How do you determine how much to raise for seed funding?


Foreward : Assume the beta release had been executed with lean a startup model and had generated impressive traction within a single city launch.

In preparation for investment proposals for a web application opportunity, our team has drafted: a development road map, talent acquisition plan, and also a breakdown of all projected expenses for the first 18 months of the project.

[1] Is 18 months too long of a runway?

Here are the projected expenses (per year) we calculated:

  • Operational: Furnished Office Space, $36000
  • Operational: Dedicated Server Rental, $3000
  • Operational: SaaS Fees, $1200
  • Contractor: Outsourced Dev Team, $7200
  • Employee: CEO Salary, $75000
  • Employee: CTO Salary, $90000
  • Employee: ROR Developer Salary, $75000
  • Employee: Mobile Developer, $65000
  • Employee: Front-End Developer, $55000
  • Employee: Sales & Marketing, $35000
  • Employee: Customer Relations, $35000
  • Employee: Healthcare/Dental, $700/month/employee
  • Operational: Standard Equipment Allowance, $1550 (x3)
  • Operational: Developer Equipment Allowance, $2550 (x4)
  • Operational: Business Cards & Stationary, $70 (x7)
  • Admin: Legal Fees for Incorporation and Seed Funding, $5000
  • Admin: Legal Buffer for Employee Agreements / Patent / Etc, $12000
  • Admin: Errand Running Services via Task Rabbit, $5000
  • Admin: Accountant (CPA), $8000
  • Admin: Graphics Designs (Freelancers), $5000
  • Admin: Team Building Allowance, $4000
  • Admin: Employee Bonus Pool, $4000
  • Admin: Travel Expenses (for Series B), $2000
[2] Are we missing, underestimating, and/or overestimating any of the above expenses?

[3] Do we just calculate total expenses over 18 months and raise that as our Series AA?

[4] How in-depth do angels want to know in detail how their investment is being spent?

Cost Business Plan Seed Funding Expenses

asked Aug 4 '11 at 15:47
Will Ko
268 points
Get up to $750K in working capital to finance your business: Clarify Capital Business Loans
  • That comes to just under $600,000 per annum ($596,840), by my calculation. Is that correct? – Chris Morgan 13 years ago
  • Patents? Do you mean licensing or getting them? If you're dealing in getting patents for software yourself, please do the world a favour and don't... – Chris Morgan 13 years ago
  • The software patent was advised by our attorney for our own protection. – Will Ko 13 years ago
  • Bleah. Software patents should rarely if ever be granted. Almost all just don't fit in the original definition of what patents were for. – Chris Morgan 13 years ago
  • I agree 100% with what you. But we're only filing for our own protection. Let's try to stay on topic :P – Will Ko 13 years ago
  • You missed internet connectivity for your office and your computer hardware allowance is quite low (barely covers a MacBook Pro, developers will need monitors, mouse/keyboard, software, etc). I'd estimate at least $5k/employee for hardware. Also, your infrastructure costs are probably low for a while, then will get higher for launch due to backups, redundancy, monitoring, etc. You probably could use Amazon EC2 for everything and save a lot of money. – Ryan Doherty 13 years ago

5 Answers


I think you are too heavy on your engineering staff, and too lite on your Sales & Marketing expense. Without customers you are dead in the water.

How do you attract & retain the Power Users in each city? If they are key to your sales and customer development, how are you accounting for their expense in your development plan (i.e.- whether you are throwing them a party, giving them some sort of referral fee or override for everyone who they influence to sign up in their city, etc.), there will be some sort of expense associated with that.

Also, I don't think you are doing enough to account for your fund raising activities - that's the CEO's job (which, BTW, CEO stands for "Cash Extraction Officer"; don't forget it). $2,000 is probably not going to be sufficient. If you think you'll need a 6 month time frame to raise funds, you should be planning for and allowing expenses for 12 - 18 months. The markets have been very tight for the last 3 years, and while there are some signs that they might be loosing up and their have been some high-profile deals recently (LinkedIn), the environment is not going to change very quickly. Without a more robust IPO market, people either can't put in new funds, or are very skittish about doing so.

Looking at your line items, I'd characterize your company as "technology development oriented" vs. "business oriented"; nothing wrong with that, but you need to show how you are going to ramp you Sales & Marketing activities in order to drive revenue. I like to see companies "fund themselves" as soon as possible. Funding from cash flow is the best and cheapest money you will ever get - and it has the added benefit of preserving your equity/control positions.

Things I would cut & re-purpose include: * Furnished Office Space - do you need a full time, dedicated space? Can you sub-lease space from someone at a lower rate, and only be there part-time? Can you "look a little harder" for a better deal. Commercial space is taking a beating, and they are very, very willing to make deals right now; it's a GREAT time to negotiate on space)

  • Employee Salaries - pay yourselves just what you need to get by for now; investors understand that everyone needs to eat, but they don't want their money going into "overhead"; they want it going into growth (i.e. - sales, marketing, scaling operations & support, etc.)
  • Standard Equipment Allowance - everyone needs a computer (laptop?) and a cell phone - and most probably already have their own - what are you going to use this for?
  • Developer Equipment Allowance - what's this line item include? Why so much?
  • Errand Running Services - this is an extraneous expense and is not directly tied to generating revenue - get rid of this & put it into your Sales & Marketing. This won't help you get any customers any faster, and it's not clear how it would help you retain customers
  • Accountant - could be market rate, but it might be a little high; it's not the first thing I would address but I would ask probing questions about you really need an "accountant", or could a part-time bookkeeper suffice, for $2,000/year, and then pay an accountant $500 to file your taxes?
Things I would increase:
  • Outsourced Development Team - compartmentalize your development and contract out pieces of the development, and you retain Integration Testing on your end. Depending on the specific skill sets you need, software development labor is fairly inexpensive, off shore, and the domestic labor market is still pretty soft. If you need skills that are more esoteric and hard to find, then those rates will still be fairly competitive.
  • Sales & Marketing (and probably customer service) - why are you only hiring one sales person? Why not 1 Marketing person & 5 or 6 sales people? Your sales force can be a commission-only sales force; put a good incentive plan in place and give them an environment where they can perform. Good sales people don't want a salary; they want uncapped earning potential. It sounds like your app would benefit from a larger, more active social media presence.
  • Graphic Designers - "people" buy your products, and the better / cooler / more engaging the User Experience, the more likely your customers will buy & stay with you. $5,000 could be sufficient, but I could easily see spending 2x (maybe 3x) that; depends on your market.
  • Travel Expenses - I think this is way too little; I'd accrue at least $10,000 for this. Assume 1 - 2 people traveling. Airplane, hotel, food and rental car / cab fare will run you $600 - $800 per person for an overnight trip. How many trips to investors will you need to make? How many visits will you need to host in Boston? Are you only looking locally for funding (mistake; you should consider the interior of the US as well). You don't have to spend, but it will be good for you to have it ready in case you need to.
  • Insurance - speak to an agent, but coverages you'll want to consider include, Key Man, E & O and Cyber Liability.
  • Software licenses - do you guys need any software to run your company (i.e. - CRM, developer tools, etc.)? I don't see any license fees (other than $1,200 in SaaS fees - and $100/month for 8 employees a few more contractors seems kind of low to me)
  • Team Building Allowance - this is a good item to include, and I would definitely "go to the mattresses" to argue for it with a potential investor before cutting it; on the other hand, if it came down to spending $4,000 for employee morale or for acquiring 100 more customers & paying for the team building event our of cash flow, you better have a darn good reason why...I could see an investor say, "Get more customers, and I'll gladly spend more than that from cash flow for a Team Building Allowance."
Bottom line: from this budget, it looks like you are looking at your business as a technology company, from the inside-out. You need to look at it as an answer to someone's problem, from the outside-in - what do you need to make that happen?

Instead of going for $500k - $600K, I'd instead go for $1.5M - $3M and show how you'll get to more revenue faster. Spending money is only one part of the equation; generating revenue is the other (and BIGGER) part of the answer - build for that.

answered Aug 8 '11 at 05:31
Chris Kauza
116 points
  • Excellent, excellent elaborations on business vs software development. The "Furnished Office Space" I had in mind was the Cambridge Innovation Center located here in Boston. Although the calculated rent for the time is slightly greater than furnishing your own office, the access to the community and constant flow of angel and venture networks is priceless. I believe there was a claim that there is more innovation per square feet in that building than anywhere else in the world. – Will Ko 13 years ago
  • Standard Equipment would be secure laptop and devices for non-developers. Developer Equipment would include secure power laptop with dual monitor setup and devices. Good call on the eliminating the errand running services allowance and just hiring someone who can do manage these other tasks on top of Marketing & Sales. Great advice on more outsourced development and decreasing team building allowances as well. Thanks again Chris! – Will Ko 13 years ago
  • Completely agree with virtually every point. Great advice. – Jonschlinkert 13 years ago
  • Agree w/the business incubator (very similar to "Tech Stars" out here); you should get more than your money's worth if you take advantage of the support & collaborative environment there. Glad you find it helpful; happy to be of service if I can...Cheers, Chris – Chris Kauza 13 years ago

  1. You don't really have 18 months of runway -- you have 18 months to launch your product. You plan should include what you will be doing for those 18 months and what milestones you will achieve. The runway comes in when you finish your milestones and need to raise more money.

  2. I am sure you are but at least you have a detailed plan you can change. You will probably over and under estimate several things. In the end, it should all even out.

  3. That's a start. Usually, things take longer than you expect, so I typically like to add a little bit of runway to the end of the thing. So, if you think it will take 18 months, raise money for 24 months. It's always better to get more than run out, especially if you are making progress and you hit a bump in the road.

  4. Angels are fickle. I have seen some that want the minute detail while others just write the check. All investors want to have a good feeling that you will spend their money wisely and for building value. You need to have all your numbers right for either type of investor and be ready to tell each angel what their money is going to achieve.
answered Aug 4 '11 at 22:22
Jarie Bolander
11,421 points
  • RE [1]: Probably 12 months to launch, the extra 6 months is just buffer. / RE [2]: Are any of the salaries or expense estimates off? – Will Ko 13 years ago
  • Okay, then 6 months is a good buffer. The salaries are a little low for Silicon Valley but it all depends on where you are at. Usually, the CEO gets the highest pay. The rest looks reasonable. You might want to consider more outsourcing just to keep the overhead low but that's up to you. – Jarie Bolander 13 years ago


You're probably not going to get a software patent for $12,000, let alone having some left over for employee agreements. I spent $15,000 on a patent the last time I did it, and that was with me writing the specification by myself. It can go much higher.

As others have commented, I personally wouldn't get a patent unless your business model is licensing intellectual property.

Also, if you're in the US I doubt you'll get health insurance for $700/month.

answered Aug 5 '11 at 00:16
Craig Schmidt
121 points
  • Provisional Patent was estimated at roughly $2-3k and full patent conversion at $12-15k. Isn't having a patent better than having no IP protection? Don't investors want whatever you're building to be somewhat protected? – Will Ko 13 years ago
  • I'm sure your patent has been advised by your lawyer, who of course is the one set to benefit from the patent fees. Software patents should not exist - being better than your competition should be enough. – Dave Hilditch 10 years ago


I am sure that there are many others that can discuss the details of patents, software expenses, time to launch. I would like to simply address the Sales/Marketing expenses associated with the 18 month budget.

These are my assumptions:

  • That financial projections for this investment round should bring the company to operating breakeven
  • Operating break even means customers
  • Customers are attracted by marketing and advertising.
  • In an SaaS model there is evergreen billing which means customer retention is a critical business indicator for success

If I was pert of the investor group -- and was only looking at the budget, not the plan (which unforuttely is often a good assumption) these would be my thought:

Where is customer acquisition? As important as the production and support of the product is the attraction and retention of customers is even more important at this stage of business development. After deployment of the beta one of the most important -- if not the most important is bringing in customers. The experience of the customers and the sales process is what should be directing the development. Meeting the needs of these customrs to ensure rentation, renews, and referrals.

Yet, over 80% of my dollars are arguably being spent on continued development of the product rather then securing customers to pay for it -- and pay for the return on my investment. Throwing two bodies -- one in marketing/sales and one in customer service does not seem sufficient to me. What I don't want is a great fantastic working application -- and no customers.

Show me a line item for marketing and sales that reflects the importance of this goal/outcome and milstone. When I look at the detail of that line item I expect to see:

  • C-level leadership in Marketing/Sales
  • Advertising dollars
  • PR dollars
  • Outsourced firm/vendors
  • Trade Show/events
  • Organizational membership/events
  • Social media budget
  • CRM Software/Systems
  • Sales Commissions/Bonuses

Obviously the details of the sales/marketing portion of the business plan may explain why the sales goals can be met with the investment of one $35K/year person and that retention rates will be maintain with one $35K/year customer relations person. But if I was the investor or part of the investor group this would be one of the critical areas that I would focus on.

answered Aug 5 '11 at 03:09
Joseph Barisonzi
12,141 points
  • This is great advice and I appreciate the shift in focus to cost of marketing & sales. Generally all of this would be good, but our "core customer base" relies only on a few (under a hundred) per city Power Users. These Power Users will have the community influence to affect the implementation decisions of smaller businesses along with driving end-user traffic. Because of this unique dynamic, some of the customer acquisition expenses you listed just aren't applicable. By the way, great point on the expectation of startups to operationally break even by the end of their seeded runway! – Will Ko 13 years ago


Your salaries seem low. Where are you located?

Hiring great devs is hard. You may not need to, but I would PLAN on having to pay 50-100% more in salary for your key devs.

EDIT: Just saw this article. It is very relevant:

"It's a Good Time To Be A Developer " (CNET)

Will it really take 18 months to build this? Seems long unless there is a lot of deep engineering (and based on your salary estimations I dont get that is your intent). As an angel, I'd rather see you have an 18 month plan but be focused on the first 9-12 months (e.g. The seed money would be for 9-12 months then we go to next round).

Lastly, it will take you 3-6 months to get fully staffed. Your burndown will be less early on as a result.

answered Aug 5 '11 at 10:20
204 points
  • Located in Boston. So you're saying I should plan for $100k+ salaries for developers? – Will Ko 13 years ago
  • I'm afraid I am. You can hire devs with little or no experience at the rates your suggesting. But I don't think that's what you want. See this: 13 years ago
  • Interesting take on hiring 2-3 elite developers as opposed to a team of 4-5. Both scenarios costing roughly the same. Thanks for the input! – Will Ko 13 years ago
  • See my answer body for a recent article that is relevant. – Tig 13 years ago

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