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Seed money, sometimes known as seed funding, is a form of securities offering in which an investor purchases part of a business. The term seed suggests that this is an early investment, meant to support the business until it can generate cash of its own, or until it is ready for further investments. Seed money options include friends and family funding, angel funding and—recently -- crowd funding.
Seed money can be used to pay for such preliminary operations as market research and product development. Investors can be the founders themselves, using savings and loans. They can be family members and friends of the founders. Investors can also be outside angel investors, venture capitalists or accredited investors. Seed capital is not necessarily a large amount of money . Many people start up new business ventures with $4,371 or less.
Seed capital can be distinguished from venture capital in that venture capital investments tend to involve significantly more money, an arm's length transaction, and much greater complexity in the contracts and corporate structure that accompany the investment. Seed funding involves a higher risk than normal venture capital funding since the investor does not see any existing project to evaluate for funding. Hence the investments made are usually lower (in the tens of thousands to the hundreds of thousands of dollars range) as against normal venture capital investment (in the hundreds of thousands to the millions of dollars range), for similar levels of stake in the company.
Seed money may also come from crowd funding or from financial bootstrapping rather than an equity offering. Bootstrapping in this context means making use of the cash flow of an existing enterprise.
Investors make their decision whether to fund a project based on the perceived strength of the idea and the capabilities, skills and history of the founders.
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