Question 1

What is a convertible note or SAFE?

Accepted Answer

Ways of raising money **without agreeing a valuation now** — the investment converts into shares at a later priced round, on terms set in advance.

**The problem they solve.** Valuing a very early company is close to arbitrary, and negotiating one is slow and expensive in legal fees. A convertible instrument defers the question: take the money now, decide the price when there is more information.

**Convertible note (or loan note).** Structured as **debt** that converts to equity on a trigger event — usually a qualifying funding round. It has a **maturity date** and frequently an **interest rate**, which typically rolls into the conversion rather than being paid.

**What happens at maturity if no round occurs** is the significant risk: the note may become repayable, which a startup usually cannot do. In practice it is renegotiated, but the leverage sits with the investor.

**SAFE (Simple Agreement for Future Equity).** Developed by Y Combinator. **Not debt** — no maturity date, no interest, no repayment obligation. Simply a right to shares on a future event. Simpler and more founder-friendly, and now widely used.

**The two terms that actually matter in both:**

**Discount.** The investor converts at a percentage below the price paid in the priced round — commonly 10–25% — rewarding early risk.

**Valuation cap.** A **maximum** valuation at which their money converts, regardless of what the round is actually priced at. If the cap is £5m and the round prices at £15m, they convert as though the company were worth £5m — getting three times the equity per pound.

Where both apply, the investor usually receives whichever is more favourable.

**The danger founders underestimate.** Caps look like a technicality and are not. **A low cap on a round that goes well causes very heavy dilution**, and because conversion happens alongside the new investment, the dilution lands on founders rather than on the new investor. Raising several instruments at different caps compounds this, and the effect is invisible until the moment it is not.

**Always model conversion** at several outcomes before signing. **Pre-money and post-money SAFEs** allocate dilution differently, and the distinction is significant.

General information, not legal or financial advice.

Question 2

What actually matters in a term sheet?

Accepted Answer

Far less than the valuation, and far more than founders expect. A term sheet is mostly non-binding, but it sets the terms everything else follows from, and the economic and control clauses matter

Question 3

What is an earn-out, and why do acquisitions use them?

Accepted Answer

A structure where part of the purchase price is paid later, conditional on the business hitting agreed targets. It exists to bridge a disagreement about value: the seller believes the business will

Question 4

What is a retainer, and how should you structure one?

Accepted Answer

An ongoing arrangement where a client pays regularly rather than per project. It converts unpredictable project income into recurring revenue — and badly structured retainers are one of the most

Question 5

What is EBITDA, and why is it criticised?

Accepted Answer

Earnings before interest, tax, depreciation and amortisation. It strips four things out of profit to give a figure intended to show operating performance independent of financing and accounting

Question 6

What is invoice finance, and what does factoring actually cost?

Accepted Answer

Borrowing against money customers already owe you — releasing cash from unpaid invoices rather than waiting for payment terms to run. It solves a genuine problem for growing businesses and is

Question 7

How do I prepare to pitch to angel investors?

Accepted Answer

To prepare for pitching to angel investors, develop a clear business plan, create a compelling pitch deck, practice the presentation, and understand the investor's background.

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