Latest / The Series A Show with Fexingo: Early-Stage Funding, Pitch Decks, and Startup Milestones / How Startups Are Using Rolling No-Cap Notes in Mid-2026
Transcript
- Lucas: It's mid-July 2026, and if you're raising a pre-seed round right now, chances are you've come across something called a rolling no-cap note. It's not exactly new, but it's quietly become the default instrument for founders who want to close quickly without setting a valuation ceiling too early. Luna: No-cap notes have been around for a while, but I'm seeing them more and more in practice. What's driving the shift now? Lucas: A few things. First, the market for early-stage AI and deep tech has gotten so hot that founders worry about leaving money on the table if they set a cap too low. Second, rolling closes let you bring in investors as you go, which is faster than a traditional round where you wait for one big check. And third, the legal templates have matured — Y Combinator's SAFE now has an uncapped variant that's widely accepted. Luna: Right, so the note itself is a SAFE — Simple Agreement for Future Equity — but without a valuation cap. Instead, investors get a discount on the next round, typically 15 to 25 percent. The 'rolling' part means you can keep the round open and add investors over weeks or months. Lucas: Exactly. And the big question for founders is: does this structure actually help you raise more efficiently, or does it just push complexity down the road? Let's look at a concrete example. Say you're a B2B SaaS founder raising a $1.5 million pre-seed. You open a rolling uncapped SAFE with a 20 percent discount. You close your first $250,000 from a few angels in week one, then another $500,000 from a micro VC in week three, and so on until you hit your target. Luna: And all those investors get the same 20 percent discount, regardless of when they came in. That's one of the appeals — early and late investors get the same terms. No cap means nobody's trying to negotiate a ceiling. Lucas: Right. The downside is that the founder's dilution is unknown until the priced round happens. If your Series A values the company at $20 million, the SAFE investors convert at an effective $16 million valuation. If the Series A is $50 million, they convert at $40 million. The discount stays constant, but the absolute dilution can swing wildly. Luna: So investors are essentially betting that the company's valuation will grow significantly before the next round. That's a bet on momentum, not on a specific number. For angel investors who trust the founder, that can be fine. Lucas: And for founders, the advantage is speed and simplicity. You don't need to negotiate a cap, you don't need to wait for a lead investor to set terms. You just open the note and start collecting checks. One founder I spoke with recently raised $1.2 million over six weeks using a rolling uncapped SAFE, and she said the hardest part was just managing the cap table — because each investor comes in at a slightly different time, you have to track conversion shares carefully. Luna: Which brings up a practical point: how do you handle the administrative burden? Most startups use Carta or Pulley to manage the cap table, and both now support rolling SAFEs with pro-rata rights and conversion mechanics. But it's still something the founder has to stay on top of. Lucas: Yeah, and one more consideration: the note typically has a maturity date or a 'most favored nation' clause. MFN means that if you later offer better terms to another investor, earlier investors can opt into those terms. With uncapped notes, the only term that might change is the discount rate, so MFN is less of a concern. Luna: So in practice, rolling no-cap notes are working well for founders who have traction and a strong network. But if you're earlier-stage with less proof, investors might push for a cap to protect themselves. Lucas: Absolutely. And that's where the market context matters. Look at some of the headlines from today, July 14, 2026. DeepSeek, the Chinese AI lab, is reportedly in talks to raise $1.5 billion at a valuation that could exceed $10 billion. That's a priced round with a massive valuation. But the startups that fuel that ecosystem — the tools, the infrastructure, the applications — they're often pre-revenue and raising on uncapped notes because nobody knows what they'll be worth in 18 months. Luna: And in that environment, a rolling no-cap note lets the founder capture value as the company grows, without giving away too much equity early. It's a flexible tool, but it's not a magic bullet. The discount still has to be attractive enough for investors to say yes. Lucas: Exactly. And if today's conversation helped you think about your own fundraising strategy, honestly, if it was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Keeps the show ad-free and helps us keep digging into these mechanics. Luna: Yeah, it's a small way to support the work we do. We really appreciate it. Lucas: Alright, back to the mechanics. One thing that often trips founders up is how the conversion works if the next round is also a SAFE or a convertible note. Most uncapped SAFEs specify that conversion happens only upon a priced equity round — typically a Series A. If the next round is another SAFE, the note doesn't convert; it just sits there and accumulates. Luna: So you could end up with a stack of SAFEs — one from the pre-seed, one from the seed — all converting at the Series A. That's fine, but it complicates the cap table. Investors with different discount rates convert at different prices, so the Series A lead has to model all of that. Lucas: Right. And that's another reason some VCs prefer a priced seed round — it forces clarity. But for founders, the tradeoff is speed. A rolling no-cap note can close in weeks. A priced seed round, even a simple one, usually takes two to three months just in legal and negotiation. Luna: Let's talk numbers. Say you raise $1.5 million on an uncapped note with a 20 percent discount. Your Series A comes in at a $15 million pre-money valuation. The SAFE investors convert at an effective $12 million valuation, so they get $1.5 million divided by $12 million, which is 12.5 percent of the company post- conversion. Without the discount, they'd get 10 percent. So the discount gave them an extra 2.5 percent. Lucas: Which is meaningful, especially if the company does well. But if the Series A is $30 million, the effective valuation is $24 million, and the SAFE holders get 6.25 percent instead of 5 percent. The absolute dilution for the founder is lower because the valuation is higher. So the uncapped structure aligns incentives — investors win more if the company's value grows faster. Luna: And that's exactly why it's popular in hot sectors like AI, where valuations are accelerating quickly. Founders don't want to cap themselves at $8 million when the market might value them at $20 million six months later. Lucas: But it's not without risk for investors. If the company stagnates and the next round is at a lower valuation — a down round — the uncapped note still converts at a discount, but the discount might not compensate for the drop. In that scenario, investors could end up with more equity than they want, but the company is worth less. That's a tough spot. Luna: So it's really a tool for high-growth, high-confidence situations. Not for every startup. Lucas: Right. And we're seeing that play out in the data. The ARK Innovation ETF, ticker A-R-K-K, is down about 0.8 percent over the past five days, and the genomics ETF A-R-K-G is down over 2 percent. That suggests some cooling in high-growth, speculative names. But the AI infrastructure names like NVIDIA, up nearly 4 percent in five days, and Meta, up over 9 percent, show that the market is still rewarding companies with clear AI narratives. Luna: So the froth is concentrated. For startups, that means if you're in AI, you can probably raise on an uncapped note. If you're in a slower-growing sector, investors might want a cap. Lucas: Exactly. And the rolling structure adds another layer: it lets you test the market. If you open a note and the first few investors are hesitant, you can adjust your pitch or your discount. If they jump in quickly, you know you have momentum. Luna: One last thing — pro-rata rights. Some investors negotiating rolling no-cap notes are asking for pro-rata rights in the next round. That means they can invest again in the Series A to maintain their ownership percentage. For founders, that can be a double-edged sword: it locks in committed investors, but it also reduces your flexibility to bring in new lead investors. Lucas: Right. And the standard Y Combinator SAFE doesn't include pro-rata rights, but many modified versions do. So founders need to read the fine print. The trend in 2026 is toward simpler terms, but there's always negotiation pressure. Luna: So what's the takeaway? Rolling no-cap notes are a powerful tool for fast-moving pre-seed rounds, especially in hot sectors. But they require careful cap table management and a clear path to a priced round. They're not a substitute for a real Series A. Lucas: Exactly. They're a bridge, not a destination. And the best founders use them to buy time to build traction and prove their model, then raise a priced round on strong terms. If you're considering one, talk to other founders who've done it, and make sure your legal counsel understands the mechanics. Luna: And keep an eye on the market. If the AI boom continues, uncapped notes might become even more common. But if the froth recedes, we might see caps come back. Lucas: That's a good note to end on. Thanks for listening, and we'll be back next episode with another deep dive.