Pre-Series A Convertible Bonds — 3 Key Terms Founders Must Negotiate

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Pre-Series A is the stage where the product is reasonably built out but the company hasn't yet cleared the bar for a Series A round. Revenue may have started, or early traction may exist, but it's still hard to pin down a defensible valuation. Pricing the round as a straight equity investment forces you to lock in a valuation right now — and that number can become a shackle in the next round. That's why investors and founders alike often agree to defer the valuation argument and convert based on the terms of the next round instead, formalizing that agreement as a CB.

From a founder's perspective, a CB looks favorable in the short term. You don't have to hand over equity immediately, and you can raise money without a valuation negotiation. But buried inside a CB contract are clauses that constrain a founder's equity and negotiating leverage in future rounds. Founders who sign knowing the structure and founders who sign without understanding it end up in very different places by the time Series A rolls around.

No immediate dilution is the headline advantage of a CB, but it comes with a repayment obligation at maturity and interest costs. What matters more is the substance of what conditions apply at the moment of conversion — and that's the core of the three negotiation points covered below.

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The price applied when a CB converts into equity is called the conversion price. If the conversion price is ₩10,000 per share, an investor who puts in ₩100M receives 10,000 shares. The problem is the clause that lets this conversion price be adjusted downward later, below the Series A valuation — the refixing clause.

Refixing generally works one of two ways. The first is downward refixing, which automatically lowers the conversion price when the share price falls. If a down round occurs — where the Series A valuation comes in lower than it was at the time the CB was issued — the CB investor receives more shares. Founders' and existing shareholders' equity gets diluted far more than expected. The second mechanism applies a discount rate, giving the CB investor a better price by discounting 10–20% off the next round's conversion price.

There are three things founders need to lock down in negotiation: set a numerical floor on the refixing (e.g., no lower than 70% of the original issue price); cap the discount rate explicitly in the contract (anything above 20% should trigger renegotiation); and make sure an upward refixing clause is included symmetrically. A structure with a downward clause but no corresponding upward clause is one-sidedly unfavorable to the founder.

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A CB is debt with a maturity date. If it hasn't converted by maturity, you owe the principal and interest. Pre-Series A CBs typically carry a maturity of one to three years. If Series A takes longer than expected, founders who treated the maturity structure as an afterthought end up facing a cash-flow crisis.

There are three things you absolutely need to confirm in negotiation: is there an extension option; can the maturity be extended without investor consent; and under what conditions does the put option (the investor's right to demand early repayment) get triggered. If the early-repayment trigger is tied to vague language like “deteriorating management” or “failure to meet financial targets,” you end up with a structure where the investor can demand repayment whenever they judge it favorable to do so.

A dangerous pattern that comes up often in practice is a two-year maturity paired with a broadly defined early-repayment trigger. The founder assumes, in theory, that they have two years — but in reality, a repayment demand can arrive within a few months. When reviewing the contract, list out the early-repayment triggers item by item and check whether each one is within the founder's actual control.

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When a CB converts to equity, the investor typically receives a specific class of preferred stock. What rights are attached to that preferred stock has a direct effect on the founder's future negotiating leverage. The two big ones are liquidation preference and anti-dilution provisions.

Liquidation preference is a structure where, if the company is sold or liquidated, preferred shareholders get paid out before common shareholders — and get more. A 1x non-participating preference is relatively less unfavorable to founders, since the investor only recovers their investment first. A participating preference, by contrast, lets the investor recover their investment first and then also take a proportional share of whatever's left. The smaller the exit, the more devastating this difference becomes for founders and option holders.

Anti-dilution provisions protect a CB investor's equity value in the event of a down round. Broad-based weighted-average anti-dilution is relatively favorable to founders. Full-ratchet anti-dilution, on the other hand, converts all of the CB investor's shares at the lowest conversion price triggered by a down round, sharply diluting the founder's stake. Accepting a full-ratchet clause at the Pre-Series A stage is extremely risky.

This third negotiation area is the hardest to handle alone without a legal professional. At minimum, ask a lawyer experienced in startup investment contracts to calculate, with numbers, the scenario-by-scenario impact of the liquidation-preference type and the anti-dilution clause. The meaning of these clauses only becomes clear once you see it in numbers.

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Once you receive the CB contract, work through the items below in order before you sit down at the negotiating table. Any single “I don't know” answer marks a spot where you're not yet ready.

1. Is the conversion price stated explicitly, with a numerical floor on the refixing?
2. If a discount rate applies, what percentage is it, and is a cap stated in the contract?
3. How many years is the maturity term, and who — founder or investor — decides on an extension?
4. Are the early-repayment trigger conditions listed as specific numerical thresholds?
5. Is interest paid in a lump sum at maturity, or in cash payments along the way?
6. What class of stock do you receive on conversion, and is the liquidation-preference type (participating or non-participating) specified?
7. If there's an anti-dilution clause, have you confirmed whether it's weighted-average or full-ratchet?
8. Does this CB issuance conflict with the existing shareholders' agreement (SHA) or the articles of incorporation?
9. Has a lawyer with startup investment-contract experience reviewed the entire agreement?

If you can check off 7 or more of these 9 items, you're ready to negotiate. If it's fewer than 5, hold off on signing and resolve each item first. Many founders delay asking these questions out of fear of straining the investor relationship — but questions at this stage actually read to investors as a signal of how well the founder understands their own business.

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Q1. Which is more favorable to founders, a CB or a SAFE? A SAFE has no maturity and no interest, so there's no cash burden and the structure is simpler. A CB is a legally well-established instrument for Korean corporations, with clear tax and accounting treatment. In the Korean VC/angel ecosystem, CBs are the more commonly used instrument. Whichever tool you use, the details are what matter — negotiating the terms comes before choosing the instrument.

Q2. If I ask an investor to revise their proposed terms, will it damage the relationship? Negotiation is a natural part of the process up until the contract is signed. If an investor refuses reasonable revision requests, that's actually a signal they may be a difficult partner to work with. That said, revision requests should come with evidence, not emotion. Framing it numerically — “this clause reduces the founder's stake from X% to Y% in a down-round scenario, so we're proposing this revision” — keeps the negotiation rational and productive.

Q3. Can I review a CB contract on my own, without a law firm? You can grasp the meaning of the basic clauses on your own, but conflicts between clauses, conflicts with the existing articles of incorporation or shareholders' agreement, and the scenario-by-scenario numerical impact are hard to calculate solo. It's not uncommon for founders who skimped on legal counsel at the seed stage to see hundreds of millions of KRW in value diluted away by Series A.

Q4. What happens if Series A gets delayed after issuing a Pre-Series A CB? If conversion doesn't happen before maturity, you owe the principal and interest. Without an extension clause, the founder may have to come up with the cash directly. To prevent this, negotiate up front for a clause like “automatic one-time maturity extension if Series A isn't completed,” or agree in advance on language that eases the investor-consent requirement for an extension.