A Note on Notes – A follow-up to raising late/post seed rounds

I wrote a post recently on late seed / post seed rounds for saas companies in Europe and received a lot of comments asking to expand more on the benefits of a convertible vs. a priced equity round. At the bottom of this post I’ve also included how to structure a convertible with the relevant terms from what I’ve been seeing over the past few months.

The benefits of a convertible note for a startup that has made tremendous progress since their seed round but is not quite ready for a Series A are (i) it is faster than an equity round to raise (ii) your legal costs are cheaper (iii) you can keep the note open and have a rolling close to build on fundraising momentum (and hopefully continued good traction in the business).

Faster to raise

I have noticed over the years that there is something about the psychology of investors and convertibles that for one reason or another they can make a decision much faster about leading or participating in a note vs. a priced round. It could be that the legals are more straight forward (and shorter). The diligence and number of meetings is probably equal, but when you move past the term sheet phase and are trying to close the equity docs, things can stall. In Europe (where I invest and where I have much more data), convertibles also tend to have more investors involved than in an equivalent size equity round.

The other thing I have noticed is that when founders raise a convertible and are going to the market looking for new money instead of relying on their existing investors, founders set the price. So this takes even more time out of fundraising because in one meeting, you can do the pitch and disclose the terms of the convertible. This makes it very straight forward for an investor.


You can use industry approved documents like Seedcamp’s Convertible Note created by JAGShaw Baker and cut down on how much time your lawyers spend negotiating and updating your docs. You also won’t need to cover any of the investors’ costs so you will save at least £10-30k in precious equity.

Rolling closes

To me, this is the single greatest advantage of a convertible. Let’s assume you are growing 15–20% MoM, have a healthy pipeline, and have some great reference customers and are raising $1.5m in late seed. You have a new investor plus a well known angel who either set the terms with $200k or were the first to sign a term sheet with the terms you set. Also, your existing angels are investing $100k.

You can communicate to other potential investors that you already have $300k committed, including relevant angel x and hot software exec y, and can go to the market from a position of strength (insiders are re-upping and they have a strong new lead) which gives other investors social proof. It also makes it really easy for other investors to come in because (i) the terms have been set and (ii) they can see a book being built with exactly who else is coming into the round. It is typically in this scenario that 2–3 VC funds will jump on board and commit $300–400k each and get you to the point where you are oversubscribed.

Furthermore, the rolling close gives you the flexibility to focus on short-term growth within the business (on-boarding your first sales people, closing your first six figure deal, developing your customer success program etc). Founders that I know that have successfully raised late seed convertibles were almost always oversubscribed by the end of the process due to the social proof of having investor x or y committing to the round and/or having reached another key milestone during the fundraise. I don’t have a large enough data-set to know exactly what amount founders were looking to raise vs. what they ultimately raised, but the main benefit of the convertible is it allows you to reach your funding goal in a faster time frame with the potential to raise even more once you built momentum. Not to say that you can’t do this in a straight equity round, but the inflection point of company traction, fundraising traction and creating real FOMO amongst VCs is a delicate act.

Relevant terms

There are several key items to be aware of and Carlos at Seedcamp wrote an excellent post on this a few years ago, so I thought it would be more beneficial to share terms that I am seeing in the market now. These only pertain to that late seed convertibles and are for the software companies with good to great traction:

  • Valuation Caps – $5–6m for companies early in generating revenue but with good growth. $5–8m+ for companies on c$50k MRR+ and typically $10–12m+ for those nearing $100k MRR with very fast MoM growth (as well as those founders that tell the best stories and create FOMO).
  • Discounts – Almost always 20% but I have seen as high as 25%.
  • Interest – 5-6%.
  • Conversion rights – Typically anywhere from $500k to $2m.
  • Maturity – Typically 3 years
  • Other rights – Typically no board or board observer rights are given; information rights are given but you’re probably not sending out monthly board packs yet


Post Seed Rounds in Europe for SaaS Startups (or Why You’re Not Ready for a Series A)

Most early stage company financings go something like this these days:
(Self-funded / Friends and family / Accelerator / Pre-Seed Round) –> (Seed Round) –> (Late Seed Round) –> (Series A)
(Seed) -> (Late Seed) -> (Series A)
Very few go from Seed directly to Series A which was the norm for a very long time in the venture capital industry. Why is this happening?
Following a seed round of $500k to $1m+ most saas companies increase headcount in engineering and product and eventually make their first commercial hires. Depending on the complexity of the sale and the size of license, most startup founders will close the first 10-20+ deals before hiring anyone in sales. If you are in a category where you can survive and grow through self-service, then most of your ‘commercial’ money will go towards growing your marketing and support/ops teams.
The best saas companies I’ve seen across Europe over the last two years raised less than $1m in seed and were able to get to $300k+ in MRR and continue to grow organically without needing venture $ (but still took venture $ to grow even faster). In very good cases, companies raised up to $1m in seed and by the time they closed their A round were on more than $100k MRR and operating at close to cash flow b/e. In most other cases, I see companies get to anywhere from $10k to $75k MRR on their seed capital. For some companies selling into large enterprises with large 5 or 6 figure ACV deals (for example many security co’s or next-gen infrastructure co’s) I’ve seen several of them go through $1m of funding and have several live POC’s but no real revenue, just the hope of converting an attractive pipeline (which is a huge positive btw). 
Controlling for team, product, market and time – until about late 2015, these numbers used to attract Series A investors who would lead rounds of $3-5m. But the majority of these investors have moved up market and now want companies on a minimum of $1-3m ARR with positive sales economics and at least one or two quarters of renewals. This is all-good, and makes a lot of sense for some funds, but what do you do as CEO when you eventually find product/market fit AND an early replicable sales model and need to raise further funding to support your growth.
Welcome to the land of late seed, post seed, pre-A, – wade through the nomenclature and pick your own term for what this is….(I prefer late seed for no reason in particular). What late seed is not, is a bridge round where you need more cash to hit product market fit. Some companies spend all of their pre-seed or seed capital before hitting pmf, and it is typically existing investors who throw good money after bad to continue to fund them, not new investors.

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