Latest / The Series A Show with Fexingo: Early-Stage Funding, Pitch Decks, and Startup Milestones / Why Startups Are Using Rolling No-Cap Notes in Mid-2026
Transcript
- Lucas: So it's July 2026, and we're seeing a really specific pattern in early-stage funding right now. Rolling no-cap notes — they're not new, but the way startups are using them has shifted pretty dramatically in the last six months. Luna: Yeah, I've seen a bunch of founders mention them on Twitter and in pitch decks. But I think a lot of listeners might still be fuzzy on what they actually are. Lucas: Right. And if today's conversation is useful for what you're building or running — whether you're a founder or an angel — the way we keep these episodes ad-free is listener support. You can find us at buy me a coffee dot com slash fexingo. That's the whole thing. It helps us keep digging into these topics without sponsored interruptions. Luna: Yeah, and we really appreciate that. So back to rolling no-cap notes — let's define them first. Lucas: Okay, so a rolling no-cap note is a convertible note that doesn't have a valuation cap, and it's offered on a rolling basis — meaning the startup keeps it open for a period of time, often a few weeks or months, and investors can come in at any point during that window. The key feature is no cap, which means early investors don't get a price ceiling on their conversion. Instead, they typically get a discount — say 20 percent — off the next round's price. Luna: And that's different from a traditional SAFE or a capped note, where you have a maximum valuation at which the note converts. Lucas: Exactly. With a cap, you're essentially saying 'this note will convert at no more than a $10 million valuation.' With a no-cap note, you're saying 'you'll get a discount, but if we raise our Series A at a $50 million valuation, you convert at $40 million effective.' The flip side — if the valuation is lower than expected, the discount still applies, so investors aren't as protected. Luna: And why are founders gravitating toward this now? I mean, we saw a lot of capped notes and SAFEs in 2020–2022. Lucas: A few reasons. First, it's faster. No cap means no negotiation over valuation. The founder sets a discount and a maturity date — often two years — and investors either agree or don't. Second, it aligns incentives: if the company does well, early investors still get a discount, but founders aren't giving away disproportionate equity if the valuation explodes. And third, in this market where valuations are compressed — look at some of the recent down rounds — founders want flexibility. They don't want to be locked into a cap that might be too high or too low. Luna: Right. And we've talked about rolling funds and rolling SAFEs in previous episodes. This is a variation on that theme. Lucas: It is. And the data backs up the trend. According to Carta's Q2 2026 report, rolling no-cap notes accounted for about 12 percent of all seed-stage instruments in the first half of this year, up from about 4 percent in the same period last year. AngelList also reported a 30 percent increase in the number of rolling note rounds on their platform. Luna: That's a pretty big jump. What kind of startups are using them? Lucas: Mostly pre-product or early-revenue startups that want to close a small round — say $500,000 to $2 million — quickly, without getting distracted by weeks of term sheet negotiations. I talked to a founder last week who runs an ai driven legal document startup. They raised $1.8 million in rolling no-cap notes in about five weeks. They had a 20 percent discount, a two-year maturity, and no cap. They closed in July, and they're already using the money to hire their first sales team. Luna: And what do investors think about it? I mean, if I'm an angel, I might be worried about dilution if there's no cap. Lucas: That's the big risk. Without a cap, if the company raises a Series A at a very high valuation — say $100 million — the note converts at $80 million effective valuation, but that's still a high price per share. The investor gets fewer shares than if they had a cap. But the discount gives them some protection, and many angels are comfortable with it because they're betting on the team and the growth trajectory, not on getting a specific valuation cap. Also, some notes include a most favored nation clause, so if the startup later issues a note with better terms, earlier investors get those terms too. Luna: Interesting. So it's almost like a trust-based instrument. The founder says 'I'm not going to screw you, and you're betting on my ability to grow the company.' Lucas: Exactly. And it works best when both sides have a relationship or when the startup has some traction — maybe a few paying customers or a strong founding team. For pre-seed, you still see a lot of capped notes because investors want more downside protection. But at seed, especially for startups that have a bit of revenue or a clear go to market plan, no-cap notes are becoming more common. Luna: And what about the legal and tax implications? I know with convertible notes, there's always the question of whether it's debt or equity for tax purposes. Lucas: Right. Rolling no-cap notes are still debt for tax purposes, so there's an interest component — typically the note accrues interest at a low rate, like 2 to 4 percent, which is added to the principal upon conversion. That interest is taxable to the investor as ordinary income. But many startups use the 'safe harbor' provisions to keep it simple. One thing founders should be aware of is that if the note matures and hasn't converted, you might have to repay the principal plus interest, which can be a cash crunch. But in practice, most notes convert before maturity — either in a qualified financing or an acquisition. Luna: And what about the investor's perspective on the maturity risk? If the company doesn't raise a priced round, the note might come due. Lucas: That's a real risk. If the startup can't raise a Series A within the two-year window, the note might need to be extended — often with investor consent — or the startup might have to repay. But in this environment, where fundraising timelines are stretched, some notes are now being structured with three-year maturities. I've also seen 'extension options' built in, where the startup can unilaterally extend for six months if they pay a small fee. Luna: So it's still a relatively founder-friendly instrument, but with some guardrails. Lucas: Yeah, I'd say it's a middle ground. It's more flexible than a priced round, but less protective for investors than a capped note. The key is transparency. Founders using rolling no-cap notes should be very clear about their milestones and how they plan to reach a priced round. And investors should do their diligence on the team and the market. Luna: And how does this fit into the broader landscape we're seeing in mid-2026? I'm thinking about the recent headlines — Colossal Biosciences reportedly raising at a huge valuation, but that's a different stage. Lucas: Right. Colossal is a later-stage biotech with massive capital needs. But for seed-stage startups, the trend is toward speed and simplicity. Rolling no-cap notes are part of a broader movement where founders are trying to minimize distraction from fundraising. You see it also in the rise of rolling funds and rolling SAFEs. The common thread is that founders want to spend less time on the phone with investors and more time building product. Luna: And the data from Carta and AngelList seems to support that this isn't just a fad. Twelve percent is a meaningful share of the seed market. Lucas: It is. And if the current macro environment continues — with interest rates staying elevated and IPO markets still slow — I expect we'll see even more adoption. Priced rounds require a lot of legal work and negotiation. Rolling notes are cheaper and faster. For a startup that wants to get to $1 million in ARR before raising a Series A, a rolling no-cap note can be the perfect bridge. Luna: So what's the one takeaway for our listeners? If you're a founder considering this, what should you watch out for? Lucas: Make sure you have a clear path to a priced round. If you use a rolling no-cap note, you should have a plan to hit milestones that will attract a lead investor — whether that's revenue, user growth, or a key partnership. And be transparent with your investors about the risks. If you do that, it can be a really efficient way to raise capital without the valuation sticker shock for either side. Luna: Yeah, I think that's the key. It's not for every startup, but for the right ones, it's a powerful tool. Lucas: Absolutely. And as always, we'll keep tracking the data. In the meantime, if you found this useful, you know where to find us — buy me a coffee dot com slash fexingo. Thanks for listening.