Latest / The Series A Show with Fexingo: Early-Stage Funding, Pitch Decks, and Startup Milestones / Why Startups Are Using Rolling Notes Instead of SAFEs
Transcript
- Lucas: So rolling convertible notes. You're seeing them more and more in seed rounds this year, and I think a lot of founders still confuse them with SAFEs — or assume they're basically the same thing. Luna: Right, because both are convertible instruments. No valuation set at signing. But the rolling part is what changes the game, right? Lucas: Exactly. A standard convertible note has a fixed maturity date — usually 18 or 24 months out. You raise the round, the note sits there, and at maturity either it converts in a qualified financing or you have to repay it. Rolling notes don't have that fixed maturity. Instead, they keep 'rolling' — meaning new investors can keep coming in at the same terms until the startup decides to cap the round. Luna: So it's like an open-ended fundraising window rather than a single close. Lucas: Yeah, and that's huge for founders who don't want to spend three months in a concentrated raise. You can start with a small anchor, then add investors one by one as they come in. The terms are the same for everyone who joins during that rolling period — usually a discount rate to the next priced round, sometimes with a valuation cap, sometimes not. Luna: And this is different from a rolling SAFE? Because those exist too. Lucas: They do, but the key difference is that a SAFE — Simple Agreement for Future Equity — is not debt. It doesn't accrue interest, and it doesn't have a maturity date even in its standard form. A rolling note is still technically debt. It accrues interest, and it has a conversion trigger. But by removing the fixed maturity, it becomes much more founder-friendly than a traditional note. Luna: So you get the tax benefits of debt — interest is deductible — without the ticking time bomb of having to raise a priced round by a certain date. Lucas: Right. And that's particularly relevant right now. Look at a fund like ARKK, which is up six percent in the last five days. That kind of risk-on sentiment can make rolling rounds even more attractive because investors are feeling bullish, but they might not want to commit to a full priced round valuation. A rolling note lets them place a bet with a discount. Luna: And on the flip side, you see a stock like RBLX up nineteen percent in five days. That's the kind of volatility that makes founders cautious about setting a fixed valuation too early. Lucas: Exactly. If you set a valuation cap on a SAFE and then your traction explodes, you've given away more equity than you needed to. With a rolling note, you can keep the terms constant and just keep adding capital until you hit a milestone that justifies a priced round. Luna: So who's actually using these? Is it mostly SaaS, biotech, what? Lucas: It's broad, but I'm seeing a lot of usage in deep tech and hardware — companies that have longer development cycles and need to raise capital in tranches as they hit technical milestones. Also in AI startups that are capital-intensive but don't have revenue yet. They can use a rolling note to bring in angel investors and micro-VCs over six to twelve months, then do one priced round when they have product-market fit. Luna: And the lawyers must be loving this — every new investor needs a side letter or an amendment? Lucas: That's the catch. Rolling notes are simpler than a priced round, but they're not as simple as a SAFE. Each new investor technically signs onto the same note, but you often need to update the schedule of investors. Some law firms have standardized this, but it's still more paperwork than a SAFE where you just issue a new agreement. Luna: But for a founder who wants to keep the round open without the pressure of a hard close, it seems like a solid middle ground. Lucas: It is. And we're seeing more VCs accept them too. A few years ago, a venture firm might have balked at a rolling note because they want a clean cap table. But now, especially with the rise of rolling closes and rolling SAFEs, the market is used to the idea that a seed round can be an extended process. Luna: Speaking of which, speaking of the show — we actually run a bit like a rolling note ourselves. Lucas: How so? Luna: Well, we don't have a fixed maturity date where we have to shut down if we don't hit a certain number of listeners. We keep going because a small group of listeners chips in monthly through buy me a coffee dot com slash fexingo. That's what keeps this ad-free and independent. Lucas: Yeah, and we're grateful for that. It's not a big ask — it's just a way to keep the conversations going without sponsored segments. So if you find these episodes useful for what you're building or running, that's the link. Luna: Alright, back to rolling notes. One thing I want to dig into: how do investors protect themselves if there's no maturity date? Lucas: Good question. Typically, the note will have a conversion trigger tied to a qualifying financing — usually a priced round of at least one or two million dollars. If that doesn't happen within a certain period, say three years, the note might convert at a default valuation or allow the investors to demand repayment. But that's rare in practice. Most founders want to raise a priced round before that. Luna: So the rolling nature gives the founder flexibility, but the investor still has a backstop. Lucas: Exactly. And the discount rate is usually the investor's main protection. If the startup does well, the discount ensures the early investors get a better price than later ones. Typical discounts range from fifteen to twenty-five percent. Luna: Is there any risk of the round getting too long? Like, you have investors coming in over two years and the cap table becomes a mess? Lucas: That's a real concern. Some institutional VCs won't lead a Series A if the seed round has more than, say, twenty investors on a rolling note. It creates administrative complexity. So founders usually set a maximum — either a dollar cap or a time cap. Once you hit two million dollars or twelve months, you close the note and move to a priced round. Luna: So it's not indefinite. It's just more flexible than a traditional note. Lucas: Right. And that's why I think rolling notes are becoming a standard tool. They sit between a SAFE and a priced round in terms of complexity, but they give both sides what they want: speed for the founder, downside protection for the investor. Luna: One last thing: are there any notable startups that have used rolling notes recently? Lucas: I can't name names without risking outdated info, but I've seen it in several Y Combinator batches. Also in some biotech seed rounds where the capital needs are lumpy. The pattern is consistent: founder wants to stay lean, raise as needed, and delay valuation until there's real traction. Luna: And for listeners who are thinking about it, what's the first step? Lucas: Talk to a startup lawyer who's done rolling notes before. The documents aren't that different from a standard convertible note, but the rolling mechanic needs to be spelled out clearly. And decide on the discount rate, the cap if any, and the maximum round size. Then start with one lead investor who sets the terms, and let others follow. Luna: Sounds like a pragmatic way to fund a company without overcomplicating things. Lucas: Exactly. And in a market where speed matters, rolling notes give founders that edge.