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Why founders reach for convertible notes
Convertible notes feel safe because they delay hard decisions:
You don’t have to price the company yet.
You avoid negotiating valuation when revenue is messy.
Legal costs are lower upfront.
Investors frame them as “bridge capital” or “just to get you to the next milestone.”
In the moment, that sounds reasonable.
Especially when cash is tight and momentum matters.
At first, nothing looks wrong.
You raise $250k. Maybe $500k.
No dilution today. No drama.
But under the surface, the note is already setting rules for a future conversation you haven’t rehearsed.
Where convertible notes quietly blow things up
Convertible notes aren’t evil.
They work when:
There’s a clear, near‑term priced round
The cap is grounded in a realistic future valuation
Total note volume is intentionally limited
Conversion scenarios are modeled before signing
The most common error isn’t choosing a note.
It’s choosing a note without modeling who you become if everything goes right.
Most founders model downside survival. Very few model upside conversion.
That’s where the quiet blow‑ups live.
1. The valuation cap becomes the real valuation
Founders often think of the cap as a ceiling.
Investors treat it as the floor.
When the priced round comes, the cap anchors expectations, even if your business has materially improved. If your growth outpaced the cap, you don’t “win.” You simply convert at the cap and give away more than you expected.
The surprise usually sounds like:
“Wait… why am I giving up that much ownership?”
2. Discounts stack in ways founders don’t intuitively calculate
A 20% discount doesn’t feel dangerous on its own.
But when combined with:
a low cap
multiple notes
different issue dates
…the effective dilution compounds.
Most founders never run the blended conversion math until the term sheet arrives.
By then, the leverage is gone.
3. Multiple notes quietly turn into a shadow round
Each note feels small and manageable.
Together, they behave like a priced round you never negotiated.
Different investors.
Different terms.
Different expectations.
When you finally raise equity, you’re not just negotiating with new money, you’re reconciling the ghosts of old decisions.
4. Notes can make your next round harder, not easier
Founders assume notes make future fundraising smoother.
In reality, they often introduce friction:
New investors worry about how much of the round will be eaten by conversion
Ownership outcomes become less predictable
Your post‑money story gets muddy
What was meant to “buy time” ends up narrowing your options.
The real risk: future‑you loses room to maneuver
The most damaging part of a poorly structured note isn’t dilution.
It’s a constraint.
By the time you’re ready to raise properly:
Your minimum acceptable valuation is boxed in
Your ownership targets may already be broken
Your negotiating power is weaker than your traction suggests
You didn’t fail.
You just ran out of clean moves.
If you’re holding notes right now
Ask yourself:
What ownership do I land at if I raise at my best‑case valuation?
How much of the next round is already spoken for?
Would I still sign these terms if this were equity today?
If those answers feel fuzzy, that’s the signal.
Not panic.
Just information you were never given.
Funding Corner
A weekly section where I share funding opportunities (grants, loans, programs) and how to approach them without the overwhelm.
1) Zoom Solopreneur Grant + Visibility Program 🎥
💸 Amount: Financial grants awarded to the Top 5 honorees
(Exact dollar amount not publicly disclosed)
👤 Best for: Solopreneurs and one-person businesses building scalable, tech-enabled ventures
📅 When: Deadline: Thursday, February 13
🔗 Learn More: https://www.zoom.com/en/audiences/solopreneurs/
👉 Tip: This is a visibility-driven grant. Clearly show how Zoom powers your business today and how your venture is built to scale beyond you.
2) Intuit QuickBooks + Mailchimp Small Business Hero Grant 🦸♀️
💸 Amount: $20,000 + business tools
👤 Best for: Established small businesses with strong community or customer impact stories
📅 When: Deadline: Friday, February 14 (current phase)
🔗 Learn More: https://intuit.promo.eprize.com/smallbusiness/
👉 Tip: Judges value story over polish. Focus on resilience, customers served, and real-world impact.
3) Crafting the Future – Artist Micro & Macro Grants 🎨
💸 Amount:
• Micro Grants: $500
• Macro Grants: Up to $10,000
👤 Best for: BIPOC visual artists and artist-led community projects
📅 When: Deadline: Saturday, February 15
🔗 Learn More: https://craftingthefuture.org/our-approach/
👉 Tip: Micro grants = personal support. Macro grants = community impact. Tailor your narrative accordingly.
4) FedEx Small Business Grant Contest 📦
💸 Amount:
• Grand Prize: $50,000
• Additional awards: $30,000 + services
👤 Best for: Growth-oriented small businesses with a compelling brand story
📅 When: Opens: February 16 (runs into March)
🔗 Learn More: https://www.fedex.com/grantcontest
👉 Tip: A short pitch video dramatically improves visibility, even if it’s optional.
5) Industry Tax Insights: Gig Economy (SW Texas SBDCs) 🧾
💸 Amount: Free educational session
👤 Best for: Gig workers, freelancers, independent contractors, short-term rental hosts, and self-employed small business owners
📅 When: Wednesday, February 18 | 1:00–2:30 PM (CT)
🔗 Learn More: SW Texas Small Business Development Centers (SBDCs)
👉 Tip: Come with real questions. This session is especially valuable if you’re unsure whether you’re classified as an employee or self-employed, mistakes here can get expensive at tax time.
6) Women Who Scale Grant 👩💼📈
💸 Amount: $2,500
👤 Best for: Women-owned or women-led businesses actively scaling (1+ year in business)
📅 When: Deadline: Thursday, February 20
🔗 Learn More: https://www.instagram.com/p/DTvy_gED1v2/
👉 Tip: This is scaling capital. Focus on systems, growth infrastructure, or expansion, not survival expenses.
Community Note
If you’re reading this and thinking, “This sounds familiar,” you’re not alone.
A lot of founders only realize how binding their notes are when they finally try to raise cleanly—and suddenly the math doesn’t match the story they’ve been telling themselves.
If you’re comfortable sharing, this is an open conversation:
Have you raised on notes or SAFEs?
What surprised you later?
What do you wish you had modeled earlier?
Your experience might be the exact clarity another founder needs before they sign.
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