Given the challenges of valuation at the pre-seed stage many ventures and investors prefer convertible instruments. These are agreements through which an investor provides capital now, with the right to convert that investment into equity at a later financing round - usually at seed or Series A round.

Convertible instruments avoid the immediate need to establish a formal valuation, while still providing investors with a potential ownership stake once the venture demonstrates traction.

The two most common types of convertible instruments are:

1 - Convertible Notes: These are technically debt instruments which convert into equity upon a qualifying event, such as a subsequent funding round. They typically include features such as a discount (allowing early investors to purchase equity at a reduced price) and a valuation cap (setting a maximum price at which the note converts to equity), both of which reward early risk-taking. Convertible notes also often accrue interest, which may convert into equity alongside the principal.

2 - SAFEs (Simple Agreements for Future Equity): SAFEs are contracts that give investors a right to future equity without the complexity of debt. They are widely used because they are simple, quick to execute and avoid interest payments or maturity dates. SAFEs can also include discounts and valuation caps to recognise early risk.

Convertible instruments are particularly suitable for pre-seed ventures because they:

• Avoid complex valuation negotiations, allowing founders and investors to focus on building the business rather than arguing over hypothetical numbers.

• Reward early investors, giving them a discount or valuation cap which reflects the uncertainty and risk they took on.

• Enable rapid capital injection, allowing founders to focus their time and resources on product development, validation and customer discovery.

Despite their simplicity, founders must pay careful attention to the specific terms of convertible instruments. Even small details such as the percentage discount, valuation cap or triggers for conversion can significantly influence ownership, control and dilution in future financing rounds. Understanding these nuances is critical to protect both founder equity and the long-term viability of the company.