Can somebody give me guidance so that my economic interests as founder are protected? I don't mind losing some control.
First round (Seed) - 100K USD @ 25%
The company spent all the money but could not raise further funding. Seed investor came back with new terms, renegotiated first round for:
100K @ 55% and bringing the second round with following terms.
Second round (Raised through Seed investor's friends and family)
400K USD at 12.5% dilution
Wow! Good for you! It looks like you are on the right track.
I have been part of several startups and have launched and failed some myself as well and learned from the experience. I have also helped raised for startups. I won't necessarily speak to the financials, but your question got me thinking on something else I hope I can provide some clarity.
When it comes to negotiating, don't worry too much about the equity right now instead ask yourself what leverage do you have over the investor. Does the investor need this deal to work more than you do? If this investor is willing to put money in it - why not find others who have more favorable terms?
Don't ignore crucial sources of power over the negotiation and then by accident put yourself in unnecessary weak position. In fact you need to find a way to remain in control as you seek more investment.
Are you looking only for money? Why friends and family? what value will they provide to the startup if any?
Instead of dilution offer board seats, convertible notes, if you sell products consider AR funding instead of straight equity.
I hope it helps, it looks to me that you need to find yourself a good lawyer now who understands funding and startups hurdles. If you reach out I'd be more than happy to refer you to fellow entrepreneurs who deal with investments on a regular basis :)
Founders have their economic interest and control through the number of shares they have in the company. The more equity you have, better control and more profits as well as financial value you will have.
Therefore the best way is to protect your equity and negotiate in an effective and efficient way to retain a larger part of it. Investors will look for more equity and founders will look for more money. This is where negotiation comes into picture.
I am a startup lawyer and fundraising consulting. I have been running my own startups since long. I can help you and answer all your questions.
I encourage you to please setup a call and let's discuss further.