Guest column

Here's what you need to know if you're raising a seed round in Texas

From friends and family rounds to how to navigate a seed round, here's what you need to know about raising money in Texas. Getty Images

In the vast majority of startups we've worked with across Texas, their "seed round" is not the first money in the door. That money is often called a "Friends & Family Round" and it's usually from people so close to the entrepreneurs that they are willing to take a gamble before there is really even much "there" to invest in. It also might include bootstrap funds put in by the entrepreneurs themselves.

After an F&F Round, Texas startups will pursue a "seed round," which generally includes some angel investors in the local and broader ecosystem. A problem we occasionally run into is that Texas entrepreneurs, including those in Houston, will get bad advice on what the right structures are for this kind of deal; either because they are reading a blog post from Silicon Valley (where things work VERY differently) or they're talking to someone marketing themselves as an "adviser" when their advice doesn't have much substantive deal experience backing it.

If your seed round is under $1 million, you will most likely structure it as a convertible note with a valuation cap and a 2 to 3 year maturity. Convertible notes are extremely slimmed down investment instruments that angel investors across Texas will be very familiar with. Usually, the "deal" in a convertible note round is that investors will get minimal up-front rights, in order to streamline early decision-making and keep legal costs down for negotiation, but they will get back-end protections like debt treatment if the company goes south. They will also almost always get a valuation cap and/or a discount on the price that future VCs pay, as recognition for the extra risk the seed investors are taking relative to later investors.

Once seed rounds get above $1 million, a more robust equity (stock) based investment structure starts to make more sense. There are two types of equity rounds, broadly speaking: seed equity and full VC-style equity. The latter involves a large set of heavily negotiated documents with robust investor protections, and is the structure most often utilized for a Series A (after seed). The former (seed equity) is a slimmed down version of full VC docs designed to give investors some rights, but keep negotiation costs (including legal fees) within a range that's reasonable for the smaller amount of money being raised. Investors vary as to whether they will accept simpler seed equity docs, or require you to give them full VC-style protections.

Given the diversity of investor expectations and contexts you're likely to run into in structuring a seed round, and the very high-stakes (and permanent) implications of the contracts you're going to sign, it's extremely important that advisers you work with have specialized experience in these kinds of deals.

In the case of lawyers specifically, it's also extremely important that they not have conflicts of interest with the investors you are raising money from. We too often see clever investors nudge entrepreneurs toward utilizing the investor's preferred law firm. Anyone with an ounce of honesty and experience can see why that's a problem.

Make sure you understand the high-level concepts and structures that are within the norms of your startup ecosystem, and then work with experienced, trustworthy advisors to translate everything into a deal that makes sense for your company's unique context.

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Jose Ancer is an emerging companies partner at Egan Nelson LLP. He also writes for Silicon Hills Lawyer, an internationally recognized startup/vc law blog focused on entrepreneurs located outside of Silicon Valley, including Texas.

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Building Houston

 
 

As of this week, Lara Cottingham is the chief of staff at Greentown Labs. Photo via LinkedIn

The country's largest climatetech startup incubator has made a strategic new hire.

Lara Cottingham is the new chief of staff for Greentown Labs, a Boston-area company that opened in Houston earlier this year. Cottingham previously served as the city of Houston's chief sustainability officer and the chief of staff for the city's Administration and Regulatory Affairs Department for the past seven years. In her new role, Cottingham will oversee the day-to-day operations and communications for Greentown's CEO Emily Reichert, along with key stakeholder engagements and strategic initiatives for the incubator.

"Lara brings a tremendous wealth of knowledge and experience to our team from her dynamic leadership role at the City of Houston," says Reichert in a news release. "Her breadth of knowledge in sustainability, climate, and the energy transition, and her expertise in regulatory and stakeholder aspects of the energy industry, will be incredibly valuable to our team and community."

Under her leadership at the city of Houston, Cottingham was the chief author of Houston's Climate Action Plan, an initiative aimed at reducing greenhouse gas emissions in Houston, and getting the city to a point where it meets the Paris Agreement goal of carbon neutrality by 2050. Cottingham helped the city move to 100 percent renewable electricity, according to the release, and helped turn a 240-acre landfill into the nation's largest urban solar farm.

"In leading the Climate Action Plan, Lara helped spark Houston's leadership in what has become a global energy transition and was a passionate advocate for climate action in Houston," says Houston Mayor Sylvester Turner in the release. "While she will be missed, this new role will only strengthen our partnership with Greentown. I look forward to working with Emily, Lara, and the Greentown team to meet our climate goals and make Houston the energy capital of the future."

Before her work at the city, Cottingham worked at Hill+Knowlton Strategies' Houston office range of clients across the energy sector. Earlier in her career, she served as communications director for two congressmen in the U.S. House of Representatives. She began her work with the city in 2014.

"In working with Mayor Turner and Climate Mayors across the U.S., I saw how important partnerships are to helping cities decarbonize," says Cottingham in the release. "There is no better partner or place for climate action at work than Greentown Labs. Greentown is 100 percent committed to attracting and nurturing the energy companies of the future and making Houston the energy transition capital of the world. I'm excited to join the team and see how climatetech can help cities reach their climate goals."

Greentown Labs first announced its entrance into the Houston market last summer. The new 40,000-square-foot facility in Midtown across the street from The Ion opened its prototyping and wet lab space, offices, and community gathering areas for about 50 startup companies opened in April. Greentown was founded in 2011 in Somerville, Massachusetts, and has supported more than 400 startups, which have raised more than $1.5 billion in funding.

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