I’ve failed 14 times. Not in business, but in fundraising. And most of those failures came down to one thing: the convertible note.
I see it all the time. Founders, bright-eyed and bushy-tailed, clutching a term sheet with a convertible note, thinking they’ve made it. They haven’t. They’ve just walked into a minefield.
Want to know why investors pass? It's usually your convertible notes. Let's fix it.
The Seductive Lie of the Convertible Note
Convertible notes are the junk food of fundraising. They’re quick, they’re easy, and they feel good in the moment. But they’ll kill your company if you’re not careful.
They promise a simple path to funding without the need for a formal valuation. Just a simple loan that converts to equity at your next funding round. What could go wrong?
Everything. Everything can go wrong.
The world of early-stage fundraising has changed dramatically. In 2026, the easy money is gone. Investors are smarter, more cautious, and they’re looking for any reason to say no. A poorly structured convertible note is the easiest reason in the world.
I remember my first startup, MovieLaLa. We were desperate for cash. We took the first convertible note that was offered to us. We didn’t negotiate. We didn’t even really understand the terms. We just signed on the dotted line. It was a huge mistake. That one decision cost us millions in dilution down the road. I don’t want you to make the same mistake.
The Brutal Reality
I’ve seen it happen to dozens of founders. They come to me for advice, their cap table in shambles, their dreams of a big Series A turning into a nightmare of dilution and down rounds. Here’s what they all have in common.
Valuation Caps are a Trap
A valuation cap sounds like a good thing. It’s a ceiling on the valuation at which the note converts, protecting your early investors from being diluted if your company takes off. But it’s a trap.
Let’s say you raise $500,000 on a convertible note with a $5 million valuation cap. You go out and kill it. You hit all your milestones, your revenue is growing 20% month-over-month, and you’re ready for your Series A. You get a term sheet for a $10 million pre-money valuation.
Congratulations, right? Wrong.
Your convertible note holders are going to convert at the $5 million cap, not the $10 million valuation. That means they’re getting twice as much equity as they would have otherwise. And that equity is coming straight out of your pocket.
I once invested in a company that had a $3 million cap on their note. They ended up raising their Series A at a $20 million valuation. The founders got diluted by an extra 15% because of that cap. They were so focused on getting the deal done that they didn’t think about the long-term consequences. The founders were diluted so much they lost control of their own company. It was a bloodbath.
Discounts Are Not Your Friend
A discount is another common feature of convertible notes. It gives your early investors a discount on the price of the equity when the note converts. A 20% discount is pretty standard.
But again, it’s not your friend.
A 20% discount means your investors are getting 20% more equity for their money. That’s 20% less for you and your team. It might not sound like a lot, but it adds up. Especially when you’re raising multiple rounds of funding.
I’ve seen founders give away 30% or even 40% of their company before they even get to their Series A, all because of discounts on their convertible notes. It’s a slow, painful death by a thousand cuts.
The "Unpriced" Round is a Myth
Founders love convertible notes because they think they’re avoiding a priced round. They think they’re not giving up any equity until the next round. But that’s a myth.
Investors are not stupid. They know exactly how much of your company they want to own. They have a target ownership percentage in mind, and they’re going to get it, one way or another.
The convertible note is just a way to kick the can down the road. But the can always comes back, and it’s usually bigger and uglier than it was before.
I had a founder come to me once who had raised $1 million on a convertible note with no valuation cap. He thought he was a genius. He thought he had pulled a fast one on his investors. But when it came time to raise his Series A, he found out that his investors had a side letter that gave them the right to convert at a 50% discount to the Series A price. He was screwed. He had to give up half his company just to get the deal done.
The Timeline is Not on Your Side
Convertible notes have a maturity date, usually 18 to 24 months. If you don’t raise a priced round by then, the note comes due. And if you can’t pay it back, the noteholders can force you into bankruptcy.
I’ve seen it happen. A promising company, a great team, a solid product. But they couldn’t raise their Series A in time, and their convertible noteholders pulled the plug.
It’s a brutal way to die.
What About SAFEs?
I know what you’re thinking. “But Sahin, what about SAFEs? Aren’t they better than convertible notes?”
Yes and no.
SAFEs (Simple Agreement for Future Equity) were created by Y Combinator as an alternative to convertible notes. They’re simpler, they’re more founder-friendly, and they don’t have a maturity date. But they’re not a silver bullet.
SAFEs still have valuation caps and discounts. And they can still lead to massive dilution if you’re not careful. I’ve seen just as many founders get screwed by SAFEs as I have by convertible notes.
The problem isn’t the instrument. The problem is the mindset. Founders are so desperate for cash that they’re willing to sign anything. They don’t take the time to understand the terms, and they don’t negotiate.
My Framework for Convertible Notes and SAFEs
So what’s the solution? How do you avoid the convertible note and SAFE trap?
Here’s the framework I use, both as a founder and as an investor.
Rule #1: Avoid Them if You Can
The best way to avoid the trap is to not play the game at all. If you can, raise a priced round from the beginning. It’s more work, but it’s worth it in the long run.
You’ll have a clean cap table, you’ll know exactly how much equity you’ve given up, and you won’t have to worry about valuation caps, discounts, or maturity dates.
If you can’t raise a priced round, consider alternatives like revenue-based financing. It’s not for everyone, but it can be a great way to get the capital you need without giving up equity.
Rule #2: If You Can’t Avoid Them, Negotiate These Three Things
If you have to raise on a convertible note or SAFE, there are three things you need to negotiate:
- The valuation cap: Get it as high as you possibly can. And if you can, get rid of it altogether. A good rule of thumb is to set the cap at 2-3x your current traction.
- The discount: Get it as low as you possibly can. And if you can, get rid of it altogether. 10-15% is reasonable. 20% is pushing it. Anything more than that is a red flag.
- The maturity date (for convertible notes): Get it as long as you possibly can. 36 months should be your minimum. This gives you enough time to raise your next round without having a gun to your head.
Rule #3: Have a Clear Conversion Strategy
If you’re going to raise on a convertible note or SAFE, you need to have a clear plan for how you’re going to convert it. That means you need to know when you’re going to raise your next round, how much you’re going to raise, and at what valuation.
Don’t just wing it. Have a plan. And then execute on that plan.
Don’t Be Another Statistic
I’ve made over 200 angel investments. I’ve seen it all. The good, the bad, and the ugly. And the ugliest thing I’ve seen is what happens to founders who don’t understand the brutal reality of convertible notes and SAFEs.
Don’t be another statistic. Take control of your fundraising. Understand the terms, negotiate hard, and have a plan.
Your company’s future depends on it.
Frequently Asked Questions
How can I apply this thinking to my own situation?
Start by identifying the core principle behind the opinion, not the specific example. Then ask yourself: does this principle apply to my context? If yes, test it in a small, low-risk way before going all in.
Do all experts agree with this view?
No, and that's fine. The best ideas in business are often contrarian. I share my perspective based on my experience and data, but I encourage you to seek out opposing viewpoints and form your own conclusions.
What's the most common pushback you get on this?
People often push back by citing exceptions or edge cases. And they're usually right that exceptions exist. But building a strategy around exceptions rather than patterns is a losing game for most founders.
What experience informs this perspective?
This perspective comes from over a decade of building companies in Silicon Valley, two successful exits (RemoteTeam to Gusto, MovieLaLa to Gfycat), and investing in 200+ startups including Anthropic, OpenAI, and Scale AI. I write about what I've lived.