This page is destined to explain each of the Instruments of a funding round and each of the clauses that are involved. Startup investing is a complex game and must be understanded carefully. This page
🟡 SAFE (Simple Agreement for Future Equity)
A SAFE is an agreement that allows an investor to contribute money today and convert it into equity in a future financing round, without setting a specific valuation at the time of investment. It is typically the most widely used investment instrument in the European Union.
These are some of the additional clauses that are used in a SAFE investment:
1. Discount (%)
Definition:
A percentage reduction on the price per share the investor pays when the SAFE converts in a future round.
Example: If the next round values shares at €1.00 and there’s a 20% discount, the SAFE holder will pay €0.80 per share.
Purpose:
Rewards early investors for their risk by giving them better terms.
2. Valuation Cap
Maximum company valuation at which the SAFE will convert into equity, regardless of how high the next round's valuation is.
Example: If the cap is $5M and the next round is priced at $10M, the SAFE holder still converts at $5M.
It's purpose is to protect early investors from excessive dilution if the company’s value grows significantly.
3. MFN Clause (Most Favored Nation)
Gives the SAFE holder the right to adopt any better terms offered to future SAFE investors.
Example: If a later SAFE investor receives a lower cap, the earlier investor can match it.
Ensures fairness and prevents early investors from being disadvantaged.
4. Pre-Money or Post-Money SAFE
Specifies whether the investor’s ownership is calculated before (pre) or after (post) the new money is added.
Example: A Post-Money SAFE means 10% ownership stays 10% even after more investment. Pre-Money would lead to dilution.
Affects dilution and investor clarity about their final ownership.
5. Governing Law
The legal jurisdiction that governs the contract terms.
Example: Delaware (USA), Spain, or UK.
Used to determine which laws apply in case of disputes or legal enforcement.
🔵 Equity Round
An Equity Round is a financing event in which investors receive actual ownership (shares) in the company in exchange for their investment.
1. Equity Offered (%)
The percentage of ownership being sold to investors in this round.
Example: 10% equity offered for €1M → company’s post-money valuation = €10M.
Helps define the startup’s valuation and dilution.
2. Type of Shares
The class of shares offered—common, preferred, or with special rights.
Example: Preferred shares may include rights to dividends or liquidation priority.
Influences investor rights and exit preferences.
3. Voting Rights
Specifies whether these shares grant the investor voting power in strategic decisions.
Example: Common shares usually include voting rights; preferred may have limited or extra voting powers.
Defines governance influence and participation in key decisions.
4. Liquidation Preference
Indicates whether the investor gets paid back before other shareholders if the company is sold or shut down.
Example: 1x preference = investor gets back their original amount before others share proceeds.
Protects investors in downside scenarios.
5. Dividend Policy
Clarifies whether the startup pays dividends and under what conditions.
Example: “No dividends unless approved by the board.”
Important for long-term investors seeking income, though early-stage startups usually reinvest profits.
🟣 Convertible Note
A Convertible Note is a short-term debt instrument that converts into equity, typically in the next funding round. It includes both debt and equity features.
1. Interest Rate (%)
The annual interest that accrues until the note converts into equity.
Example: A €100,000 note with 5% annual interest → €105,000 value after one year.
Compensates the investor for the time value of money and risk.
2. Maturity Date
The deadline by which the note must either convert into equity or be repaid.
Example: 18 months from signing.
Provides a conversion timeline and legal clarity for both parties.
3.Discount (%)
Like a SAFE, it allows the investor to buy shares at a reduced price during conversion.
Example: 20% discount → investor pays €0.80/share instead of €1.00.
Rewards early participation.
4. Valuation Cap ($)
Caps the conversion valuation to protect the investor if the next round's valuation is very high.
Example: Cap at $6M, even if the round is priced at $12M.
Limits dilution and aligns early investor incentives.
5. Conversion Terms
Conditions under which the note converts to equity (e.g. automatic upon next round, optional, or forced at maturity).
Example: “Automatically converts in the next priced round of at least $500K.”
Defines conversion mechanics and investor expectations.