Structuring a Seed Fund

There are factors that structurally limit the size of a seed VC fund like deal flow, allocations and check sizes and pro rata participation. Thoughts on each of these below, with the size of the fund at the end.

  • Step 1: Deal Flow and First Check Sizes
  • Step 2: Pro Rata
  • Step 3: Fund Size

Step 1: Deal Flow and Ownership

Deal Flow and Portfolio Companies

  • The number of companies you will have in your fund may be influenced by the following:
  • Where/how you get your deal flow
  • Whether you have a sector focus and how specific this is
  • GP threshold of deal quality
  • There are funds that will do 4 deals a month and others that will do 4 deals a year
    • The number of companies in your portfolio is the first limiting factor in fund construction

First Check Sizes

  • Together with the post money valuation (pre-money valuation + money raised in round), the funds’ first check into a company will determine the funds’ initial ownership
  • This is critical since it sets the upper limit on ownership in the company (assuming no super pro rata rights) and will likely be diluted (assuming the seed investors do not participate in late stage pro rata rounds even if they have pro rata in the first place)
  • Lead investors in the seed round generally end up with 15% to 20% of the company
  • Raising $1.5m on a $8m post with lead investor deploying $1.2 leaving $300k for angels
  • You should also determine whether the fund will lead seed investments (sometimes taking a board seat, guiding/advising the company on strategy, supporting hiring, guiding the company to Series A through networks)
  • This is a key differentiator for micro-VC seed stage funds since generally you do want an active lead investor getting the company to series A, if this is not your fund you will own significantly less than the lead and this changes fund economics (deploy $300k to a $8.0m post, own 3.75% versus 15%)


Step 2: Pro Rata

  • But ownership in the company at exit is also heavily affected by whether the fund participates in pro rata rounds
  • Many times seed investors will not be given pro rata rights and in some instances will not be provided these rights even if they were given at the time of seed (in some cases this can be positive if a very strong Series A investor is leading the A, therefore giving the company a higher potential exit opportunity)
    • An illustrative example (real raising amounts/valuations will change):
      • Let’s say the fund invests $1.0m as part of a $1.5m round at a $10m post valuation. Here the fund owns 10% of the company


  • The table on the bottom left shows the subsequent funding rounds, how much the company is raising, how much the funds pro rata allocation would be to maintain 10% and the pre and post money valuations to work out dilution
  • The bottom right table shows the effect of this dilution if the fund did not participate in any pro rata, if the fund Series A pro rata only, and if the fund did Series A and Series B
  • Note: it is unlikely that the seed fund would be able to participate in Series C rounds since here the fund allocation would be $10m, also the Series A, B, C investors would be aggressive on gaining as much ownership as they can)
  • Dilution calculation: If the fund did not participate in the Series A:
  • Fund owns 10% of the pre-money $30m, $3m
  • But company raises $5m cash, so we now own $3m in a $35m company ($3m/$35m = 8.6%)
  • From the table, we see taking no pro rata we get diluted to 4.5% ownership, while participating through the B we get diluted to 5.9%
  • In a billion dollar exit this represents a $14.5m difference
  • We have effectively exchanged $2.5m to retain 1.4%
  • If we did not invest in the A or B, we would have $2.5m to deploy to other seed companies
  • At $1m per check this would be 2.5 more companies
  • To make up this $14.5m through 2.5 other seed checks (assuming 1 would become a winner), we would need that company to realize an exit of at least $330m
  • Math as follows: In that other seed company our 10% ($1m into a $10m post) would be diluted to 4.5%, this 4.5% would have to cover $14.5m, 4.4%*$330 = $14.5
  • So if we did not participate in the A or B pro rata rounds we would need 1 out of the next 2.5 companies to realize an exit of $330m+ in order for this scenario to be better than participating in the Series A, Series B pro rata rounds (assuming you knew at Series A if it is likely to be successful)
  • Having a $1b+ and $300m+ realized exit in 4 companies may be difficult given the power law in seed stage returns


Step 3: Fund Size

So now putting it all together we can generate the size of the fund that fits with our strategy

Number of companies:

  • Say we could identify 1 company per month that crosses the threshold of quality (sector, team, market etc.) that’s 12 companies per year with a 2 year investment period on a micro-VC fund that’s 24, say 25 companies
  • At $1m per check that’s $25m in primary investments
  • Assuming we have pro rata in all companies, and 60% of companies survive to Series A that’s 15 companies of which the fund will choose to participate in 10 of these companies’ Series A, that’s $5m (assuming we own 10% and they raise $5m at A)
  • We already know that in some instances we will not be able to participate our full pro rata amount given deal dynamics, so this seems to be upper bound
  • Say half of these 10 companies survive to series B, that’s 5 companies and the fund would participate in 3 of them, that’s $6m (assuming we still own 10% and they each raise $20m)
  • So total fund size through 25 primary checks at $1m each over 2 years, and Series A pro rata in 10 companies at $5m and Series B pro rata in 3 companies at $6m we get total fund size of ~$40m


  • 6.0x ROIC on a $40m fund is $240m
  • In 25 companies, say 5 are winners at blended 5.5% ownership this implies success case should be $900m
  • This seems unreasonable
  • Assume 1 company runs to $5b, at 5.5% ownership this would return $275


Fund Construction Summary:

  • $40m fund, approximately 60% to primary seed checks, 40% reserved for pro rata
  • 25 companies at seed, participate in 10 Series A rounds and 3 Series B
  • Will generate 6.0x ROIC with 5.5% ownership (diluted after Series B) with 1 out of 25 companies that exits at $5b (3.0x ROIC with 1 out of 25 companies exiting at $2b)
  • Even if fund could not maintain (or does not get pro rata rights) will be diluted to 4.5%, of $5b exit this is still ~6.0x ROIC

Will need to prove:

  • High quality deal flow
  • Ability to write $1m seed checks into $1.5m seed round
  • Ability to maintain pro rata through Series A