
- A convertible note: similar, but written as a loan that converts, with an interest rate and a maturity date.
- A priced round: the investor buys shares now at an agreed valuation, with more legal work and usually a board seat or other rights.
Dilution in plain terms
Every round sells part of the company. Model what you and your co-founders will own after this round and after the next one, including an option pool for future hires. Small differences in the cap or the pool add up over several rounds.
What to ask a lawyer
Use a lawyer who works with startups. Ask them to explain the cap, the discount, any pro rata or most-favored-nation terms, and what the documents mean for your next round. Standard documents exist for most of this, and a good startup lawyer will tell you when a term is unusual.
Key takeaways
- Angels and pre-seed funds bet mostly on the team and the problem.
- Know the difference between a SAFE, a convertible note, and a priced round.
- Model ownership across this round and the next, option pool included.
- Have a startup lawyer explain every term before you sign.
Questions founders ask
- Is a SAFE debt?
- No. A SAFE is a right to future shares, not a loan; it has no interest or maturity date. A convertible note is written as debt. A lawyer can explain how each converts in your case.
- Do angels take board seats?
- Usually not at this stage. Board seats more often come with a priced round led by a fund. Angels still expect regular updates.
Know how long the money lasts
Before you decide how much to raise, model runway and burn for the plan the money pays for. The calculators are free and show their formulas.
Related calculators
Free calculators for the numbers in this lesson, each with its formula and a worked example.