We're maybe taking a convertible note arrangement with a recognised and established industry expert / accelerator in exchange for expertise, time,partnerships etc. The value is apparent as the deal involves key third parties that could benefit our business. I want to ensure we're protected as we've only done a small round to date and haven't needed one since. Also major players have broadly expressed interested in future acquisition. Want to ensure when they're asking for fully diluted, all options, warrants, or outstanding convertible notes taken into account when calculating percentage and that 'standardised founder-friendly documentation will be used to structure this, "taking ordinary shares with light-touch investor protections, including standard pre-emption on later funding rounds, and tag along rights" does this sound (un)reasonable?
I work in corporate finance and venture funding and have experience with multiple convertible notes, SAFEs and early-stage equity deals for founders and investors.
Answer:
What you’re describing can be a fair structure – but only if the details are right and truly founder-friendly. With a recognised accelerator/industry expert it’s normal that they use a standard convertible note, but you’re right to be cautious.
Here are the key things I’d check as a founder:
1. Conversion mechanics if there’s no new round
Because you may not raise another round before an exit, you need very clear rules for:
• What counts as a conversion event (next equity round, sale of the company, or a long-stop date).
• How the price is set if there is no priced round (e.g. a valuation cap or a pre-agreed formula).
• What happens at an exit before conversion – do they get a multiple on the note, a discount on the exit price, or just their money back?
Without this, the note can sit on your cap table in a very grey area and create arguments exactly at the moment you want things to be clean (exit).
2. “Fully diluted” and ownership percentage
You are absolutely right to insist that:
• all options, warrants and all outstanding notes
• any ESOP you are planning
• and any other commitments
are included in the fully-diluted cap table used to calculate their percentage.
Ask them for a simple cap-table example: “If we sell for $30M and your note converts, what % will you own, and what will each founder own?” If they can’t show this on one page, it’s a red flag.
3. Rights and investor protections
What you describe – ordinary shares with “light-touch” protections, standard pre-emption on future rounds and tag-along rights – is pretty standard and can be reasonable if:
• there are no heavy veto rights on day-to-day operations
• no “hidden” liquidation preference or guaranteed minimum return
• no anti-dilution beyond a normal pro-rata right
• no right to block a reasonable exit
You want them aligned with you on value creation, not in a position to paralyse the company.
4. Is the equity you’re giving away proportionate to the value?
Because you are paying partly with equity for expertise / network, ask yourself:
• How much time and hands-on support will they really give?
• Are there clear expectations on intros, strategic work, board involvement?
• Is the effective equity cost (after conversion) in line with that value?
If this note ends up being, say, 5–10% of the company post-conversion and they genuinely move the needle (access to key partners, follow-on investors, credibility), that can be a good trade. If it drifts higher with vague commitments, it’s not.
5. Use truly founder-friendly docs
“Standardised founder-friendly documentation” is good – but only if your own lawyer confirms that. At minimum, I’d want:
• clear, short note terms (cap/discount, maturity, interest, triggers)
• standard shareholder protections, nothing exotic
• a clean clause on what happens at an early exit
This is not legal advice, and you should absolutely have a startup lawyer review the actual documents before signing. But from what you’ve written, the structure sounds broadly reasonable – it just needs to be nailed down in proper, precise language.
If anyone needs help with this, I’m happy to walk through your draft term sheet or cap table and sanity-check the economics with you in more detail on a call.
