Seed Funding for Startups: Types & When To Raise

A flourishing garden filled with stunning blooms can evoke a sense of beauty and vitality. Flowers thrive across a well-manicured lawn, and it’s difficult to imagine that this space was ever bare.

However, every beautiful garden begins with a humble seed planted in the ground.

That’s where the startup world got the term “seed funding”: some of the earliest money a new company receives to grow.

“For startups, seed investing is what is needed for you to see those beautiful tulips one day,” says Michael Duda, cofounder and managing partner of Bullish Inc., a venture capital firm that has invested in companies like Warby Parker, Peloton, Harry’s, Bubble Beauty, and Bandit Running.

“It’s that early money to plant the beginning of something in the ground, and hopefully help it grow and flourish in the future.”

Read on to learn more about how seed funding works, the types of seed funding, and when to raise it.

What is seed funding?

Seed funding is the initial capital used to start a business. It may be provided by the company’s founders themselves, family and friends, startup incubators, angel investors, or venture capitalists, typically in exchange for a piece of the business.

Some startups raise what’s called “pre-seed funding,” but many go right to seed funding. This seed capital is often used for initial business operations like conducting market research, developing product prototypes, hiring employees, and launching early marketing campaigns.

Pre-seed and seed fundraising rounds tend to be less formal than the subsequent rounds—from Series A to Series D and beyond. A seed round is often unpriced, meaning the company does not yet have a valuation, and investors often receive convertible securities rather than direct equity.

Seed-stage funding rounds can vary in range from tens or hundreds of thousands to a few million. In 2024, the median size of all seed rounds in the US was $2.5 million, according to a recent Carta study. 

Types of seed funding

• Unpriced rounds
• SAFE notes
• Convertible notes
• Priced rounds

Seed stage rounds can be priced or unpriced, and seed investors may receive different types of equity or securities in exchange for the funds they provide.

Here are a few types of seed funding:

Unpriced rounds

Because startups in the seed stage are so new, it can be difficult for a company to determine a business valuation against which to raise money. So in many cases seed rounds are “unpriced,” and investors offer money in exchange for a type of security that converts into equity at a later date. The equity conversion is often triggered by an event like a priced funding round such as a Series A. This is why unpriced rounds are also called convertible rounds.

Generally speaking, unpriced funding rounds are simpler, faster, and cheaper for companies to close than traditional equity rounds. That’s because they tend to require less paperwork and legal fees.

SAFE notes

Simple Agreement for Future Equity (SAFE) notes are counted as equity on a balance sheet. They’re legally binding agreements in which an investor agrees to provide funds now in exchange for the right to buy shares at a future date—often the next round of equity fundraising.

SAFEs have become common instruments in the seed funding stage because they are relatively simple and fast. Unlike convertible notes, the other major instrument used in unpriced rounds, SAFEs don’t involve interest rates or maturity dates. A 2025 Carta study noted “the dominance of SAFEs continues to grow,” comprising 64% of seed deals raised on Carta from the third quarter of 2023 to the third quarter of 2024.

SAFEs include valuation caps that set a maximum valuation at which the investment will convert. This protects the investor from excessive dilution if the company’s value jumps significantly. Another common benefit is a conversion discount, which offers the earliest investors a discount on the price per share compared to those who invest later.

Convertible notes

A convertible note is the other instrument used in unpriced rounds. It’s debt that later converts into equity upon a triggering event. At the time it’s issued, a convertible note is somewhat similar to a bond. The note comes with an interest rate, and it also has a maturity date by which the interest must be repaid.

The note is converted into equity when a trigger happens, such as a future equity round of fundraising, or the company being purchased. If a triggering event hasn’t occurred by the time of the maturity date, both the company and investor can agree to extend it.

Otherwise, the company would have to pay out the principal and interest amount at the time of the maturity date. For example, if a venture capital firm invested $10,000 at a 5% interest rate, the startup would have to pay them back $10,500. Like SAFE notes, convertible debt often comes with valuation caps or conversion discounts.

However, because convertible notes are more complex than SAFEs, they’ve become markedly less popular. Convertible notes comprised just 10% of seed deals in the year ending in the third quarter of 2024, Carta says.

Priced rounds

Priced seed rounds work similarly to a standard equity fundraising round. Investors receive direct equity in the company based on a specific startup valuation. This is less common for seed stage companies compared to SAFE notes, but it may be available for founders like serial entrepreneurs who have a track record of success.

Priced equity rounds made up 27% of seed deals over the year ending in the third quarter of 2024, according to Carta.

When to raise seed funding

• You can demonstrate your product and some consumer traction
• You’ve developed a financial plan
• You can share a compelling narrative
• You’ve identified investors who are a fit

Before approaching potential sources of capital, whether that’s family or venture capitalists, it’s prudent to have a few basics to convince investors that your idea has the potential to grow:

You can demonstrate your product and some consumer traction

It’s helpful to have at least a basic example of your product or service—even if it’s a minimum viable product (MVP)—to show your potential investors. A minimum viable product is a basic version of a product or service with just enough features for customers to use and interact with, while still feeling complete.

This doesn’t necessarily have to be a full prototype. There are several types of MVPs that don’t require you to build a product, like:

• A website describing the product and its features

• An explainer video

• A “smoke test” marketing campaign driving people to sign up for a waitlist

• A single-feature MVP testing one functionality to see if it’s a hit

The results from these MVPs will help you collect feedback from users and prove consumer interest to investors. To fund their development, consider crowdfunding. This approach not only helps you raise money, but it can also demonstrate traction with your target audience.

“Forums like crowdfunding can be really great to spread awareness and build a little bit of a fan base,” Michael says. “You can learn about your customers and get feedback. And if you show investors that you raised $40,000 instead of the $20,000 you were hoping for, it can show them that there’s something here.”

You’ve developed a financial plan

A good product concept doesn’t necessarily translate into a viable business idea. Investors will be looking for a clear business model and financial plan showing your idea can make money. Within your pitch, you’ll need to include several details that tell the story of your business:

• Addressable market: Include research about the market size and market opportunity, as well as why you believe your offering has product-market fit.

• Financial story so far: Detail your revenue streams, annual sales, customer base, customer acquisition cost, cost of goods sold, monthly website traffic, and profit margin. 

• Future plans: Describe your growth strategy, and financial projections.

• Why you need money: Michael says it’s also critical to explain why you want to raise seed money, and what you’ll do with that capital. Will you focus on refining your prototype, hiring a solid founding team, or conduct more thorough market research?

“We don’t expect some complex financial model at this stage, but we do like to see that you’ve thought about: ‘How far will this money get me, and how much more money might I need in the future?’” Michael says.

You can share a compelling narrative

Investors need to understand the customer pain point your product or service addresses, and why your company is the one to solve this problem. Gain investor interest with a compelling story that demonstrates your personal passion: 

• The origin of your idea

• The problem you’re solving

• Your vision for future growth and success

“Investors really love to hear your story,” Michael says. "If you can’t explain what your idea or your progress service does, why would you expect me to fund it?"

You’ve identified investors who are a fit

If you’re targeting angel investors and venture capital (VC) firms, research your targets’ previous investments to determine if your business fits into their interests. You may have the greatest consumer product in the world to pitch, but if your target invests only in enterprise technology, there’s simply no point.

“Beauty is in the eye of the beholder, and different people want different proof points,” Michael says. “Some VCs really like a certain entrepreneur, some love investing in snacks, some prefer tech products. At Bullish, we love early-stage consumer businesses. Find who you’re a fit for, and who’s a fit for you.”

Michael notes, however, that very few startups ever raise venture capital. So when finding investors for startup funding, don’t end your search there. Consider friends and family, crowdfunding platforms, local small business grants, and accelerators, and know that you may end up using several options.

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