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Getting a rejection from a VC can be frustrating, but it’s also part of the game. Every "no" brings you one step closer to the right investor.

VCs assess startups based on market opportunity, traction, team strength, and scalability. If they don’t see the potential for a venture-scale return, they’ll pass no matter how promising your idea sounds.

The good news? Most rejections are fixable. Here’s what might be holding you back and how to course-correct before your next pitch.

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1. Your market isn’t big enough

Why VCs pass on small markets

VCs are looking for businesses that can scale to $100M+ in revenue and create outsized returns. If they don’t believe your market is big enough to support that growth, they won’t invest.

How to fix it

• Define your Total Addressable Market (TAM), but go beyond top-down estimates. Every person on earth is not a potential user. Investors want real data on how your startup captures market share.
• Show how your Serviceable Addressable Market (SAM) and Serviceable Obtainable Market (SOM) grows over time. If your core market is niche, highlight expansion opportunities into adjacent sectors. 
• Use third-party research and bottom-up calculations to validate your market potential.

Investors don’t need proof that your market is massive today, they need to believe it can be.

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2. You don’t have enough traction

Why early-stage traction matters

VCs want to see signals that your startup is moving in the right direction. If you’re too early (without revenue, users, or customer validation) you’re asking them to take a bigger leap of faith than they’re comfortable with.

How to fix it

• Show momentum. Even pre-revenue, proof points like waitlists, beta users, and LOIs (Letters of Intent) indicate demand.
• Focus on metrics that prove engagement. Investors care more about active usage and retention than vanity metrics.
• If you’re pre-product, highlight customer discovery insights, strong demand signals, and your roadmap to traction.

VCs don’t expect perfection, but they do expect progress.

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3. Your team isn’t convincing investors

Why VCs pass on teams

At the earliest stages, investors bet more on founders than the product. If they’re not confident your team has the skills, experience, and resilience to execute, they won’t take the risk.

How to fix it

• Lead with founder-market fit. Why are you uniquely qualified to build this business?
• Show how your team executes under pressure. Share examples of how you’ve adapted and overcome obstacles.
• Be upfront about skill gaps and your hiring plan to fill them. Investors don’t expect a perfect team, but they do expect you to know what’s missing.

Great ideas are everywhere. VCs back the teams that can make them real.

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4. The timing isn’t right

Why external factors impact funding

Sometimes, rejection has nothing to do with your startup. If a VC isn’t actively investing in your space, is at the end of their fund cycle, or just deployed capital into a similar company, they won’t write a check no matter how great your pitch is.

How to fix it

• Ask for direct feedback. If timing was the issue, stay in touch and provide updates as your startup progresses.
• Track investor cycles. VCs raise their own funds in intervals. If a firm is at the end of their fund, they may have limited capital left for new deals.
• Expand your investor pipeline. If one fund isn’t ready, others might be. Keep building relationships and widening your network.

A no today doesn’t mean a no forever. Timing matters, but persistence matters more.

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5. You’re not differentiated enough

Why VCs reject startups without a competitive edge

If an investor can’t immediately understand why your product is different (and better) than competitors, they won’t see a reason to invest.

How to fix it

• Be clear on what makes you 10x better, faster, or cheaper than alternatives.
• Use customer testimonials and case studies to show why users choose you over the competition.
• If your edge is technical, network-based, or proprietary, explain how it compounds over time to create a long-term advantage.

It’s not enough to be different. You need to be defensibly better.

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6. Your business model doesn’t make sense

Why VCs pass on unscalable business models

If your revenue model isn’t scalable, repeatable, and profitable at scale, investors will hesitate.

How to fix it

• Show strong unit economics and how they improve over time (lower customer acquisition cost, higher margins, increased lifetime value).
• Prove revenue potential, even if early. Early traction, even at a small scale, reduces risk for investors.
• Be clear on how your business scales. VCs don’t fund one-off projects, they fund models that grow exponentially.

If investors don’t see a path to venture-scale revenue, they won’t write a venture-scale check.

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7. You pitched the wrong investors

Why some VCs will never invest no matter how good your pitch is

Every VC has a specific investment thesis based on:

• Industry focus (e.g., SaaS, climate tech, fintech).
• Stage preference (e.g., pre-seed, Series A, growth-stage).
• Geography (some VCs only invest in specific regions).

If your startup doesn’t fit their criteria, they won’t invest - even if they love your idea.

How to fix it

• Do your research. Pitch investors who actually fund startups at your stage and in your sector.
• Tailor your pitch. Show how your startup aligns with their investment thesis.
• Expand your search. The best investor isn’t just one with money, it’s one who understands your vision.

It’s not about convincing every VC. It’s about finding the right one.

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Turn rejection into progress

Every founder gets rejected. It’s not a reflection of your startup’s potential—it’s a signal to refine, iterate, and keep going. Each "no" brings you closer to the right investor, the right timing, and the right opportunity.

The best founders use rejection as fuel. They adjust their pitch, strengthen their traction, and expand their investor network until they get the "yes" that matters.

If you’re ready to connect with the right investors, streamline your outreach, and take a smarter approach to fundraising, Capwave can help.

Find the right investors faster with Capwave AI →

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Finding the right fundraising platform can make or break your startup’s funding journey. Instead of wasting months on cold outreach and outdated investor lists, founders now have access to AI-driven tools, investor networks, and alternative funding sources to raise capital faster.

In this guide, we’ll break down the best fundraising platforms for startups in 2025, covering:
✔ AI-powered investor matchmaking
✔ Equity crowdfunding platforms
✔ VC and angel investor networks
✔ Revenue-based financing options

1. How fundraising has evolved: why platforms matter in 2025

Raising capital has become more competitive than ever. While total VC funding rebounded in 2024 (up 18.4% from 2023), investors are writing fewer but larger checks, making it harder for early-stage founders to secure funding.

Key market challenges:

• Fewer deals, more competition. The number of VC funding rounds dropped by 7.3%, meaning startups must stand out.
• Tougher pre-seed environment. Pre-seed funding fell 36% in Q3 2024, making investor connections even more critical.
• More investor meetings needed. Early-stage founders often meet 50+ investors before securing funding.

💡 With fewer opportunities, startups must leverage smarter fundraising tools to reach the right investors faster.

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2. Best AI-powered fundraising platform: Capwave AI

📌 Best for: Founders looking for highly targeted, AI-driven investor matchmaking.

Why Capwave?

• AI-powered investor matching with 60,000+ active VCs & angel investors.
• Investor insights (portfolio history, investment thesis, warm intro paths).
• IP protection. Ensures investors aren't funding direct competitors.
• AI pitch deck optimization. Get data-driven feedback based on thousands of successful startup pitch decks.
• Exclusive fundraising masterclass. Learn proven fundraising strategies from experts who’ve raised $400M+ for startups.
• Founders-only Slack network. Network with other founders currently fundraising at your startup’s stage & explore warm connection pathways.

💡 Capwave eliminates the guesswork, helping startups raise faster with the right investors. Find your ideal investors now →

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3. Best VC & angel investor networks

📌 Best for: Startups looking to connect with traditional venture capital and angel investors.

1. AngelList

• Best for: Early-stage startups raising from angel investors & syndicates.
• Standout feature: Roll-up vehicles allow multiple investors to invest as a single entity.

🔗 Explore AngelList

2. Crunchbase

• Best for: Startups looking for VC data & investor research tools.
• Standout feature: Searchable investor database with funding history.

🔗 Explore Crunchbase

3. Angel Capital Association

• Best for: Startups looking for angel investors in the US.
• Standout feature: Access to over 250 angel groups and 14,000+ investors.

🔗 Explore Angel Capital Association

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Capwave streamlines investor research by matching you with VCs and angels ready to invest. 🎯 Get AI-powered investor matches →

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4. Best equity crowdfunding platforms for startups

📌 Best for: Early-stage founders looking to raise from a large pool of individual investors.

1. Republic

• Investor type: Retail investors, angels, and accredited investors
• Best for: Startups looking to raise $50K–$5M from the public
• Standout feature: Allows non-accredited investors to participate

🔗 Explore Republic

2. SeedInvest

• Investor type: Accredited investors & institutional funds
• Best for: Startups with strong traction looking for institutional backing
• Standout feature: Rigorous vetting process to ensure high-quality startups

🔗 Explore SeedInvest

3. Wefunder

• Investor type: Everyday investors & accredited VCs
• Best for: Community-driven startups looking for high engagement
• Standout feature: Largest crowdfunding platform for startups in the US

🔗 Explore Wefunder

💡 Crowdfunding platforms work best for consumer-facing startups with a strong community.

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5. Best revenue-based financing platforms

📌 Best for: Startups with revenue looking for non-dilutive capital.

1. Clearco

• Best for: SaaS & eCommerce startups with steady revenue.
• Standout feature: No equity dilution—funding is repaid as a percentage of revenue.

🔗 Explore Clearco

2. Pipe

• Best for: Startups with recurring revenue (SaaS, subscription models).
• Standout feature: Turn MRR into upfront capital without giving up equity.

🔗 Explore Pipe

💡 Revenue-based financing is great for profitable startups that want to scale without giving up ownership.

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6. Other must-know platforms for founders

Beyond fundraising, these platforms help founders scale efficiently:

• Carta: Cap table management & equity planning. 🔗 Visit Carta
• DocSend: Secure pitch deck sharing with investor tracking. 🔗 Visit DocSend
• TechCrunch: Startup news & investment trends. 🔗 Visit TechCrunch
• Y Combinator Startup Library: Free startup advice from top investors.  🔗 Visit YC

💡 The right tools can help founders raise smarter and operate more efficiently.

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Fundraising smarter in 2025

• AI-powered investor matching is the fastest way to connect with the right investors.
• Crowdfunding and revenue-based financing are great alternatives to VC funding.
• Choosing the right platform depends on your startup’s funding stage & goals.

🚀 Looking for the best platform for your startup? Capwave AI helps founders raise smarter with AI-driven investor matching. Find your next investor now →

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📌 Raising capital is one of the most challenging parts of building a startup. Founders spend months pitching investors, refining their decks, and navigating endless due diligence, often with no guarantee of funding. But what if there was a smarter, data-driven way to approach fundraising?

This guide breaks down how to secure startup funding efficiently, covering everything from investor outreach to AI-powered fundraising tools that can help you raise capital in weeks, not months.

‍Why startup funding is so competitive in 2025

The startup funding landscape is evolving rapidly. Investors are more selective, and founders face intense competition for capital. Here’s what’s changed:

• AI-driven decision-making: Investors now rely on AI to evaluate startups more efficiently.
• Shorter funding cycles: Startups need to raise faster and smarter to stay ahead.
• Increased due diligence: Investors expect data-backed traction before they commit.

💡 Market Insight: According to Carta’s "State of Private Markets: Q4 and 2024 in Review", startups raised $3.5 billion in Series C funding in Q4 2024. That’s a 59% year-over-year increase. However, seed-stage funding dropped by 18%, signaling that early-stage founders must be more strategic in securing capital.

To succeed in 2025, founders must be willing to adapt. That means leveraging AI tools, optimizing pitch decks, and targeting the right investors from the start.

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Step 1: Choosing the right type of startup funding

Before you start pitching, you need to identify the best funding option for your stage and goals.

🚀 Pre-Seed & Seed funding (for early-stage startups)

• Angel Investors: Individual investors who fund early-stage ideas.
• Venture Capital (VC) Firms: Institutional investors backing high-growth startups.
• Accelerators & Incubators: Programs like Y Combinator that provide capital + mentorship.
• Crowdfunding: Platforms like Republic.co and SeedInvest allow startups to raise from the public.

Best for: First-time founders, early product development, and MVP launches.

📈 Series A & Beyond (For Scaling Startups)

• Growth-Stage VCs: Institutional investors focused on scale-ups with proven traction.
• Corporate Venture Funds: Investment arms of major corporations (e.g., Google Ventures).
• Revenue-Based Financing: Non-dilutive funding based on future revenue.

Best for: Startups with strong traction looking to scale rapidly.

If you’re not sure which funding route is best, Capwave’s AI-powered platform can analyze your business and match you with the most relevant investors for your stage.

🎯 Find the Right Investors Now →

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Step 2: Crafting a winning investor pitch

Your pitch deck is the first impression you make on investors. Plus, they only spend about 2 minutes looking at it, so it needs to be perfect. Check out Capwave’s free Pitch Deck Teaser Template. 

Key sections your pitch deck must include:

1. Cover Slide: startup name, logo, and a one-liner that captures your vision.
2. Problem & Solution: clearly define the problem and how your startup solves it.
3. Market Opportunity: use data-backed insights to highlight market size, demand, and growth potential.
4. Traction & Metrics: showcase key milestones: revenue, user growth, partnerships, and retention rates.
5. Business Model: explain how you make money (pricing, revenue streams, scalability).
6. Go-To-Market Strategy: outline customer acquisition channels and growth strategy.
7. Competitive Advantage: show how you stand out, your moat, and why investors should bet on you.
8. The Team: highlight founder expertise, key hires, and industry experience.
9. Financials & Projections: provide 3-5 year revenue forecasts, burn rate, and key financial metrics.
10. The Ask: state how much you're raising, at what valuation, and how you'll use the funds.

Make your pitch investor-ready:

Want expert feedback? Capwave’s AI analyzes thousands of successful decks and gives data-backed recommendations to make your pitch investor-ready.

🏆 Optimize Your Pitch with AI →

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Step 3: Finding & connecting with investors

Where to find the right investors

Not every investor is the right fit. You need strategic investors who:

• Invest in your industry & stage
• Have active portfolios (not just window-shopping)
• Align with your startup’s long-term vision

3 Ways to Find Investors

💡 Warm Introductions: Leveraging LinkedIn or founder networks increases response rates.

💡 Investor Directories: Crunchbase, PitchBook, and AngelList can help, but manual research is slow. Plus, having a list of investors won’t guarantee you’ll secure a meeting.
💡 AI-Powered Investor Matching: Platforms like Capwave AI connect you with ideal investors instantly.

Capwave’s AI scans 60,000+ VC & angel investors to find your perfect match. No more manual searching, just data-driven connections.

🎯 Get AI-Driven Investor Matches →

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Step 4: Mastering the investor outreach process

Once you’ve identified the right investors, effective outreach is key to securing meetings. Here’s how to approach it strategically:

Best practices for investor outreach

1. Personalize your approach. Investors receive hundreds of pitches. Research their portfolio and tailor your message to align with their investment thesis.
2. Use warm introductions when possible. A warm intro from a mutual connection significantly increases response rates.
3. Keep your initial message concise. Whether via email or LinkedIn, your first outreach should be short, clear, and focused on traction and opportunity.
4. Follow up strategically. If you don’t get a response, follow up 7-10 days later with a brief update on your startup’s progress.
5. Track your outreach in a CRM. Keeping a record of who you’ve contacted, their response, and next steps is critical. You can do this yourself, or use Capwave’s built-in CRM and Next Best Step tools to help you track investor interactions, ensuring you follow up at the right time and maximize engagement.

How Capwave AI helps you connect with investors

• AI-Powered Investor Matching. Get matched with investors actively looking to fund startups like yours.
• Investor Insights. Access detailed investor profiles, including their portfolio, focus areas, and funding history, so you can personalize outreach effectively.
• Built-in CRM for Outreach Tracking. Log investor interactions, monitor responses, and optimize follow-ups directly within Capwave.
• LinkedIn Integration. Identify mutual connections for warm introductions. Start Tracking & Connecting with Investors →

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Raising a smarter process in 2025

Raising startup capital doesn’t have to be a slow, frustrating process. By leveraging AI-powered investor matching, pitch optimization, and smarter outreach tools, you can secure funding faster and focus on building your business.

💡 Need a customized fundraising strategy? Capwave AI premium includes a quarterly 1:1 Strategy Session with an in-house expert.

Additional Resources

• Carta’s Latest Market Data on Startup Funding
• Investor Pitch Deck Template (Free Download)
• Venture Capital Terms Explained: Early-Stage Founder’s Guide

🚀 Ready to Raise Smarter? Get Started Today at Capwave AI

Raising capital is one of the most critical decisions founders face. Timing your fundraising correctly can mean the difference between securing favorable terms and diluting your ownership too early. But how do you know when it’s the right time to raise? Let’s explore key benchmarks, factors to consider, and the risks associated with premature or delayed fundraising.

Understanding the startup funding stages 🔎

Each funding stage has distinct benchmarks and expectations. Here’s a general breakdown:

💡 Pre-Seed

This stage occurs before a product is fully developed. Founders often rely on personal savings, friends and family, or angel investors to fund early research, prototype development, and validation efforts. The focus here is on identifying a real market problem and conducting customer discovery. For insights on how to approach early fundraising, check out Carta's Pre-Seed Fundraising Guide.

Key KPIs:

• Customer discovery insights and validation
• Early prototype or MVP development
• Initial market research and problem identification

Best time to raise:

• When you have initial proof of concept and validated demand through customer discovery.
• Before running out of personal savings, ensuring you have enough runway to develop an MVP.

🌱 Seed

At this point, a startup has an MVP (Minimum Viable Product) and is testing its value proposition. Investors expect to see some early traction: this could be initial users, beta customers, or even small amounts of revenue. The goal is to validate market demand and build towards product-market fit. Y Combinators’s Guide to Seed Fundraising offers tactical advice on securing seed funding and crafting a compelling investor narrative.

Key KPIs:

• Revenue milestones: Ideally $10K MRR
• Customer retention & engagement: Early adoption and reduced churn rates
• Market demand: Increasing inbound interest from customers or partners
• Unit economics: CAC vs. LTV trends

Best time to raise:

• When you have a functional MVP with early traction.
• If user engagement and adoption show positive trends.
• When there’s growing inbound interest from investors or partners.

📊 Series A

This stage is about scaling a validated product. Investors will look for consistent revenue growth, strong market demand, and a business model that can scale. A common benchmark for Series A funding is generating $1M in Annual Recurring Revenue (ARR) or demonstrating strong user growth and retention. Check out Carta’s Guide to Series A Fundraising. For deeper insights into venture deal structures, Venture Deals by Brad Feld & Jason Mendelson is a must-read.

Key KPIs:

• Revenue milestones: ~$1M ARR
• Customer growth & engagement: Increasing retention rates and reduced churn
• Market expansion: Strong market demand with scalable acquisition strategies
• Operational readiness: Clear roadmap and hiring strategy

Best time to raise:

• When you have clear product-market fit and strong revenue growth.
• If your startup is ready to scale operationally and expand into new markets.
• Before needing cash urgently, allowing room for negotiation and better terms.

📈 Series B and beyond

Here, startups focus on expansion, process optimization, and market dominance. Investors typically look for $5M+ ARR, strong unit economics, and a proven ability to scale effectively. As startups grow, it becomes crucial to understand equity structures: Carta’s State of Private Markets provides a detailed guide on managing equity and valuation.

Key KPIs:

• Revenue milestones: $5M+ ARR
• Scalability: Optimized growth strategies and strong financial performance
• Customer retention & engagement: Low churn and high customer lifetime value
• Process & operational efficiency: Streamlined systems and automation

Best time to raise:

• When your startup is demonstrating significant traction and market leadership.
• Before expansion costs become unmanageable without external capital.
• If the market is favorable and investor appetite is high.

Time Between Rounds ⏰

The time between funding rounds varies based on company performance, industry trends, and investor expectations. According to Peter Walker, the median time between Seed and Series A funding is approximately 2.1 years, while the gap between Series A and Series B is 2.4 years. However, high-growth startups may raise faster, sometimes in under a year, whereas others may take longer to reach the necessary milestones.

Factors Affecting Fundraising Timelines:

• Market conditions: Favorable conditions can shorten fundraising cycles, while downturns may delay raises.
• Revenue growth: Companies with accelerating revenue growth tend to raise more frequently.
• Burn rate & runway: Startups must time their raises strategically to avoid running out of cash.
• Investor sentiment: If venture funding slows, startups may need to extend their runway before raising the next round.

The risks of raising too early vs. too late ⏳

• Raising too early: If you raise before validating your product or market fit, you may face low valuations, excessive dilution, and pressure from investors before your startup is ready to scale.
• Raising too late: If you wait too long and run low on cash, you may be forced to accept unfavorable deal terms, conduct a down round, or risk shutting down operations due to lack of capital.

How valuation impacts your raise 📊

Valuation plays a major role in fundraising because it determines how much equity you give away. A higher valuation means you can raise more capital while giving up less ownership, but it also sets expectations for future performance.

Key factors that influence valuation include:

• Revenue growth rate: Investors favor companies with steady and significant revenue growth.
• Market size & competitive positioning: Startups in large, high-growth markets often receive higher valuations.
• Investor sentiment & economic conditions: During bullish markets, valuations rise; during economic downturns, investors become more cautious.
• Previous fundraising terms: The valuation from prior rounds affects how much dilution occurs in future rounds. Early-stage dilution can impact long-term ownership. Carta’s State of Private Markets provides deeper knowledge on cap table management and fundraising strategy.

Final thoughts: be strategic about fundraising

Raising capital isn’t just about securing funds: it’s about ensuring you can sustain and scale your business effectively. Founders should focus on building strong fundamentals before seeking investment and avoid fundraising simply because it’s expected. The right timing, valuation strategy, and investor fit will set your startup up for long-term success.

Need help timing your raise? Capwave AI offers insights and tools to help founders navigate their fundraising journey efficiently.

One of the most critical decisions startup founders face is how much equity to give away when raising capital or bringing on key stakeholders. Equity allocation impacts long-term control, fundraising potential, and team motivation. So, how much should founders part with at different stages of their journey? Let’s break it down using Carta-backed data.

1. The golden rule: preserve ownership while driving growth

Equity is your most valuable asset as a founder. The key is to strike a balance between retaining enough ownership for control and motivation while giving away enough to attract investors and key hires. For more detailed guidance on structuring startup equity, check out Carta’s Founder Equity Guide.

2. Standard equity breakdown by stage

While every startup is unique, the following benchmarks provide a rough guide:

• Pre-seed: Founders typically retain 80-90% of equity. Angel investors or early advisors may take 5-15% in total.
• Seed Round: Investors typically take 10-25%, leaving founders with around 60-80%.
• Series A: VCs generally take another 15-25%, reducing founder ownership to around 50-65%.
• Later Rounds (Series B+): Further dilution occurs, with founders often holding 30-50% by Series B and 20-40% by Series C.

Download Carta’s Founder Ownership Report 2025 to view the latest market data.

3. The employee equity pool: attracting top talent

Most startups set aside 10-20% of equity for an employee stock option pool (ESOP) to attract and retain key employees. This is often created before a seed or Series A round. Check out Carta and Peter Walker’s insights on employees and option pools for more free resources on how to structure these pools effectively.

4. How much equity to give to advisors?

Advisors typically receive 0.07-0.25% equity, depending on their involvement, reputation, and the startup’s stage. Equity is often structured as vesting over time to ensure continued contributions.

5. Co-founder equity splits: what’s fair?

Co-founders often split equity based on factors such as contribution, experience, and role. A common mistake is a 50/50 split without discussing long-term commitment or responsibilities. Tools like vesting schedules (e.g., 4-year vesting with a 1-year cliff) help ensure fairness. To better understand vesting structures, read Stock vesting by Carta.

6. Understanding valuations and avoiding over-dilution

Valuation plays a crucial role in determining how much equity founders give away. A higher valuation means less dilution when raising capital, while a lower valuation requires giving away more equity for the same amount of funding. Founders should consider factors such as market conditions, revenue growth, and investor appetite when negotiating valuations. Tools like Carta’s State of Private Markets can help founders benchmark their startup's worth.

While raising capital is essential, too much dilution can leave founders with little control or upside. Founders should:

• Be strategic about when and how much they raise.
• Consider alternative funding sources (e.g., revenue-based financing, grants).
• Negotiate valuation carefully to minimize unnecessary dilution.

7. Equity calculator: planning your stake

Using an equity dilution calculator (like the one on Capwave AI) can help founders forecast their ownership across funding rounds and avoid surprises.

Final thoughts: play the long game

Giving away equity is inevitable, but smart founders ensure it’s done strategically. Retaining a meaningful stake while securing the right investors, team, and advisors will position your startup for long-term success.

Need help modeling your equity distribution? Capwave AI offers tools and insights to help founders navigate fundraising and dilution effectively.

When raising early-stage capital, founders often choose between SAFE (Simple Agreement for Future Equity) notes and convertible notes. Both options allow startups to raise funds without setting an immediate valuation, but they have key differences. Understanding these differences can help you make an informed decision.

What is a SAFE?

A SAFE is an agreement where an investor provides capital today in exchange for the right to receive equity in the future, typically at the next priced funding round. Created by Y Combinator, SAFEs are designed to be founder-friendly and simplify early-stage fundraising.

Key features of SAFEs:

• No interest or maturity date.
• Converts into equity when a future funding round occurs.
• May include a valuation cap or discount rate (or both) to reward early investors.
• No debt obligations, making it a simpler instrument.

📌 Further Reading: Y Combinator’s SAFE Primer

What is a Convertible Note?

A convertible note is a debt instrument that converts into equity at a future financing round. Unlike SAFEs, convertible notes accrue interest and have a maturity date, making them a hybrid between debt and equity.

Key features of Convertible Notes:

• Includes an interest rate (typically 4-8%).
• Has a maturity date, at which point it may need to be repaid or converted.
• Usually contains a valuation cap or discount to incentivize early investors.
• Can give investors more leverage in negotiations due to repayment terms.

📌 Further Reading: VC Stack’s Deep Dive: Convertible Notes

Key differences between SAFEs and Convertible Notes

Which one should you choose?

• Choose a SAFE if: You want a simpler agreement with no debt risk and no pressure from maturity deadlines.
• Choose a Convertible Note if: Your investors prefer debt-based instruments or want additional security with interest and a repayment option.

📌 Further Reading: Carta’s Guide to SAFEs vs. Convertible Notes and Priced vs. Unpriced Rounds

Additional Considerations for Founders

Negotiation strategies

Regardless of whether you choose a SAFE or a convertible note, it’s crucial to negotiate favorable terms. Consider:

• Valuation Cap: A lower cap benefits investors, while a higher cap gives founders more equity retention.
• Discount Rate: Investors typically receive a 10-20% discount on the next funding round’s valuation.
• Pro-Rata Rights: Some agreements allow early investors to invest more in future rounds to maintain their ownership percentage.

Impact on future fundraising

• SAFEs and convertible notes defer valuation discussions, but that means your priced round investors will consider prior agreements when setting the valuation.
• Accrued interest on convertible notes can increase dilution for founders at the time of conversion.
• Having too many SAFEs or notes outstanding can create a complex cap table, making future fundraising more challenging.

Investor Preferences

The vast majority of early-stage rounds now use SAFEs, as they offer simplicity and speed. However, some investors, particularly those outside major capital hubs, may prefer convertible notes due to their structure and risk mitigation features.

Institutional investors and VCs typically transition to priced rounds from larger seed rounds onward, moving away from these early-stage instruments. For more on the rise of SAFEs, check out Carta’s insights.‍‍

Final Thoughts

SAFEs and convertible notes both help startups secure early funding without setting an immediate valuation. The right choice depends on your investors’ preferences and how much flexibility you need as a founder.

Need help raising your next fundraising round? Capwave AI provides expert tools and insights to navigate early-stage funding with confidence.