Investment Types
Understand the different investment instruments available in Captable: SAFEs, convertible notes, and equity rounds. Learn when to use each type and how they impact your cap table.
SAFE Agreements
Simple Agreement for Future Equity - deferred equity with conversion triggers
Convertible Notes
Debt instruments that convert to equity under specific conditions
Equity Rounds
Direct purchase of preferred shares with immediate ownership
SAFE Agreements
Simple Agreement for Future Equity (SAFE) is an investment contract that provides the investor the right to receive equity in a future equity financing round, without determining a specific price per share at the time of the initial investment.
Created by Y Combinator, SAFEs have become the standard for early-stage startup fundraising due to their simplicity and founder-friendly terms.
SAFE Types Supported by Captable
Post-Money Valuation Cap
Converts based on a predetermined company valuation cap
Discount Rate
Investor gets shares at a discount to the price in the next round
Most Favored Nation (MFN)
Investor receives the best terms of any subsequent SAFE or convertible
Pro Rata Rights
Right to participate in future funding rounds to maintain ownership percentage
SAFE Advantages
- Fast and simple execution
- Lower legal costs than equity rounds
- No board seats or control rights
- No interest or maturity date
- Founder-friendly terms
- Standardized Y Combinator documents
SAFE Considerations
- Dilution calculations can be complex
- Conversion may not happen if no future round
- Stacking multiple SAFEs can create issues
- Less investor protection than notes
- Potential tax implications
- May discourage institutional investors
SAFE Conversion Example
Scenario: $100K SAFE with $5M post-money valuation cap
If Series A at $10M pre-money:
- • SAFE converts at $5M cap (better for investor)
- • Conversion price: $5M ÷ shares outstanding
- • Investor owns more shares than Series A price
If Series A at $3M pre-money:
- • SAFE converts at Series A price (better for company)
- • Same price as new Series A investors
- • Cap doesn't provide additional benefit
Convertible Notes
Convertible Notes are debt instruments that convert into equity upon certain triggering events, typically a subsequent financing round or maturity date.
Unlike SAFEs, convertible notes are actual debt with interest rates and maturity dates, providing more investor protection.
Convertible Note Types in Captable
Convertible Note (NOTE)
Traditional convertible debt with interest and maturity
Compulsory Convertible Debenture (CCD)
Must convert to equity at maturity or qualifying event
Optionally Convertible Debenture (OCD)
Holder can choose between conversion and repayment
Key Terms and Calculations
Interest Calculation Methods
Simple Interest
Principal × Rate × Time
Compound Interest
Principal × (1 + Rate)^Time - Principal
Interest Accrual Options
Note Advantages
- Interest provides downside protection
- Maturity date creates urgency
- More familiar to traditional investors
- Senior to equity in liquidation
- Repayment option if no conversion
Note Disadvantages
- More complex legal documentation
- Higher legal costs than SAFEs
- Interest obligation increases debt
- Maturity creates repayment pressure
- May require board consent
Equity Rounds
Equity Rounds involve the direct sale of company shares (usually preferred stock) to investors in exchange for cash, providing immediate ownership and typically more comprehensive investor rights.
These rounds establish a clear valuation and price per share, making them more complex but providing greater certainty for both founders and investors.
Equity Round Features in Captable
Valuation Terms
- Pre-money valuation
- Post-money valuation
- Price per share calculation
- Fully diluted share count
- Option pool allocation
Investor Rights
- Liquidation preferences
- Anti-dilution protection
- Board representation
- Information rights
- Pro rata participation
Liquidation Preferences
Determines the payout order and amounts in a liquidation event (sale, merger, or dissolution).
Non-Participating Preferred
Investor chooses between liquidation preference OR converting to common stock
Example: 1x liquidation preference means investor gets their money back first, then participates as common stock
Participating Preferred
Investor gets liquidation preference AND participates in remaining proceeds
Example: Get money back first, then share in remaining proceeds with common stockholders
Capped Participation
Participating preferred with a maximum total return cap
Example: Participate until total return reaches 3x investment, then convert to common
Anti-Dilution Protection
Protects investors from dilution in future down rounds by adjusting conversion ratios.
Weighted Average
Adjusts conversion price based on weighted average of old and new prices
- • Narrow-based: Uses common shares outstanding
- • Broad-based: Includes options and convertibles
- • More founder-friendly than full ratchet
Full Ratchet
Conversion price adjusts to the new lower price
- • Complete protection for investors
- • More dilutive to founders and employees
- • Less common in current market
Typical Round Progression
Seed Round
$250K - $2M
Initial institutional funding, often includes SAFEs and convertibles
Series A
$2M - $15M
First major institutional round with full preferred stock terms
Series B
$10M - $50M
Growth capital with proven business model and traction
Series C+
$20M+
Later stage growth capital, expansion, or pre-IPO funding
Investment Type Comparison
| Feature | SAFE | Convertible Note | Equity Round |
|---|---|---|---|
| Complexity | Simple | Moderate | Complex |
| Legal Cost | Low ($5-15K) | Medium ($15-30K) | High ($30-100K+) |
| Timeline | Days to weeks | 1-2 weeks | 1-3 months |
| Interest Rate | None | 2-8% annually | None |
| Maturity Date | None | 12-24 months | None |
| Board Rights | None | Usually none | Often included |
| Voting Rights | None until conversion | None until conversion | Immediate |
| Liquidation Rights | Upon conversion only | Upon conversion only | Immediate |
| Valuation | Deferred | Deferred | Set at closing |
| Dilution Impact | Future rounds | Future rounds | Immediate |
When to Use Each Investment Type
Use SAFEs When:
- Raising smaller amounts quickly (under $2M)
- Early stage with uncertain valuation
- Want to minimize legal costs and complexity
- Founder-friendly terms are priority
- Following Y Combinator or similar accelerator
Use Convertible Notes When:
- Investors require downside protection
- Bridge financing before larger equity round
- Traditional investors prefer debt instruments
- Want to create urgency with maturity date
- Need more investor-friendly terms
Use Equity Rounds When:
- Raising significant capital ($2M+)
- Clear valuation and business metrics
- Institutional investors require full terms
- Need investor expertise and connections
- Ready for board oversight and governance
Need help understanding financial terms?
Our comprehensive glossary explains all the key financial and legal terms you'll encounter when managing your cap table and fundraising.