Latest / The Series A Show with Fexingo: Early-Stage Funding, Pitch Decks, and Startup Milestones / Why Startups Are Using Rolling No-Cap Notes in 2026
Transcript
- Lucas: So rolling no-cap notes have become the go-to instrument for a lot of pre-seed and seed rounds this year. I'm seeing deal after deal where founders are closing a $1 million to $2 million round in just a few weeks, using a structure that doesn't have a valuation cap at all. Luna: And that's different from a standard SAFE or a capped note, right? No cap means the investor doesn't know what price they're converting at until the next round. Lucas: Exactly. With a capped note, there's a maximum valuation at which the note converts. So the investor knows they won't convert above, say, a $10 million cap. But with a no-cap note, there's no cap — the conversion price is set by a discount to the next round's price. Typically 15 to 25 percent discount, plus sometimes a valuation floor, which is a minimum valuation for conversion. Luna: So the investor is betting that the company's valuation will go up enough that the discount gives them a good entry. But if the next round is at a lower valuation, they could be underwater? Lucas: That's the risk. But in practice, what I'm seeing is that founders are using rolling no-cap notes when they have strong traction — like growing revenue or a clear path to product-market fit — but they don't want to spend months negotiating a valuation. They want to move fast, and investors are willing to trust the process because the discount and floor provide some protection. Luna: And the 'rolling' part — that means they can keep adding new investors over time, right? It's not a single close. Lucas: Right. The round stays open for a period, maybe 30 to 90 days, and the founder can bring in new investors as they come. Each investor gets the same terms, which simplifies things a lot. You don't have to renegotiate pricing every time someone new wants in. Luna: That sounds great for momentum. But what happens if the round doesn't fill? Is there a minimum? Lucas: Most have a minimum — say, $500,000 — and if that minimum isn't met by the deadline, the note might convert early or the investors can get their money back. But the trend I'm seeing is that rounds are filling faster because the terms are founder-friendly and investor-friendly at the same time. Luna: Let me push back a little. Isn't this just a rebrand of convertible notes? I mean, convertible notes have existed for decades. Lucas: Fair question. The difference is that traditional convertible notes had a maturity date and interest rate, which created a debt-like obligation. No-cap notes are structured as SAFEs — they don't accrue interest and don't have a maturity date. They're pure equity instruments. The 'no-cap' part just removes the valuation cap, which was the most contentious term in many SAFE rounds. Luna: So it's essentially a SAFE with only a discount and a floor. No cap, no interest, no maturity. That does sound cleaner. Lucas: It is. And it's particularly popular right now because the market is so split. Look at the ARK Innovation ETF — down four point three percent in the last five days. Meanwhile, Palantir is up five and a half percent. That divergence means some sectors are hot and some are cold. In hot sectors like AI or defense tech, founders can raise quickly with minimal dilution because investors are eager. In colder sectors, a no-cap note might be the only way to get a round done without a fire sale valuation. Luna: So it's a tool for both scenarios. Let's talk about the dilution risk for founders. If the company takes off and raises a Series A at a $50 million valuation, and your note has a 20 percent discount, the investor converts at $40 million valuation. That's still a lot of dilution if the note is, say, $2 million. Lucas: That's the trade-off. But remember, without the note, the founder might not have raised at all, or might have given up more equity earlier. The no-cap note lets the company prove itself before setting a price. And if the valuation goes up a lot, the discount becomes less significant as a percentage of the company. Luna: I want to get into a specific example. Say a B2B SaaS startup is raising a $1.5 million rolling no-cap note with a 20 percent discount and a $5 million valuation floor. How does that play out in different scenarios? Lucas: Great example. Scenario one: the startup raises a Series A at a $15 million pre-money. The note converts at a 20 percent discount to that, so effectively at a $12 million valuation. The investors get 12.5 percent of the company for their $1.5 million — 1.5 divided by 12. That's pretty standard. Luna: Scenario two: the Series A is at $6 million pre-money. Above the floor, so the discount applies — 20 percent off $6 million is $4.8 million. So the investors get 31.25 percent of the company. That's a lot of dilution. Lucas: And scenario three: the Series A is at $4 million pre-money, below the floor. Then the note converts at the $5 million floor valuation. Investors get 30 percent. So the floor protects them from the worst-case, but the founder still takes a big hit. Luna: So the key for founders is to set the floor high enough to protect themselves but low enough to attract investors. What are you seeing as typical floors these days? Lucas: For pre-seed rounds, I'm seeing floors between $3 million and $8 million, depending on the sector and traction. Seed rounds might go higher, up to $12 million. But the trend is definitely toward lower floors because investors want more downside protection given the market uncertainty. Luna: And if the content we're sharing today helps you think about your own fundraising strategy, that's exactly why we do this. The show stays ad-free because of listener support. If you find value in these conversations, you can help keep them going at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small way to make a big difference. Every contribution goes right back into producing more episodes like this one. Luna: So back to the no-cap note trend — I want to ask about investor sentiment. Are institutional VCs actually participating in these rounds, or is it mostly angels and family offices? Lucas: It's a mix. I've seen some top-tier seed funds participate in rolling no-cap notes, but usually they're the lead and they set the terms. A lot of the participation is from angels and smaller funds who like the simplicity. The big VCs often prefer to wait for the priced round so they can negotiate the valuation and get their standard board seats and information rights. Luna: Right. And with a no-cap note, there's no board seat or voting rights for the note holders. So it's truly a simple financial instrument. Lucas: Exactly. And that's part of the appeal for founders — they retain full control of the company until the Series A. No board observers, no veto rights, no monthly reporting beyond standard updates. It's just money in, equity later. Luna: One more thing — how do these notes handle down rounds? If the next round is at a lower valuation than the floor, what happens? Lucas: Most notes have a provision that if the next round is below the floor, the note converts at the floor valuation. But some notes also have a 'most favored nation' clause, which means if the company issues a new instrument with better terms later, the note holders get those terms too. That's rare in no-cap notes, but it exists. Luna: So the structure is pretty straightforward, but the devil is in the details of the discount and floor. Lucas, what's your take on where this trend is heading in the next 12 months? Lucas: I think rolling no-cap notes will become even more common as more founders and investors get comfortable with them. The key is that they reduce friction in the fundraising process. Instead of weeks of back and forth on valuation, you agree on a discount and floor, and you're done. In a market where speed matters, that's a huge advantage. Luna: And for founders who are worried about dilution, is there a way to mitigate it? Like setting a higher floor or a smaller note size? Lucas: Absolutely. If you're confident in your growth, you can set a higher floor to reduce the dilution risk. You can also cap the total note size to limit how much converts at a discount. Some founders are doing a two-tranche structure: first tranche as a no-cap note, second as a priced round. That gives them a bridge now and a cleaner exit later. Luna: That's a smart approach. So the no-cap note isn't the end of the fundraising story — it's a bridge to a priced round. Lucas: Exactly. And in this environment, with the market showing such divergent signals, having that bridge can be the difference between closing and stalling. If you can raise $1.5 million in 30 days versus 90, you're in a much stronger position to hit your milestones and command a higher valuation later. Luna: Well said. Thanks for breaking this down, Lucas. Lucas: Thanks, Luna. For our listeners, if you're raising right now, take a hard look at rolling no-cap notes. They might be the fastest path to your next round.