Lesson 6 of 8 · About 6 min read · By Lane Kawaoka, PE · Updated November 2026 · Course home

SAFEs, Convertible Notes and Priced Rounds for Angel Investors

Your question: “How do startup deals work, and what’s different from pre-IPO?”

Most of this course is about later-stage pre-IPO deals, because that’s where most of what our community looks at sits. Early-stage angel deals are a different animal. You’re usually investing directly or through a small syndicate, often before the company has meaningful revenue, and the paperwork uses its own vocabulary. This lesson covers the four structures you’re most likely to see.

Early-stage failure rates are high. Many startups never return any money to their investors. Read this lesson with that in mind.

SAFEs

A SAFE (simple agreement for future equity) isn’t stock and isn’t a loan. It’s a contract that gives you the right to receive shares later, usually when the company raises a priced round. Until then you own no shares, have no vote and may have no right to information.

The two terms that matter most:

• Valuation cap. The maximum company valuation at which your money converts into shares. If the company later raises at a higher valuation, you convert as if it were at the cap, so you get more shares.
• Discount. A percentage off the price that new investors pay in the next round.

A SAFE with no cap leaves you with only a discount, which may be weak protection if the company later raises at a high valuation. If the company is sold before a priced round, the SAFE usually lets you take either your money back or a share of the sale, depending on its wording. If the company fails, SAFE holders typically stand behind creditors and often get nothing.

A SAFE May Leave You Without Investment Updates

A SAFE can give you a path to future equity without any right to regular information. After you invest, you may receive no financial statements, operating updates or notice of a new funding round unless those rights appear in the agreement or a side letter.

There’s a fair tradeoff here. A founder running a small company may have little time and staff, and a large investor might reasonably ask for periodic reporting where a small investor can’t. Before signing, ask what information you’ll receive, how often, and whether you’ll be told about future financing. If those answers matter to you, get them in writing.

Convertible Notes

A convertible note starts as a loan that’s meant to turn into shares. Like a SAFE, it usually converts at the next priced round, often with a cap and a discount. Unlike a SAFE, it has an interest rate and a maturity date.

The interest rarely means cash. In most startup notes, interest accrues on paper and converts into more shares rather than being paid out.

Hypothetical illustration, not a projection: a $100,000 note at 8% simple interest shows a balance of $108,000 after one year and $132,000 after four years. If the note converts at a 15% discount to a $10 share price in the next round, your conversion price is $8.50. Your $132,000 balance buys about 15,500 shares instead of the 13,200 a new investor would get for the same money.

What happens at maturity matters. If the company hasn’t raised a qualifying round by the maturity date, the note may become due, convert automatically, be extended by a majority of noteholders or give investors little practical recourse. Many notes are unsecured and sit behind bank debt and other creditors. A note that could legally be repaid is worth little if the company has no cash to repay it.

Convertible Note Interest Is Often Not Real Income

Don’t assume an 8% convertible note behaves like a real estate private loan or a house-flip debt investment. In a house-flip loan, you usually expect principal and interest to be repaid before any equity profits are split. In a convertible note, you’re often still making a bet that depends on an exit.

The same goes for a stated 8%, 10% or even 12% accrued return on a SAFE-like or convertible instrument. That accrued amount only matters if there’s a qualifying financing, conversion, sale or other liquidity event. If the company never raises a priced round, never sells or fails, the accrual may have little practical value. The longer a deal drifts, the larger the accrued figure grows on paper, without making repayment any more likely.

If you’re focused on coupon, current yield or predictable income, a SAFE or convertible note is probably the wrong tool.

Priced Rounds

In a priced round, the company sets a per-share price and a valuation, and investors buy actual shares, usually preferred stock. This is the cleanest structure because you know what you own and at what price on day one.

Priced rounds come with longer documents: a stock purchase agreement, an investor rights agreement, a voting agreement and a right of first refusal and co-sale agreement are typical. The terms to read closely are the liquidation preference, any participation rights, anti-dilution protection, pro rata rights to invest in future rounds, information rights, and board or voting control.

Royalty Deals

A royalty deal is a different tool altogether. Instead of owning shares, you receive a percentage of the company’s revenue until you’ve been paid back a set multiple of your investment.

Royalties fit revenue, not moonshots. They can make sense when you like a business, believe it can keep producing revenue, and don’t believe it has true venture-style upside. Picture a stable but slow-growing software company with real users: a royalty turns the bet from “this company needs to explode in value” into “I want a share of existing revenue until I hit a negotiated cap.” If the company’s whole story depends on a big acquisition or breakout, a royalty caps the very upside you’d be investing for.

The return cap can make or break the deal. Hypothetical illustration, not a projection: a 12% royalty capped at 1.25 times your investment may sound fine, but if the company pays you back in two years you’re out of the deal with a modest gain and need to find, vet and fund another one. A cap of 2.0x to 2.5x may better reflect the risk, depending on the company’s revenue quality and growth.

Royalties also change incentives. You’re paid from the top line, before expenses. That can be appealing, but the payment comes ahead of reinvestment, growth spending and margin improvement. Ask whether the business has enough gross margin and stable revenue to carry the royalty without starving itself.

A Lead Investor’s Commitment Is a Starting Point, Not a Decision

Early-stage rounds often have a lead investor, someone experienced who negotiates terms and does the most diligence. A good lead is helpful. Their commitment still doesn’t make the investment right for you.

I’ve watched less experienced investors gain confidence because a few sophisticated people in the room were in. Following the group can create confidence without understanding the business, the note or the chance of losing the money. Ask what the lead actually investigated, whether they got the same terms as you, and which risks remain unresolved. You should be able to explain your own reason for investing and when you’d pass.

Early-Stage Investors Should Add Value Without Becoming Noise

In small companies, investors can help with relationships, introductions, industry knowledge, hiring referrals and customer leads. Some companies even pay investors a share of first-year revenue from customers they introduce. Help has limits, though. An investor who takes up the founder’s time with unproductive questions can hurt the investment. Ask whether the company has a deliberate way to use what its investors bring.

Watch: Two Conversations on This Topic

If you would rather listen than read, these episodes cover much of this lesson. Use the timestamps to jump to the parts that matter most.

I am considering an angel investment through [a SAFE / a convertible note / a priced round] with these terms: [valuation cap, discount, interest rate, maturity]. Explain how this converts into shares, what happens if the company raises at a lower valuation or never raises again, and what a sensible check size and number of companies might look like for an angel portfolio. Use the lessons at thewealthelevator.com/home/resources/angel/ as background. Do not recommend a specific investment, and list what I should confirm with my CPA.

The podcast behind this course

Listen to the Angel Investing podcast

Many people who find this course don’t realize there’s a whole podcast on this topic. Each month I walk through angel and pre-IPO deal terms, due diligence questions and lessons from real conversations with investors.

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