How to close a fundraising round quickly with low legal fees

Hi! I’m glad you’re here. You’ve made it to issue #16 of VC Demystified🪄.

My name’s Nicole - I’m a Principal at an early stage venture fund, and I know firsthand that VC can often be a black box. Breaking into the industry may feel daunting and resources can seem scarce and inaccessible. I wanted to put together a newsletter to give others the playbook I wish I had when I first started.

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Today’s deep dive: Understanding convertible instruments and how they can be used to ensure a quick & affordable fundraise

My personal mission is to open as many doors as possible for other people and this newsletter is just one avenue to do that. As always, I will continue to post VC insights daily across my socials for those of you who prefer those channels.

Understanding convertible instruments and how they can be used to ensure a quick & affordable fundraise

When it comes to fundraising for early-stage startups, two common paths are often considered:

1. Convertible Instruments

2. Priced Rounds

In this post, we'll dig into the first option: convertible instruments. These are a popular choice for founders who want to raise money quickly without getting bogged down in lengthy negotiations over their company's valuation. Since the company isn’t actually getting valued at that round, there are less documents to negotiate and less legal back and forth.

*Tip: Jump to the end of this newsletter to get a simple explanation of convertible instruments in layman’s terms. The beginning of this newsletter will be more complex but don’t worry the section “Contextualizing Convertible Instruments” should clear it up!

What Are Convertible Instruments?

A convertible instrument is an investment that allows a company to raise capital while deferring the discussion of its valuation to a later date. This approach offers several advantages over a traditional priced round:

• Speed: Convertible instruments can be quicker to close, allowing startups to get cash wired faster.

• Cost-Effective: They are generally less expensive to set up than priced rounds, saving valuable resources for early-stage startups.

• Flexibility: Founders maintain more control over their company’s future by postponing valuation negotiations.

Whether you’re a founder or VC, understanding the different vehicles you can use to fund / invest in a business is critical.

I will cover the different types of convertible instruments, convertible notes and the one that is ubiquitously known within VC, the SAFE.

I’ll dive into how each one of these works so you can understand the right time to use them and I’ll provide a real world example to contextualize the mechanics of these instruments.

Let’s get into it!

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