SAFE Notes, Convertible Notes & Seed Financing

A short investment document can create long-term obligations. Before accepting seed capital, founders should understand what converts, when it converts, how ownership changes, and what the company must disclose and file. Philip Falco, Attorney & CPA, helps review financing documents alongside the capitalization model and financial records.

Compare the Actual Terms

A SAFE commonly provides a right to future equity on specified events. A convertible note is generally debt with terms such as interest, maturity, and conversion rights. A priced equity round issues shares with defined rights at closing. Forms differ, and amendments or side letters can materially change the deal.

• Valuation cap, discount, and the definitions used to calculate conversion.
• Pre-money or post-money mechanics and treatment of the option pool.
• Interest, maturity, repayment, or extension rights where applicable.
• Pro rata rights, information rights, and most-favored-nation provisions.
• Treatment of a sale, dissolution, or financing that does not meet a threshold.
• Consent rights and interaction with earlier instruments.

Model Dilution Before Signing

Build scenarios using all outstanding instruments, expected new money, and the proposed employee pool. A cap is not a promise of a particular ownership percentage in every future scenario. Multiple closings and inconsistent side letters can make a simple-looking capitalization table misleading.

Keep the assumptions with the model. Show founders what changes if the next round is smaller, later, or priced differently from the plan. The legal definitions in the instruments should drive the calculation, rather than a spreadsheet formula copied from another deal.

Securities Compliance Starts Before the Wire

Offers and sales of securities require registration or an available exemption. Rule 506(b) generally prohibits general solicitation; Rule 506(c) permits it subject to conditions including accredited purchasers and reasonable verification. Review the offering path before public fundraising announcements. Regulation D offerings generally require a Form D notice within 15 days after the first sale. See the SEC exempt-offerings overview.

Exemption from registration does not remove antifraud obligations. State notice requirements and fees may remain. Investor materials should fairly describe the business, risks, use of proceeds, and material facts. See the SEC’s exempt-offering questions. Review compensated finder arrangements before promising a success fee.

Organize the Investor Diligence File

• Formation documents, governing agreements, and corporate approvals.
• Ownership ledger, grants, prior financings, and side letters.
• Founder and developer IP assignments and material licenses.
• Financial reports, cash forecast, tax returns, and outstanding liabilities.
• Customer, employment, contractor, and other material contracts.
• A list of disputes, missing documents, and other unresolved issues.

The review should identify gaps as well as collect documents. A clean folder cannot cure a missing assignment or an unapproved issuance. Address corrections with accurate dates and appropriate approvals.

Connect Financing to the Prototype Budget

Explain what the round is intended to achieve: technical development, testing, regulatory work where relevant, key hires, or customer validation. Tie those milestones to cash forecasts and investor reporting. Separately analyze the accounting and tax treatment of the instrument; the marketing label “SAFE” does not resolve every classification question.

Prepare for the Next Round

Institutional investors may require changes to governance, equity plans, financial reporting, and existing investor rights. Review the entity structure and equity program early. Legal and financial preparation supports diligence but does not guarantee funding or include investor placement services.

Bring all proposed terms and prior instruments to the consultation, including unsigned side letters and any public fundraising communications.

AI Startup Investor Diligence

For an AI company, review developer assignments, model and data licenses, compute commitments, and support for claimed tax benefits alongside the financing documents. See AI startup contracts and IP considerations.