> You can raise money at any time without having to worry about creating tax risks and without having to mess up your equity pricing.
If you raise a note with an $8M cap, it might not have the same impact on tax and equity pricing as an actual equity round at an $8M valuation. On the other hand, I wouldn't say the impact is zero. A share of stock in a company that's raised a convertible note is arguably less risky than one with no cash period. And while you're not necessarily legally obligated to raise above the cap, it certainly anchors expectations for future rounds. Even if there isn't a cap, there's some anchoring going on based on the amount of money raised -- i.e. if I raised $2M in notes, it's going to feel weird to raise less than that in a Series A. And to the extent that investors have expectations about the percentage of a company they want to own, anything that affects the amount you expect to raise affects your Series A valuation.
> Basically, there is a whole different dynamic in using notes/SAFEs versus doing an equity round.
Note that the dynamic is technically orthogonal to which instrument you use to raise. You could (probably) draft a simple seed stock issuance that functioned similarly to a SAFE with a cap (e.g. preferred stock, 1x liquidation preference, and pull-up rights) in terms of transaction costs, flexibility, etc.
Practically though, this doesn't happen often. Again, the issue is really about anchoring. If you're going to issue preferred seed stock, you have to put some kind of language down about the rights of that stock. And while this language can always be amended, what you put (or don't put) down has the psychological effect of anchoring the Series A discussion.
> You can raise money at any time without having to worry about creating tax risks and without having to mess up your equity pricing.
If you raise a note with an $8M cap, it might not have the same impact on tax and equity pricing as an actual equity round at an $8M valuation. On the other hand, I wouldn't say the impact is zero. A share of stock in a company that's raised a convertible note is arguably less risky than one with no cash period. And while you're not necessarily legally obligated to raise above the cap, it certainly anchors expectations for future rounds. Even if there isn't a cap, there's some anchoring going on based on the amount of money raised -- i.e. if I raised $2M in notes, it's going to feel weird to raise less than that in a Series A. And to the extent that investors have expectations about the percentage of a company they want to own, anything that affects the amount you expect to raise affects your Series A valuation.
> Basically, there is a whole different dynamic in using notes/SAFEs versus doing an equity round.
Note that the dynamic is technically orthogonal to which instrument you use to raise. You could (probably) draft a simple seed stock issuance that functioned similarly to a SAFE with a cap (e.g. preferred stock, 1x liquidation preference, and pull-up rights) in terms of transaction costs, flexibility, etc.
Practically though, this doesn't happen often. Again, the issue is really about anchoring. If you're going to issue preferred seed stock, you have to put some kind of language down about the rights of that stock. And while this language can always be amended, what you put (or don't put) down has the psychological effect of anchoring the Series A discussion.