Your First Pre-Seed Round: A Founder's Guide to SAFEs, Convertible Notes, and Key Deal Terms

Raising your first pre-seed round? This comprehensive guide covers everything you need to know about SAFEs, convertible notes, securities compliance, and essential deal terms to protect your interests while giving investors confidence.

Introduction

Picture this: You've built an MVP, validated your idea with early customers, and now you're ready to raise your first institutional capital. You schedule coffee with an angel investor who's interested in writing a $50,000 check. They mention wanting to invest via a "SAFE with a $10 million cap and pro rata rights." You nod enthusiastically, but inside, you're thinking: "What does any of that actually mean?"

You're not alone. According to recent data from Carta, only 48% of seed-funded startups successfully raise a Series A in 2025, and many of those failures stem from poor deal structure in early rounds. The terms you agree to in your pre-seed round will shape your cap table, investor relationships, and future fundraising ability for years to come.

This guide breaks down everything you need to know about raising your first pre-seed round—from choosing between SAFEs and convertible notes to understanding securities compliance, rolling closes, and the investor rights that matter most. Whether you're raising $100,000 from angels or $1 million from early-stage funds, you'll learn how to structure deals that protect your interests while giving investors the confidence to back your vision.

Understanding Your Fundraising Instrument Options

Before you can raise capital, you need to choose the right financial instrument. For pre-seed rounds, you have two primary options: Simple Agreements for Future Equity (SAFEs) and convertible notes. Your choice impacts everything from legal costs to investor appeal to your company's financial obligations.

SAFEs: The Founder-Friendly Default

Y Combinator introduced the SAFE in 2013 as a streamlined alternative to convertible notes, and it's become the dominant instrument for early-stage fundraising. SAFEs are designed to be exactly what their name suggests—simple. They're not debt instruments, which means they don't create a loan obligation on your company's books.

Here's what makes SAFEs attractive: no interest accrual, no maturity date, and no repayment obligation. You receive capital from investors in exchange for the right to receive equity in a future priced round. The SAFE converts into preferred stock when you raise your next equity round, typically a Series A.

In 2023, SAFEs accounted for 80% of pre-seed invested capital according to Carta's fundraising data. They're particularly popular among very early-stage startups that are still in the seed or pre-seed stage, where valuation is highly uncertain and founders want to avoid complex negotiations.

The standard Y Combinator SAFEs come in several variations: post-money SAFE with a valuation cap, post-money SAFE with a cap and discount, and MFN-only SAFEs (more on these terms later). Most startups use the valuation cap version, which provides investor protection while remaining straightforward to execute.

Convertible Notes: The Traditional Bridge Instrument

Convertible notes have been around longer than SAFEs and remain common in certain industries and situations. Unlike SAFEs, convertible notes are debt instruments—essentially loans that convert into equity rather than requiring cash repayment.

Key characteristics of convertible notes include an interest rate (typically 6-10% annually) and a maturity date (usually 18-24 months). This creates both advantages and disadvantages. The interest component can be beneficial for investors as it increases the value of their investment over time. For startups, it means taking on a debt obligation that technically needs to be repaid if the note doesn't convert before maturity.

In practice, convertible notes rarely get repaid in cash. They usually convert into shares during the next funding round, or if the company becomes insolvent, investors claim their funds as creditors. However, having that maturity date hanging over your head can create pressure if fundraising takes longer than expected.

Certain industries still prefer convertible notes over SAFEs. According to industry data, medical devices, hardware, and biotech companies see significantly more investment through convertible notes. This often reflects investor preferences in these capital-intensive sectors where traditional debt instruments feel more appropriate given the longer development timelines.

The Practical Differences That Matter

When deciding between SAFEs and convertible notes, consider these practical implications:

Speed and cost: SAFEs are faster to execute and have lower legal costs because they're standardized agreements with fewer terms to negotiate. You can often close a SAFE round in days rather than weeks.

Investor appetite: Some institutional investors and funds prefer convertible notes because they understand debt instruments better. However, this is changing rapidly as SAFEs become more mainstream. Many sophisticated investors now expect and prefer SAFEs for pre-seed rounds.

Financial statement impact: Convertible notes appear as debt on your balance sheet and reduce available cash through interest payments. SAFEs don't impact your cash flow and don't show up as liabilities, which can be advantageous when fundraising or applying for credit.

Conversion complexity: Both instruments convert during equity rounds, but the mechanics differ. SAFEs have cleaner math for determining ownership percentages, especially when using post-money valuation caps.

For most pre-seed founders in 2025, SAFEs are the default choice. They offer simplicity, founder-friendly terms, and broad investor acceptance. However, if you're in a sector where convertible notes dominate or dealing with investors who specifically prefer them, they remain a perfectly viable option.

Navigating Securities Compliance Requirements

Here's an uncomfortable truth: many founders close their first fundraising round without fully understanding the securities laws they need to follow. This isn't just a paperwork issue—it's a legal requirement that can have serious consequences if you get it wrong.

Why Securities Laws Matter for Your Pre-Seed Round

When you sell equity or equity-equivalent instruments (like SAFEs) in your company, you're selling securities under federal and state law. The Securities Act of 1933 requires companies to register securities offerings with the SEC unless they qualify for an exemption. Registration is expensive, time-consuming, and completely impractical for early-stage startups raising small rounds.

Fortunately, Regulation D provides exemptions specifically designed for private placements. Almost all pre-seed rounds rely on Rule 506 exemptions, which allow you to raise unlimited capital without SEC registration. However, "exemption" doesn't mean "no compliance"—it means following a different set of rules.

Rule 506(b): The Standard Path for Pre-Seed Rounds

Most pre-seed rounds use Rule 506(b), which provides maximum flexibility while minimizing verification burdens. Under this exemption, you can raise unlimited amounts from accredited investors plus up to 35 sophisticated non-accredited investors.

Accredited investors meet specific financial thresholds: individuals with income exceeding $200,000 ($300,000 with a spouse) for the past two years, or net worth exceeding $1 million (excluding primary residence). Most angel investors and all institutional funds qualify as accredited.

The "up to 35 non-accredited investors" provision sounds useful, but there's a catch. Any non-accredited investor must be "sophisticated"—meaning they have sufficient financial knowledge to evaluate the investment's risks. More importantly, including non-accredited investors requires you to provide extensive disclosure documents, including audited financial statements in some cases. This dramatically increases legal costs and complexity.

In practice, most startups using Rule 506(b) stick exclusively to accredited investors to keep things simple. The key restriction with 506(b) is that you cannot use general solicitation or advertising. This means no posting about your raise on social media, no mass emails to people you don't know, and no public pitch events to promote the round.

Instead, you must rely on pre-existing relationships—investors you knew before starting the fundraising process. The SEC hasn't strictly defined what constitutes a "pre-existing relationship," but best practices include meeting investors at private events, through referrals, or building connections before you start fundraising.

Rule 506(c): When You Want to Advertise

If you want to publicly promote your raise or find investors you don't already know, Rule 506(c) provides an alternative. This exemption allows general solicitation—you can tweet about your round, demo at pitch events, or send cold emails to potential investors.

The trade-off? You must take "reasonable steps to verify" that all investors are accredited. This means you can't rely on self-certification. You need to review tax returns, bank statements, or get third-party verification from attorneys or CPAs. Recent SEC guidance in March 2025 clarified that high minimum investment amounts ($200,000+ for individuals, $1,000,000+ for entities) combined with written representations can constitute reasonable verification steps, making 506(c) somewhat easier to use than before.

Most pre-seed founders still choose 506(b) because they have enough warm connections to fill their round without public solicitation, and the investor verification requirements of 506(c) create additional friction.

The Form D Filing Requirement

Regardless of whether you use 506(b) or 506(c), you must file Form D with the SEC electronically within 15 calendar days after your first sale of securities. The "first sale" occurs when an investor is contractually committed to invest—typically when they sign the SAFE or convertible note.

Form D is straightforward—it includes basic information about your company, the offering size, the exemption you're claiming, and details about founders and officers. There's no filing fee, and while it's technically possible to file yourself, having your attorney handle it ensures compliance and proper timing.

State-Level "Blue Sky" Compliance

Federal exemptions don't eliminate state securities law requirements entirely. Most states require a "notice filing"—essentially submitting a copy of your federal Form D to state regulators along with a state-specific form and filing fee (typically $100-500 per state).

The good news: Rule 506 offerings are "covered securities" that preempt state-level registration requirements. The bad news: you still need to make these notice filings in each state where you have investors. Missing state filings can create problems down the road, especially during due diligence for future rounds.

Professional legal help is worth the investment here. Securities compliance isn't optional, and fixing violations after the fact is far more expensive than getting it right initially. Platforms like Paralex can connect you with experienced attorneys who can handle your Regulation D filings at a fraction of traditional law firm costs.

Rolling Closes vs. Initial Closing Strategies

Once you start getting investor commitments, you'll face a crucial decision: Do you wait until you have commitments for the full round amount before closing, or do you start taking money as investors commit? This is the choice between a single closing and a rolling close structure.

The Traditional Single Closing Approach

In a perfect world, you'd secure commitments from all your target investors, they'd all complete due diligence simultaneously, and you'd have a single closing where everyone wires funds on the same day. This approach is clean, simple, and increasingly rare in practice.

Single closings work well when you have a small number of large investors who can move quickly and coordinate timing. If you're raising $500,000 from three investors who all commit within a two-week period, there's no reason to complicate things with a rolling close structure.

The main advantage is administrative simplicity. Everyone signs the same documents on the same day, and you don't need to track multiple closing dates or coordinate subsequent closings. Your cap table is also simpler to manage since all pre-seed investors come in at exactly the same terms and timing.

Understanding Rolling Closes

A rolling close is a mechanism that keeps your round open for additional investors after you've completed an initial closing with your first committed investors. Rather than waiting for all commitments, you close with the investors who are ready first, then bring in additional investors over a defined period at the same terms.

Here's how it typically works: You secure your first commitments—perhaps $200,000 from three angel investors. You have several other investors who are interested but need more time for due diligence or fund transfers. Rather than making everyone wait, you do an initial closing with the first group and specify a rolling close period (usually 60-90 days) during which additional investors can join at the identical terms.

Rolling closes solve several practical problems that almost every pre-seed founder faces. Investors operate on different timelines—some can move in days while others need weeks. International investors may need extra time to navigate fund transfers. Institutional investors often have slower internal approval processes than individuals. Rolling closes accommodate these real-world constraints.

Key Terms in Rolling Close Structures

When you structure a rolling close, several important provisions protect both the company and early investors:

Time limits: The rolling close period typically ranges from 30 to 90 days after the initial closing, with 60 days being most common. You can push for longer periods if needed, but investors may resist very long windows (120-180 days) as it allows later investors to "wait and see" how the company progresses before committing.

Price protection: Rolling close provisions require that additional investors pay the same price or a higher price than initial closing investors. This prevents dilution of early investors' ownership percentage. If you wanted to offer better terms to later investors (which is rare), you'd need to amend existing agreements or offer those improved terms to initial closing investors as well.

Investment caps: Many rolling close structures include a cap on the total amount you can raise during the period. For example, if your initial closing is $300,000, you might cap the rolling close at an additional $200,000. This gives initial investors certainty about the maximum dilution they'll face.

Documentation requirements: New investors joining through a rolling close must agree to the same SAFE or convertible note terms as the initial investors, including any side letters or additional agreements. They're typically required to become parties to any shareholders' agreement or voting agreement in place.

Strategic Considerations for Choosing Your Approach

The decision between single and rolling closes often depends on your specific situation:

Choose a single closing when: You have a small number of committed investors who can all move quickly, you're raising a relatively small amount ($100,000-300,000), or you have sufficient runway that you don't need the cash immediately.

Choose a rolling close structure when: You're raising from many smaller investors with different timelines, you need to start spending the capital even if you haven't hit your full target, or you want flexibility to bring in additional investors as opportunities arise without reopening terms.

Many successful pre-seed rounds use rolling closes precisely because fundraising timelines are unpredictable. You might close with your strongest supporters first (often friends, family, and close advisors), giving you capital to extend runway while you continue conversations with other potential investors.

The rolling close approach also creates positive momentum. When new investors learn that others have already closed, it provides social proof and can accelerate their decision-making. Nothing motivates investors like knowing that others have already committed capital.

Practical Implementation Tips

If you decide on a rolling close structure, here are some best practices:

Get shareholder approval at the initial closing for both the initial share issuance and the additional shares you might issue during the rolling close period. This prevents delays if you need shareholder consent for subsequent closings.

Communicate clearly with all potential investors about the timeline. Let people know when the initial closing is scheduled, how long the rolling close period will last, and any target or cap for the total raise amount.

Track your rolling close deadline carefully. When the period ends, you need to formally close the round—no more investors can join at those terms. Set calendar reminders well in advance so you can follow up with investors who expressed interest but haven't committed yet.

Consider whether you need flexibility to extend the rolling close period if circumstances change. Some agreements include provisions allowing a short extension (15-30 days) with board approval.

Minimum Investment Amounts and Investor Thresholds

Setting minimum investment amounts might seem like a minor administrative detail, but it has significant strategic and practical implications for your pre-seed round. Get this right, and you'll attract serious investors while keeping your cap table manageable. Get it wrong, and you might find yourself with dozens of small investors who complicate future rounds.

The Strategic Purpose of Minimums

Investment minimums serve multiple purposes beyond just administrative convenience. They signal the seriousness of your fundraise and help filter for investors who are genuinely committed rather than those making token investments.

A reasonable minimum investment amount also keeps your cap table clean. Every investor requires tracking, K-1s for tax purposes (if you're a partnership), and potentially requires communication and management attention. Having 30 investors who each put in $5,000 creates far more administrative burden than five investors who each contributed $30,000.

From an investor perspective, minimums can actually be attractive. Higher minimums indicate that you're selective about who you bring into the company. They also create scarcity—if the minimum is $25,000 or $50,000, it naturally limits the investor pool to people who can make meaningful commitments.

Typical Minimums for Pre-Seed Rounds

Pre-seed round minimums vary based on the total raise size and your investor target audience, but here are common ranges:

$10,000-15,000 minimums work for very early rounds (under $300,000 total) where you're primarily raising from angels, friends, and family who might not be able to commit larger amounts. This keeps the round accessible to individual supporters while still being meaningful enough to prevent your cap table from becoming unwieldy.

$25,000-50,000 minimums are common for typical pre-seed rounds raising $500,000-1,000,000. This level filters for more serious angel investors and small funds while keeping your total investor count manageable. You'll end up with 10-20 investors rather than 50+.

$100,000+ minimums make sense when you're raising larger pre-seed rounds (over $1 million) or dealing primarily with institutional investors and high-net-worth individuals. This might limit accessibility for smaller angels, but it dramatically simplifies cap table management and future fundraising processes.

Pro Rata Rights and Investment Thresholds

Investment minimums become particularly important when you're offering pro rata rights (more on these later). Pro rata rights allow investors to maintain their ownership percentage in future funding rounds by investing proportionally.

Many founders set a higher threshold specifically for pro rata rights—for example, offering pro rata rights only to investors who commit at least $100,000 or $250,000. This approach serves several purposes:

First, it incentivizes larger commitments. If investors want the valuable right to participate in future rounds, they need to make a significant investment now. This can help you reach your fundraising target faster with fewer total investors.

Second, it keeps future rounds manageable. If you gave pro rata rights to everyone who invested $10,000, you might end up with 20+ investors all wanting to exercise their rights in your Series A. This creates coordination headaches and can make it harder to bring in new, high-value institutional investors.

Third, it recognizes the reality of future rounds. Institutional VCs leading your Series A want to see a clean cap table with room for new investors. Having numerous small investors exercising pro rata rights can complicate these dynamics.

Exceptions and Strategic Flexibility

While minimums are important, successful founders build in strategic flexibility for exceptional situations:

Key relationship exceptions: If a well-connected investor or industry expert wants to invest below your minimum, it might be worth making an exception. A $15,000 investment from someone who can make game-changing introductions could be more valuable than a $50,000 check from a passive investor.

Late-stage additions: As you near the end of your rolling close period, you might lower minimums slightly to fill out the round. If you're $40,000 short of your target and have a committed investor ready to do $30,000, it probably makes sense to close that gap rather than strictly enforcing a $50,000 minimum.

Key employee participation: Some founders explicitly allow key early employees to participate at lower minimums (perhaps $5,000-10,000). This gives team members ownership without requiring them to make financial commitments they can't afford.

Document any exceptions clearly. If your standard documents state a $25,000 minimum but you're accepting a $15,000 investment from someone, you might include a simple clause noting that the company has waived the minimum investment requirement for this particular investor.

Communicating Minimums Effectively

Be upfront about investment minimums from your first conversation with potential investors. Include them in your deck, mention them when discussing the round, and confirm them before sending documents.

When investors push back on minimums or request exceptions, have a clear framework for evaluating the request. Is this investor bringing strategic value beyond capital? Would making an exception set a precedent that complicates future decisions? Does accepting a lower amount from this investor help you close the round faster?

Remember that minimums are ultimately about building the right cap table for your company's future. Every investor you bring in now will be on your cap table through multiple future rounds, so choose wisely. Your cap table will either become a strategic asset or an administrative nightmare—minimum investment thresholds are one tool for ensuring it's the former.

Valuation Caps and Discount Rates Explained

If there's one aspect of pre-seed fundraising that confuses founders most, it's understanding valuation caps and discount rates. These mechanisms determine how many shares your early investors receive when their SAFEs or convertible notes convert into equity. Getting these terms right balances investor expectations with your long-term ownership goals.

What Valuation Caps Actually Mean

A valuation cap sets the maximum valuation at which an investor's SAFE or note will convert into equity during your next priced round. It's investor protection against being overly diluted if your company's valuation increases dramatically before the conversion.

Here's a concrete example: You raise $200,000 on a SAFE with a $10 million post-money valuation cap. Six months later, you raise your Series A at a $20 million pre-money valuation. Without the cap, the investor would receive shares as if they invested in the $20 million round. With the cap, they receive shares as if the company were valued at only $10 million—giving them roughly twice as many shares as a Series A investor paying the same amount.

The math works like this: With a $10 million post-money cap, a $200,000 SAFE investment represents 2% of the company ($200,000 ÷ $10,000,000 = 0.02). When that SAFE converts during a $20 million Series A round, the investor still receives their 2% ownership, even though that same ownership would cost $400,000 at the Series A valuation.

Typical Pre-Seed Valuation Caps

Valuation caps for pre-seed rounds typically range from $3 million to $6 million, though they can be greater depending on your circumstances. The right cap for your company depends on several factors:

Traction and stage: If you have strong customer validation, revenue, or impressive team credentials, you can justify higher caps. If you're truly pre-product with just an idea, expect caps on the lower end of the range.

Geographic market: Silicon Valley and major tech hubs typically see higher valuation caps than secondary markets. A pre-seed company in San Francisco might command a $6-8 million cap or higher, while a similar company in a smaller market might see $3-5 million.

Sector and capital intensity: Software companies with low capital requirements and high margins can often justify higher valuations than hardware or biotech companies that need significant capital before reaching key milestones.

Competitive dynamics: If you have multiple investors competing to invest in your round, you have leverage to push for higher caps. If fundraising is challenging and you're working hard to secure commitments, expect to negotiate caps more favorable to investors.

Post-Money vs. Pre-Money Valuation Caps

Y Combinator's post-money SAFE, introduced in 2018, has become the standard because it provides clearer math for determining investor ownership. With a post-money cap, the investor's percentage is straightforward: investment amount divided by the cap equals ownership percentage.

Pre-money caps are still used occasionally but create complexity. The investor's final ownership depends not only on their investment and the cap but also on how much total capital you raise on SAFEs. If multiple investors come in at different times with the same pre-money cap, they receive different ownership percentages.

Unless you have specific reasons to use pre-money caps (perhaps investors are more familiar with them), stick with post-money SAFEs. The simpler math reduces confusion and makes cap table modeling much easier.

Understanding Discount Rates

Discount rates provide an alternative mechanism for rewarding early investors. A discount (typically 10-20%) allows the investor to convert their SAFE or note into shares at a price per share that's lower than what Series A investors pay.

For example, with a 20% discount, if Series A investors pay $1.00 per share, your SAFE investors pay $0.80 per share—receiving 25% more shares for the same investment amount ($1.00 ÷ $0.80 = 1.25x).

Many pre-seed instruments include both a valuation cap and a discount. When both are present, the investor gets to choose whichever option is more favorable at conversion time. This typically means the investor converts at the valuation cap if your Series A valuation is high, or uses the discount if the Series A valuation is lower than the cap.

Caps vs. Discounts: Strategic Considerations

Most founders should focus on getting the valuation cap right rather than worrying extensively about discounts. Here's why:

Valuation caps have bigger impact: In high-growth scenarios where your company valuation increases significantly, the cap determines the investor's ownership. The discount often becomes irrelevant because converting at the cap gives investors a better deal than the discount would.

Discounts are investor-friendly additions: If you're competing for investor attention, adding a 10-20% discount alongside your cap can make your terms more attractive without fundamentally changing the economics in most scenarios.

Caps-only SAFEs are increasingly common: Many founders successfully raise on SAFEs with valuation caps but no discount. This is simpler to explain and results in cleaner conversion math. If investors push for a discount, consider it a negotiable point rather than a standard requirement.

Negotiating Caps in Practice

When investors propose a lower cap than you want, you have several options:

First, push back with data. Show comparable companies at similar stages and their valuation caps. If you have meaningful traction (revenue, user growth, partnerships), emphasize these accomplishments to justify a higher cap.

Second, consider structuring different investor tiers. Some founders successfully offer different caps to different investors based on their contribution to the company. For example, a strategic investor who brings significant industry connections might receive a lower cap than a purely financial investor. However, be very careful with this approach—you must comply with securities laws around fair dealing, and managing multiple cap structures adds complexity.

Third, focus on the total investment amount rather than just the cap. If an investor wants a $8 million cap but is willing to invest $150,000 instead of $100,000, you might come out ahead even with a slightly lower cap because you're raising more total capital.

Finally, remember that caps are just one component of the overall deal. If an investor offers to lead your round, introduce you to customers, and provide ongoing strategic support, their value might justify more favorable terms than someone who's purely a check-writer.

The goal isn't to extract maximum valuation in your pre-seed round—it's to raise sufficient capital at reasonable terms that set you up for a successful Series A. Unreasonably high caps might feel like a win today but can create problems later if you can't grow into that valuation before your next round.

Pro Rata Rights: Letting Investors Maintain Ownership

Pro rata rights—sometimes called participation rights or follow-on rights—give investors the option to maintain their ownership percentage in future funding rounds by investing additional capital proportional to their stake. These rights sound straightforward but have significant strategic implications for both founders and investors.

How Pro Rata Rights Work

Imagine an investor puts $100,000 into your pre-seed round and receives 2% ownership when their SAFE converts during your Series A. Without pro rata rights, that ownership percentage gets diluted in every subsequent round as new investors come in. With pro rata rights, the investor has the option (but not obligation) to invest additional money in your Series A and future rounds to maintain their 2% stake.

Here's the math: If you raise a $5 million Series A, an investor with 2% ownership and pro rata rights would have the option to invest $100,000 in the Series A ($5,000,000 × 0.02 = $100,000) to maintain their percentage. They're not required to invest—it's a right, not an obligation—but the option is valuable.

Pro rata rights typically continue through multiple funding rounds until certain triggering events occur, such as an IPO, acquisition, or explicit termination of the rights. This means an investor who participates in maintaining their ownership in Series A also gets the opportunity to maintain it in Series B, C, and beyond.

Why Investors Value Pro Rata Rights

From an investor perspective, pro rata rights are extremely valuable for several reasons:

Doubling down on winners: Early-stage investing is a power law game where a small percentage of investments generate most returns. Pro rata rights allow investors to increase their allocation in companies that are performing well. If they invested $50,000 in your pre-seed and the company is crushing it, they might invest $200,000 in Series A to maintain and grow their stake.

Dilution protection: Without pro rata rights, even successful companies dilute early investors significantly through multiple funding rounds. An investor who owns 2% after your seed round might own less than 0.5% after several subsequent rounds. Pro rata rights give them the option to prevent this dilution.

Strategic positioning: For angel investors who might want to eventually syndicate deals or raise their own funds, having pro rata rights in promising companies strengthens their reputation and deal flow. They can tell future investors, "I have pro rata rights in these five companies."

The Founder's Perspective on Pro Rata Rights

Pro rata rights create both opportunities and constraints for founders:

The positive case: Pro rata rights align incentives between you and early supporters. Investors with pro rata rights have more reason to actively help your company succeed—they can benefit from that success by investing more. This can turn passive check-writers into engaged advisors and advocates.

Pro rata rights also provide a source of "friendly money" in future rounds. When raising your Series A, having existing investors who are excited to put in more capital shows momentum and validates your progress to new investors. It can fill out a round and reduce the amount you need to raise from new investors.

The complications: The main downside is that exercising pro rata rights reduces the room available for new investors in future rounds. If you're raising a $5 million Series A and your existing investors want to exercise $500,000 in pro rata rights, you only have $4.5 million available for new investors. This might limit your ability to bring in a new lead investor who wants to own 20% of the company.

Pro rata rights also create administrative complexity. Before closing each new round, you need to notify all investors with pro rata rights, give them time to decide whether to exercise, track their responses, and coordinate their participation if they choose to invest. With numerous small investors, this process can be time-consuming.

Strategic Approaches to Pro Rata Rights

Smart founders take a strategic approach to granting pro rata rights rather than treating them as a standard term:

Threshold-based pro rata rights: As mentioned earlier, many founders only grant pro rata rights to investors who meet a minimum investment threshold—often $100,000 or more. This limits the number of investors who can exercise these rights and keeps future rounds manageable.

Super pro rata rights: Some strategic investors negotiate "super pro rata rights" that allow them to invest up to 2x or even 3x their pro rata share. This is common with lead investors or very valuable strategic partners. For example, if they would normally have the right to invest $100,000 to maintain their ownership, super pro rata rights might allow them to invest up to $200,000 or $300,000.

Time limitations: Some companies grant pro rata rights for only one future round (typically Series A) rather than indefinitely. This gives early investors the benefit of participating in one more round while preserving flexibility for later-stage financings.

Selective granting: Not every investor needs pro rata rights. Strategic angels who bring significant value might receive them, while purely financial investors might not. Be consistent and defensible in your approach—you don't want to create perceptions of unfair treatment.

Practical Negotiation Strategies

When investors request pro rata rights, consider these approaches:

If an investor is truly strategic (brings customers, partnerships, or expertise) and is investing a meaningful amount, granting pro rata rights is usually wise. These are exactly the people you want more engaged as your company grows.

If an investor is requesting pro rata rights but investing a small amount, you might counter with a higher minimum investment requirement to unlock the rights. "We're granting pro rata rights to investors who commit $100,000 or more" sets a clear standard.

For investors who are somewhere in between, consider offering a limited or modified version—perhaps pro rata rights for only the next round, or pro rata rights that are subject to approval by your board or lead investor in future rounds.

Remember that pro rata rights are negotiable. Some investors will strongly push for them, while others are indifferent. Don't give them away without thought, but also don't create friction with valuable investors over a right they might never exercise. Many investors never actually exercise their pro rata rights even when they have them—but having the option makes them feel more comfortable with the initial investment.

Most Favored Nation (MFN) Provisions

Most Favored Nation clauses—commonly called MFN provisions—ensure that if you offer better terms to future SAFE or convertible note investors before your next priced round, earlier investors automatically receive those same favorable terms. These provisions protect early investors from being disadvantaged by better deals offered to later investors.

The Basic Mechanics of MFN Provisions

Here's how MFN clauses typically work: You raise $200,000 on SAFEs with a $10 million valuation cap and no discount. The SAFEs include MFN provisions. Three months later, you raise another $150,000 on SAFEs, but this time investors negotiate a $8 million valuation cap with a 20% discount.

With the MFN clause, your first investors can elect to receive the same terms as the second group—the $8 million cap and 20% discount. They don't have to accept the new terms if their original terms are better, but they have the option to opt in if the later terms are more favorable.

The MFN provision typically expires when the SAFEs or notes convert during a priced equity round. At that point, everyone converts based on their final terms (whether original or amended via MFN), and the MFN protection no longer applies.

Why MFN Clauses Exist

MFN provisions address a fundamental fairness concern in early-stage fundraising. Your earliest investors take the most risk—they back you when you have the least traction, the smallest team, and the most uncertainty. If later investors can negotiate better terms once you've de-risked the company with their capital, early investors rightfully feel disadvantaged.

From an investor perspective, MFN clauses level the playing field. They ensure that being an early supporter doesn't mean accepting permanently worse economics than someone who invests three months later after you've hit key milestones.

From a founder perspective, MFN clauses might seem constraining—they limit your flexibility to offer different terms to different investors. However, they also provide a sort of insurance policy. If you need to offer more favorable terms to close a strategic investor later, you know all your existing investors will receive the same terms, maintaining alignment across your cap table.

MFN-Only SAFEs: A Special Case

Y Combinator offers an MFN-only SAFE that has no valuation cap or discount. Instead, it solely relies on the MFN provision—the investor gets whatever the most favorable terms are that you offer to any future SAFE investor before your priced round.

This structure serves a specific purpose: it allows founders to raise capital quickly without negotiating a valuation cap. The investor is essentially betting that you'll raise more SAFEs later, and when you do, they'll get the same terms as those investors. If you never raise another SAFE and go straight to a priced round, the MFN investor converts at the priced round valuation with no discount or cap—a less favorable outcome for them.

MFN-only SAFEs are relatively rare and typically used when founders have significant leverage or when investors are willing to back the founder with minimal negotiation to move quickly. Most pre-seed investors prefer SAFEs with actual caps (possibly with an MFN clause in addition to the cap) rather than relying solely on MFN protection.

The Strategic Implications of MFN Provisions

MFN clauses create several strategic considerations:

Negotiation impact: Knowing that all your existing investors will automatically receive any improved terms can actually make it easier to negotiate with new investors. You can tell a later investor who's pushing for a lower cap: "I can offer you this cap, but be aware that all my existing investors have MFN rights, so they'll receive the same terms." This makes investors think twice about demanding terms that are significantly better than what earlier investors received.

Future fundraising constraints: MFN provisions can limit your flexibility in later SAFE rounds. If you need to offer more favorable terms to close a large investor later, you might need to provide those improved terms to all existing SAFE holders. This isn't necessarily bad—it maintains fairness—but it's something to model in your cap table projections.

Administrative tracking: With multiple SAFE rounds and MFN provisions, you need careful tracking of who has what rights and what terms would trigger MFN adjustments. This creates additional legal and administrative work, especially if you have many SAFE investors across multiple rounds.

When to Accept MFN Provisions

In practice, MFN provisions are fairly standard in SAFE agreements, and most founders accept them without extensive negotiation. Here's the practical reality:

If you're raising from sophisticated angels or small funds who regularly invest in early-stage companies, they'll likely expect MFN provisions as standard. Fighting over this clause might signal that you plan to offer better terms to later investors—which raises red flags about your commitment to early supporters.

The better approach is to accept MFN provisions and commit to offering consistent terms across your pre-seed fundraising. If all your SAFE investors receive the same cap, discount, and other terms, the MFN provision becomes effectively irrelevant. You won't trigger it because no one is getting better terms than anyone else.

Where founders should push back is on overly broad MFN provisions that extend beyond SAFEs and convertible notes. Some aggressive investors might try to include language ensuring they receive the best terms compared to any future investment, including priced equity rounds. This is unreasonable—Series A investors should get different (often better) terms than pre-seed SAFE holders. Make sure your MFN provisions are limited to other convertible instruments issued before the next priced round.

Practical Management of MFN Rights

If you do trigger MFN provisions by offering improved terms to later investors, here's how to manage it:

Notify all existing SAFE holders promptly when you issue new SAFEs with different terms. Provide clear documentation showing the original terms and the new terms, and give investors a reasonable period (typically 15-30 days) to elect whether to amend their agreements to receive the new terms.

Track elections carefully. Some investors might elect to amend their terms while others stick with the original terms (perhaps because they think the original terms are actually better for some reason, or because they don't want to deal with the paperwork).

Consider having your legal counsel prepare an amendment document that investors can sign to effectuate the MFN adjustment. This creates a clear paper trail and ensures everyone is documenting the changed terms properly.

Most importantly, try to avoid triggering MFN provisions unnecessarily. Structure your pre-seed round with a clear target amount, defined terms, and a time frame for completion. If you raise the full amount at consistent terms, MFN provisions sit dormant—protecting your early investors without creating additional work.

Bringing It All Together: Structuring Your Pre-Seed Round

You now understand the major components of pre-seed fundraising—SAFEs versus convertible notes, securities compliance requirements, rolling closes, minimum investment amounts, valuation caps and discounts, pro rata rights, and MFN provisions. The final challenge is assembling these pieces into a coherent deal structure that achieves your fundraising goals while maintaining flexibility for future rounds.

Start With Your Fundraising Goals

Before diving into term negotiation, clarify your objectives:

How much capital do you actually need? Base this on a realistic assessment of your runway requirements—typically 18-24 months to reach key milestones that position you for a Series A. Don't just pick a round number. If you need $650,000 to hire three engineers, launch your product, and acquire initial customers, that's your target, not $500,000 or $1 million.

What type of investors do you want? Are you targeting angels who can write $25,000-50,000 checks, or are you seeking a few larger checks from small funds or high-net-worth individuals? Your investor profile determines appropriate minimum investment amounts and how you structure pro rata rights.

What's your competitive position? Be honest about your leverage. If you have multiple investors competing for allocation in your round, you can push for founder-friendly terms. If fundraising is challenging, you might need to offer more investor-favorable terms to close the round.

Standard Pre-Seed Term Sheet Framework

Here's a reasonable starting point for a typical pre-seed round in 2025:

Instrument: Post-money SAFE with valuation cap (no discount needed unless investors request it)

Valuation cap: $3-6 million depending on traction, sector, and market (can be greater based on your specific situation)

Minimum investment: $25,000 for typical rounds, potentially lower ($10,000-15,000) for very early friends and family rounds

Rolling close: 60-90 day rolling close period after initial closing to accommodate investors with different timelines

Pro rata rights: Granted to investors committing $100,000 or more (adjust threshold based on your round size)

MFN provisions: Standard Y Combinator SAFE MFN language (ensure it only applies to other convertible instruments before your next priced round)

Securities exemption: Rule 506(b) of Regulation D, limiting you to accredited investors (or up to 35 sophisticated non-accredited investors if absolutely necessary)

This framework provides founder-friendly terms while giving investors reasonable protections. It's similar to what many successful startups have used for their pre-seed rounds and should face limited pushback from experienced early-stage investors.

Negotiating With Investors

When investors push for changes to your proposed terms, use this framework for evaluation:

Is this a standard market term? If experienced investors are consistently asking for something (like pro rata rights or MFN provisions), it's probably reasonable to accommodate. Fighting over standard terms can signal that you plan to offer better terms to later investors—which raises red flags about your commitment to early supporters.

Does this term protect legitimate investor interests? A valuation cap protects investors from excessive dilution if your valuation increases dramatically—that's reasonable. A demand for board seats in a pre-seed SAFE round is not reasonable (equity investors get governance rights, not SAFE holders).

What's the cost to my future flexibility? Some terms, like rolling closes or higher valuation caps, cost you little. Others, like granting super pro rata rights to many investors or accepting very low valuation caps, can constrain future fundraising significantly.

Is this investor worth special treatment? If a strategic investor is bringing exceptional value beyond capital—customer introductions, distribution partnerships, or deep industry expertise—offering slightly better terms might make sense. Document any special terms clearly to avoid later disputes.

Common Mistakes to Avoid

Learning from others' mistakes can save you significant pain:

Mistake 1: Overoptimizing for valuation. Pushing for an $8 million valuation cap when market is $5 million might get you 1-2% less dilution, but it also might cause you to lose investors or create tension that damages relationships. A reasonable valuation that lets you close the round quickly is better than an optimal valuation that takes an extra three months to raise.

Mistake 2: Creating a messy cap table. Accepting dozens of small checks without minimums creates administrative nightmares. You'll spend countless hours managing investor communications, coordinating K-1s, and dealing with stragglers during pro rata exercises in future rounds. Maintain discipline on minimums.

Mistake 3: Giving away governance rights too early. SAFEs and convertible notes should not include board seats, voting rights, or other governance mechanisms. Those rights belong to equity investors in priced rounds. If an investor pushes for governance rights in a SAFE, politely decline—this is not market standard.

Mistake 4: Neglecting securities compliance. Failing to file Form D, skipping state notice filings, or using general solicitation in a 506(b) round can create legal issues that haunt you during due diligence for Series A. The money you save by skipping legal counsel will cost you far more in the long run.

Mistake 5: Poor documentation. Keep detailed records of who invested when, what terms they received, and any side agreements or special provisions. Use a cap table management tool from day one—spreadsheets become error-prone quickly, and errors in your cap table can derail future fundraising.

After You Close: Setting Up for Success

Once you've successfully raised your pre-seed round, several post-closing actions set you up for success:

Complete all securities compliance filings promptly. File your Form D within 15 days, make state notice filings, and keep all documentation organized for future due diligence.

Implement proper cap table management. Use tools like Carta, Pulley, or other cap table platforms to track ownership accurately. Model what happens when SAFEs convert to understand the dilution impact.

Communicate regularly with your investors. Send quarterly updates even if they're just SAFE holders without formal rights. Early investors who feel informed and included become your biggest advocates.

Focus relentlessly on hitting the milestones that will position you for a strong Series A. The terms you negotiated in your pre-seed round matter, but execution matters far more. The best way to set up a successful Series A is to use your pre-seed capital efficiently and show compelling progress.

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