BUSINESS FUNDING
SAFEs, Convertible Notes and What a Raise Actually Costs You
Raising money is not one decision. It is a sequence of them, and the expensive ones are almost never about the amount.
Raise in rounds, not all at once
Raising everything at the start is one of the most costly mistakes a founder makes, and it is costly for a reason that is easy to miss: the raise itself increases the value of the company.
Take a first tranche. Use it to move the business forward. Come back at a higher valuation. The same total dollars, taken in that order, cost you materially less ownership than taking them all at the opening price.
Sizing round one is the judgement call: enough to actually move, small enough to protect the price.
The instruments, by what they do to you
Equity, in a priced round. The valuation is set. Everyone knows what they own the day it closes. Clean, and the most expensive to get wrong, because the price is fixed at the moment you had the least room to argue.
Convertible notes. Debt that becomes equity. Interest accrues. There is a maturity date. The question nobody asks at signing is the one that matters: *what happens if you never raise again?* That note does not evaporate. It is a debt with a date on it.
SAFEs. The simple agreement for future equity. "Simple" is doing a great deal of work in that name. A SAFE has no maturity and accrues no interest, which feels friendlier, and it converts later under terms agreed now.
The discount and the valuation cap
These two get mentioned in the same breath and they do different things.
A discount gives the early investor a percentage off the next round's price. A valuation cap sets a ceiling on the valuation their money converts at, no matter how well the next round prices.
The cap is the one that bites. If your company does far better than expected, a low cap means early money converts at a fraction of the new price — and the dilution lands on you, not on the new investor. Model both side by side, with your real numbers, until you can see which one hurts in the scenario where you succeed.
Term sheets: read the control terms, not just the money
Founders read valuation. The terms that decide whether it is still your company are further down the page: liquidation preference, participation, board seats and protective provisions. Then the rights that decide what happens when someone sells: anti-dilution, pro-rata, and the drag and tag provisions.
There is a category of term that should make you stand up and leave rather than negotiate. There is also a pressure tactic worth naming: the exploding term sheet, which exists to stop you taking advice. A term sheet that cannot survive you reading it carefully is telling you something.
The cap table, and the pool that comes out of your side
The cap table is the scoreboard. Build it from formation forward and model your own dilution before it happens — watch your slice shrink on paper, across three rounds, while the decisions are still reversible.
One specific: the option pool. It is usually created before the new money comes in, which means it comes out of the existing holders' ownership. Yours. A pool negotiated casually is a real transfer of ownership.
The doctrine underneath all of it: accept dilution only when the investor makes it worth it. A very large cheque from an investor who changes the company's trajectory earns dilution. A small cheque does not earn the same terms, and should not get them.
And the waterfall, which decides who actually gets paid
When the money finally arrives at an exit, it does not get split by percentage. It goes through a waterfall, in order. Liquidation preferences pay first. There are real exits, at numbers that sound like success, where the founder nets nothing, because the preference stack consumed the proceeds before common stock was reached.
If you learn one thing from this article, make it that. The headline exit number and the founder's cheque are different numbers, and the gap between them was decided years earlier, in a term sheet.
Where PRBE fits
This is the structural half of capital: not where the money comes from, but what taking it does to the company you keep afterwards. That is the conversation we have with owners before they raise, and it costs nothing to have it.
This is an explanation, not legal or investment advice. Have counsel read anything you are asked to sign.
Common questions
Why raise in rounds instead of all at once?
The raise itself increases the company's value. Taking a first tranche, moving the business forward, and returning at a higher valuation costs materially less ownership than taking the full amount at the opening price.
What is the difference between a discount and a valuation cap?
A discount gives an early investor a percentage off the next round's price. A valuation cap sets a ceiling on the valuation their money converts at. The cap is usually the term that costs the founder more when the company does well.
Who pays for the option pool?
It is typically created before new money comes in, which means it dilutes the existing holders rather than the incoming investor.
Can a founder net nothing from a successful exit?
Yes. Proceeds pay out through a waterfall, and liquidation preferences are paid before common stock. A large headline exit can leave little or nothing for founders depending on the preference stack agreed in earlier rounds.
Mark Jones, the Deal Surgeon
Mark Jones sits down in THE DEAL ROOM and opens a deal the way a surgeon opens a patient: where the problem actually is, what comes out, what stays. Rounds, terms, the cap table, and the language that decides who gets paid first.