Chapter 6: Raising Capital
Finally, let’s talk about debt financing. Unlike priced rounds or SAFEs—where investors expect equity in return—debt financing involves borrowing money that must be repaid, usually with interest.
There are two common forms of startup debt financing:*
Convertible Notes – These are similar to SAFEs in that they convert into equity later, but unlike SAFEs, they have an interest rate and a maturity date (meaning they must be repaid if they don’t convert).
Venture Debt – This is a loan provided by banks or specialized lenders that must be repaid in cash, often used to extend runway between funding rounds.
Convertible notes often include a valuation cap and/or a discount rate, just like SAFEs. However, they also include an interest rate (often 4-8%) and a maturity date (typically 18-24 months). If a startup hasn’t raised a priced round by the maturity date, the lender may require repayment or renegotiation.
Venture debt, on the other hand, is useful for later-stage startups that already have revenue but don’t want to give up more equity. These loans typically require monthly payments and can be risky if the company doesn’t generate enough cash flow to make those payments.
Pros of Debt Financing:
No immediate dilution—founders keep their equity.
Convertible notes allow startups to raise funds before a priced round.
Venture debt provides extra cash without giving up ownership.
Cons of Debt Financing:
Requires repayment—which can be dangerous for early-stage startups with no revenue.
Investors may be hesitant to give loans to pre-revenue startups.
Convertible notes can become problematic if they don’t convert before the maturity date.
So, which financing option is right for your startup? It depends on your stage, fundraising goals, and investor preferences. If you’re early-stage and want to raise funds quickly, a SAFE is a simple and founder-friendly option (they’ve also been really popular lately, so investors are generally friendly towards SAFE’s). If you’re ready to set a valuation and bring in experienced investors, a priced equity round is a good choice. If you want to avoid dilution and have confidence in future revenue, debt financing might work—but it comes with repayment risk.
Most startups use a combination of these methods as they grow. A startup might raise an early SAFE round, then a priced equity round for Series A, and later use venture debt to extend runway before a Series B.