In this scenario, all proceeds go to preferred shareholders up to their preference amount, and founders may receive nothing.

Most deals use a 1x non-participating liquidation preference, meaning investors get their original investment back first, but no more.

SAFEs are best for early-stage, fast-moving fundraising where simplicity and speed are critical, while convertible notes may be more appropriate if investors prefer debt protections.

Yes. Issuing SAFEs at different caps can lead to more dilution than founders expect when they all convert. Careful modeling is important.

Not always. Some SAFEs are uncapped, though most include either a cap, a discount, or both to reward early investors.

A SAFE is not debt, meaning it has no interest rate or maturity date. A convertible note starts as debt and must either convert or be repaid.

They are most useful at the pre-seed and seed stage, or as bridge financing between rounds, when valuations are difficult to set and speed of funding is important.

Discounts usually range from 15% to 25%, rewarding early investors with more favorable share pricing in the next round.

Most notes are designed to convert, but if no qualifying financing occurs by maturity, the company may need to repay the note or negotiate an extension.

A convertible note is debt that converts into equity with interest and maturity terms. A SAFE (Simple Agreement for Future Equity) is not debt and has no maturity or interest, making it simpler but sometimes less investor-friendly.

Yes. Many high-profile companies rebounded from down rounds to reach IPO or successful exits. The determining factor is how effectively leadership uses the new capital to achieve sustainable growth milestones.

Transparency is key. Frame the round as a strategic move to secure runway and strengthen the company, rather than a setback. Clear messaging helps maintain confidence among employees, customers, and partners.

Most prior investors have anti-dilution protections in their agreements. Depending on whether it’s a full ratchet or weighted average clause, existing investors may be shielded from dilution, which can further reduce founder and employee equity.

The primary impact is equity dilution - shares may lose paper value, and employee options can go “underwater.” To counter this, companies often implement option pool refreshes or repricing programs to maintain team motivation and retention.

Not necessarily. A down round often reflects market conditions or a recalibration of expectations, rather than a death sentence. Many companies use down rounds to reset and build stronger fundamentals.

They are more common than many founders realize, especially during market downturns or periods when investor sentiment shifts from growth to profitability. Even well-known unicorns have gone through down rounds before achieving long-term success.

Yes, in most cases. Securities counsel, accountants, and IP attorneys can help you spot and fix issues before investors do. It’s often less costly to prepare in advance than to renegotiate under pressure later.

No. Angels often conduct lighter checks, focusing on the team and vision, while VCs and strategic acquirers require comprehensive financial, legal, and technical verification. The later the stage, the more rigorous the process.

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The biggest issues are disorganized records (messy cap tables, missing contracts) and unresolved legal/IP questions. These red flags create delays, valuation pressure, or even deal collapse.

For early-stage rounds, due diligence can take 2–4 weeks if your documentation is organized. Later-stage or acquisition-level diligence may take 2–3 months due to deeper financial, technical, and legal reviews.