Your handy guide to agile fundraising!
What is SeedFAST?
A SeedFAST is an S/EIS-friendly way for startups to raise cash ahead of a funding round. It’s the SeedLegals brand name for our enhanced version of an Advanced Subscription Agreement. It enables founders to raise investment now in exchange for offering shares later, either within a future Funding Round or via a Conversion agreement.
Like a Convertible Loan Note, or ‘SeedNOTE’, a SeedFAST enables start-ups to receive investment quickly and relatively easily. The key difference between the two is that a SeedFAST cannot be repaid in cash (to maintain S/EIS eligibility), and must be repaid by issuing equity, without any interest. As SeedNOTEs have repayment terms, they are not S/EIS compatible when raising funds.
How does a SeedFAST convert into shares?
An investor uses the SeedFAST to invest now and subscribe for shares later, receiving them via a Conversion event. Within the terms of the SeedFAST, this Conversion event is either:
- A Qualifying Funding Round
- An Instant Conversion (Conversion by the Longstop Date)
A Qualifying Funding Round enables the investor to receive their shares alongside other investors within an external fundraise. They will convert their shares at the Valuation set within that Funding Round, subject to any Valuation Cap or Discount. Here, not only do the SeedFAST investors dilute with everybody else, but they enjoy the benefit of being able to negotiate the Shareholder’s Agreement and Articles of Association.
An Instant Conversion has a Conversion Agreement, which is signed when the SeedFAST is due to convert by the Longstop Date. The Longstop Date is the deadline by which the company needs to convert the SeedFAST, if a qualifying Funding Round has not occurred within the set period outlined in the agreement. Here, the investors receive their shares according to the agreed Longstop Valuation. For a SeedFAST to be S/EIS compatible, the maximum longstop date, as stipulated by HMRC, must be 6 months from the date the agreement is signed.
What is the difference between SeedFAST and a Funding Round?
The major difference between a SeedFAST and a Funding Round is the flexibility you can offer each investor and the timeline under which you can receive funds. Within a Funding Round, multiple investors commit to invest in the company under a set valuation, depending on one another to negotiate and sign documents accordingly. While necessary to negotiate the complexities of your Articles of Association and Shareholder’s Agreement, we find that this structure isn’t helpful for companies looking to take in investment quickly, especially as the Shareholders Agreement must be fully signed before any funds are received.
The SeedFAST removes many of these complexities, enabling founders to raise funding much faster, and consistently throughout the year. This is down to the following reasons:
- Each agreement is between the company and the investor, so no need to gather a large group to start fundraising.
- There’s no need to decide on a Valuation now, so you can focus on bringing in investment first. By setting a Variable Valuation within the SeedFAST, you can let the investment convert at the Valuation within a future funding round. You do have to set the Longstop Valuation, but this only applies if the SeedFAST converts outside of a qualifying Funding Round.
Advantages and Disadvantages of raising via SeedFAST
You can take in investment quickly and flexibly, without the need to amend your Articles and Shareholders Agreement if you do not wish to do so.
The investor becomes a party to the Shareholder’s Agreement via a Deed of Adherence, and therefore cannot negotiate specific terms.
No need to outline the exact valuation at which the investment will convert at in a funding round.
Founders can overlook how much equity they are giving away in exchange for instant fundraising, and later find they are obligated to give more equity than they intended when setting up the SeedFAST.
Each agreement is addressed to one investor, so there’s less dependence on every investor to sign the same agreement.
You need to track your investments separately, rather than catering to your single funding round within one document or Shareholder’s Agreement.
A S/EIS compatible way of raising funds outside of a funding round.
A discount within the SeedFAST is only available via conversion within a qualifying Funding Round
What is the difference between SeedFAST and a YC SAFE?
SeedFASTs are the UK equivalent to SAFEs, which are a common way for US companies to raise investment ahead of a future round.
SAFEs are designed for US law, whereas the SeedFAST is a carefully worded, easy-to-understand, document designed for UK law. Crucially, SeedFASTs are compliant with SEIS and EIS legislation.
Factors to consider before you raise with SeedFAST
- We recommend having an idea as to what Valuation you want your SeedFAST to convert at. This will enable you to calculate how much equity your proposed investments will give away, and let you set a clearly defined Longstop Valuation within your SeedFAST.
- How much are you looking to raise within your next funding round? If you wish to give your investors any discounts to your future round’s valuation, you’ll need to raise a certain amount to trigger this discount. We know that this can be difficult to determine in advance, so we advise setting this ‘trigger’ to an amount you are confident you can fundraise. Please note that any discount or valuation cap will apply only within a qualifying Funding Round, not an Instant Conversion.
- Track your investments effectively! By outlining how much investment you are taking in, you can map out how much equity you are looking to give away, which prevents any nasty surprises arising at the time of conversion. SeedLegals makes staying on top of your SeedFASTs a breeze, with the platform logging all the Longstop Dates on your Debt Table. Our Agile Funding team is also always on hand to answer any questions.