Term sheets for space founders: dilution, SAFEs, and cap tables

Dilution, in plain terms

Every time your company sells newly created shares, the buyer joins your capitalisation table (cap table) and you own a smaller percentage of the company than before. That's dilution, and it happens with every financing — including, often invisibly, the moment a batch of convertible notes or SAFEs converts into shares. Per the course, this is exactly where many founders get an unpleasant surprise: they've mentally budgeted for, say, 20% dilution in a priced round, but forgotten that a stack of older notes is converting at the same time and taking a further bite.

The rule worth internalising early: the more you raise, the more you dilute, and the worse the terms tend to get on each successive raise if the company isn't visibly progressing. Money needs to be productive, because you will need to raise again.

Convertible notes vs SAFE notes

Founders usually raise early money on one of these two instruments rather than a fully priced round, mainly for simplicity — less negotiation overhead, faster to close, and no valuation discussion to have yet.

The valuation cap and discount both exist to reward the investor for taking risk earlier: when the next priced round happens, their money converts at a better rate than the new investors are getting, via whichever of the two mechanics is more favourable to them.

A well-known practical guide on this exact problem is Carta's "How to Manage Equity Dilution" — the course points to it directly and it's worth reading before your first raise.

Cap-table hygiene

Per the course, the earlier your stage, the cleaner your cap table should be — and "clean" has a specific meaning. A few practical markers:

• Fewer, pooled line items beat many small ones. Twenty-six angels each holding a sliver of the company is messier than one angel syndicate holding the same aggregate stake.
• Watch for "dead equity." Shareholders — often departed co-founders or early employees — who no longer contribute either work or capital but still hold a meaningful stake are a red flag that sophisticated investors will notice and price into their decision.
• Founders need to keep enough ownership. If two founders are collectively under roughly 10% after two or three rounds, that's read as an incentive-alignment problem, not just an arithmetic one — investors generally will not want to push founders below a workable stake, because it makes the company harder to keep motivated and, ultimately, harder to invest in.

Messy cap tables can be cleaned up later at a successful, later-stage company — but the earlier and cleaner you keep it, the easier every subsequent round becomes.

Vesting

A lot of first-time founders resist this one instinctively: you've put years into the company, so why should your own shares vest over time? The course's answer is that vesting exists to prevent "dead equity" from the founder side — if you leave shortly after a round closes, the company shouldn't be left with a large, unproductive equity block. A standard schedule is four years. In a pure angel round (not bundled with an institutional seed), vesting sometimes isn't discussed at all; where it is, founders may get partial credit for time already served — anywhere from roughly 5% to 25% of their shares treated as already vested — though investors may reset that credit at Series A, and again at Series B, typically compensated by a much higher share value by that point.

Liquidation preferences

When you issue preferred shares to investors, those shares typically carry a liquidation preference: in an exit, the investor gets paid out of the proceeds before anyone else. Historically, multiples of 2x-4x existed — meaning an investor who put in $1 million could take $3-4 million off the top before common shareholders saw anything, and still participate in the remaining proceeds with their percentage stake. That's uncommon in the current environment. The standard today is a straightforward 1x, non-participating preference: the investor chooses either to take their original investment back first, or to participate pro rata with their shareholding — not both. Liquidation preference is one piece of a broader concept the course calls "downside protection" — the set of terms that shield investors from partial or total loss if things go badly.

Pre-money, post-money, primary and secondary

The core formula: pre-money valuation + investment amount = post-money valuation. Raise $2 million against an $8 million pre-money valuation, and once the round closes and the cash is in the bank, the company is worth $10 million post-money.

The course's central piece of advice here: treat valuation as an output, not an input. Rather than opening a negotiation by anchoring on a valuation number, decide the investment amount you need and the dilution you're willing to accept — the valuation falls out of that math. Anchoring on a valuation first backfires in both directions: raise less than planned and you're "better off" on paper but under-capitalised; raise more and you're stuck defending a valuation you never should have led with.

Primary shares are newly created shares — the cash goes into the company. Secondary shares are existing shares sold by current holders (founders, early angels, earlier investors) directly to a new investor — the cash goes to the seller, not the company. Secondary sales typically surface when an incoming investor wants a bigger stake than the primary round's dilution math alone would give them. A priced round (also called an equity round) is simply a round done at a negotiated, fixed valuation, rather than on convertible or SAFE terms.

The "3x valuation uplift" rule

When VCs size an investment, they typically underwrite it against an expectation of roughly a 3x valuation step-up between the current round and the next one, usually 18-24 months out. Less than that reads as a weak signal about the company's trajectory; more is, obviously, welcome. This expectation sits behind two other pieces of practical advice from the course: right-size your raise using both a bottom-up and a top-down calculation aimed at 18-24 months of runway, and build a sensitivity range — a minimum you need to make the plan work, and a maximum (roughly 1.5x the minimum) you'd take if offered.

ESOP and the ownership math

VCs typically require an Employee Stock Option Plan (ESOP) pool — commonly around 10% — to be carved out before a priced round closes, so the company can offer options to attract talent. That pool comes out of existing shareholders' stakes, not the incoming investor's. Run this forward across a few rounds — a friends-and-family or angel check, then an institutional seed round, then a Series A, each adding pro-rata dilution plus its own ESOP top-up — and it becomes clear how quickly even two founders starting at 50/50 can end up holding well under half the company, entirely through ordinary, "clean" dilution rather than anything adversarial.

What to do about it

1. Track every convertible or SAFE's cap, discount and issue date the moment you sign it — in a spreadsheet or a dedicated cap-table tool — not when the next round forces you to reconstruct it.
2. Keep the cap table clean. Pool small checks into a single vehicle where you can, and resolve dead equity from departed co-founders or early employees before your next raise, not during it.
3. Let valuation be the output. Decide the amount you need and the dilution you can accept; don't open a negotiation by anchoring on a number.
4. Expect a 1x, non-participating liquidation preference as the market standard — treat anything higher as a real economic concession worth negotiating, not boilerplate to sign past.
5. Read the actual conversion mechanics before you sign anything — the interaction between valuation cap, discount, and Most Favoured Nation clauses across multiple notes is exactly where dilution surprises come from later.

These mechanics sit inside a bigger picture of how European space venture capital actually allocates money and which funds specialise in this sector — we cover that in how European space venture capital actually works.

FAQ

Sources