A CEO raises $1M on convertible notes, and two years later realizes they've already given up 25% of the company, because they didn't fully understand what they signed. CEOs are brilliant at building; with funding instruments, too many wing it, and the wrong terms can cost millions. Here are the three most common early-stage instruments, in plain terms, so you raise the right way.
1. Convertible Notes
A convertible note is a loan with four variables (valuation cap, discount, interest rate, and maturity date) that converts into equity at your next round.
- Pros: widely understood, more popular with East Coast investors, good if you plan to raise again in 18 to 24 months.
- Cons: you owe the money back if it doesn't convert by maturity; complexity compounds with multiple notes on different terms (assume everyone eventually learns everyone else's terms, so be fair).
A hard-won caution from my own history: I had to file Chapter 7 business bankruptcy when my earlier company, Waveborn, carried $500K+ in convertible notes that hit maturity before I could raise a priced round or repay them. The lesson: never schedule all your notes to mature on the same near-term date (I set mine for my 30th birthday; there was no party). Choose a maturity date as far out as you reasonably can.
2. Safe Notes (Simple Agreement for Future Equity)
Y Combinator created the SAFE to simplify early-stage raising. There's no interest and no maturity date; it converts to equity at a later priced round, usually with a valuation cap and/or discount.
- Pros: CEO-friendly, no legal-fee or negotiation headaches, more popular with West Coast investors, fast to execute.
- Cons: multiple SAFEs can stack and dilute you dangerously if you don't track them; some investors outside Silicon Valley still prefer notes or equity.
3. Priced Equity Rounds
Investors buy shares at a set valuation; you establish or add to a board, set preferred terms, and sell a percentage of the company.
- Pros: clean cap table, investors locked in (no more conversion math), signals maturity.
- Cons: legal costs, time-consuming, requires clarity on valuation and structure. Most effective once you have traction and alignment on valuation.
CEO Tips From the Field
- Don't mix instruments. Two notes and three SAFEs are messy to clean up before a priced round; pick one: notes or SAFEs.
- Track dilution in real time, with a tool like Carta or a fractional CFO.
- Ask your lawyer the "dumb" questions now; they save you a dumb amount of money or equity later. (We're not lawyers; this isn't legal advice.)
- Cap with confidence: set valuation caps that match your traction, not your dreams.
How We Can Help
A fractional CFO can model the dilution impact of each instrument before you sign; our Entrepreneur Roundtable is a place to get live answers on term-sheet questions; and an executive coach can build your confidence negotiating with investors.
Talk to our Team to book a free 30-minute Scalability Audit about your raise.
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