The protracted aggregation of capital has materialized. Analysts corroborate this trend: investment volumes have escalated while transaction frequency has diminished. The Global Venture Capital Report indicates global investment reached $120.9 billion in Q1 2025, marking an 86% year-over-year increase. This capital is increasingly concentrated in fewer ventures, frequently through substantial financing rounds, exemplified by OpenAI’s $40 billion capital raise.
Impact Capital’s strategic focus on market leadership predates the widespread adoption of its approach. Annually, the firm evaluates up to 1,500 projects, subsequently investing in 2–3 of the most robust. The portfolio demonstrates successful exits and prospective unicorns, projecting returns ranging from 5x to 65x. Notable holdings include Twinby, Technored, Jet Sharing, and Dodo Pizza, all of which were developed amid economic volatility and intricate cross-border regulatory frameworks.
With over 16 years of experience in private equity, I’ve identified numerous promising companies. Upon recognizing a “champion,” I initiate rapid acquisition. Before deal closure, the substantive work commences with deal structuring—a process designed to preserve liquidity and control while minimizing tax exposure.
This article will explore four primary private equity deal structures: SAFE (Cash now, equity later), Convertible Notes (money as a loan, repaid with interest or converted into equity), and Direct Equity. Additionally, I’ll discuss Syndicates (SPVs) as a distinct format for pooling investors, although they are not a deal structure themselves.
Equity: Immediate ownership, institutional liquidity, and IPO as the endgame
Direct equity investment presents significant administrative demands due to extensive legal and regulatory obligations. In the United States, equity acquisition in an LLC or a C-corporation is facilitated by a standardized contractual framework. Conversely, other jurisdictions impose more intricate procedures; some mandate notarized transfers for LLC equivalents, while joint-stock companies typically register ownership changes within their shareholder registries.
Preferred equity, also known as preferred shares, represents a more costly and complex financing instrument compared to common stock. Significant investors and institutional funds favor preferred shares due to their embedded anti-dilution provisions, priority in payment, veto rights, and, frequently, a designated board seat.
Overpaying at entry constitutes one of an investor’s most significant errors. This phenomenon is particularly prevalent in secondary markets, where founders and extant shareholders frequently reference prior funding rounds or personal expectations rather than objective business economics. Consequently, an inflated valuation immediately erodes prospective returns. Investment firms mitigate this by providing substantiated valuations, thereby safeguarding the interests of all stakeholders.
Retail investors frequently prioritize an objective valuation of a company. However, novice investors often fixate on extraneous factors. A common query, “What if the company goes bankrupt?” overlooks the fact that formal bankruptcy is relatively infrequent in private equity. Businesses typically access new capital, incur debt, restructure, divest non-core assets, or pursue a strategic sale. For a professional, the paramount risk is illiquidity.
A strategic acquisition represents the most viable and expeditious liquidity event, particularly within a 3- to 7-year investment horizon. Initial Public Offerings (IPOs) typically entail extended timelines and increased transactional costs. Secondary market share dispositions are also feasible, contingent upon the absence of corporate charter restrictions. Founders frequently present share repurchase programs, allocating a portion of corporate profits for this purpose, to attract investors. However, the execution of a share buyback in an early-stage enterprise necessitates the prior generation of profitability. Absent a clearly defined exit strategy, investors risk accumulating “paper gains,” where theoretical valuations substantially exceed actual realizable value, effectively rendering the investor a perpetual, non-controlling partner.
Minority investors in private equity inherently possess limited influence. However, investment firms can aggregate these minority stakes to safeguard their interests and impact critical decisions, such as dividend distributions.
For a private equity investor, dividends are incidental, as the primary objective is capital appreciation. A minority stake in a company demonstrating accretive acquisitions is often more compelling than a controlling interest in a stagnant enterprise. Equity ownership is dynamic, subject to dilution from new share issuances to subsequent investors. These new investments typically occur at elevated valuations, thereby appreciating existing shares and generally offsetting dilution. However, conversion of early CLAs and SAFEs with low valuation caps, or the exercise of founders’ deeply in-the-money options, can preclude such valuation increases. Consequently, a thorough review of the cap table, taking into account early options, SAFEs, and CLAs, is critical before investing.
Investor tax liabilities are realized upon the disposition of equity interests. Dividends, when distributed, are universally subject to taxation in nearly all jurisdictions, affecting both resident and non-resident individuals. In the United States, non-resident investors are exempt from capital gains taxation, with the exception of real estate holding companies. For resident investors, a preferential long-term capital gains tax rate ranging from 0% to 20% applies to assets held for more than one year.
CLA: Creditor priority, equity upside, and heavy bureaucracy
A Convertible Loan Agreement (CLA) constitutes an investment vehicle possessing characteristics of both debt and equity. This loan transitions into equity shares upon the occurrence of a predefined trigger event within a stipulated timeframe, as delineated in the agreement. Such a trigger may encompass the culmination of a qualified financing round (QFR) or the procurement of capital exceeding a specified threshold. Should the financing round not conclude within the designated period, the investor retains the right to demand principal repayment with accrued interest, negotiate a temporal extension, or accede to revised conversion terms.
The jurisdictional variability of CLA structuring costs is significant. Emerging markets frequently present complex frameworks, often necessitating unanimous shareholder approval and notarization, which impedes execution and escalates costs for companies with multiple investors. Conversely, Western jurisdictions, including the U.S., UK, and Singapore, have standardized CLAs as investment instruments, requiring merely a board resolution and a signed term sheet for their implementation.
A CLA offers investors the option of either earning a modest interest return or converting the principal into equity under predetermined favorable conditions. The valuation cap functions as a ceiling on the company’s valuation at the point of conversion. Should the subsequent funding round establish a valuation exceeding this cap, the investor’s equity stake is calculated at the capped valuation, thereby mitigating the risk of overpayment. Conversely, suppose the subsequent round’s valuation falls below the cap. In that case, the conversion is executed at the actual valuation, with the CLA’s inherent discount enhancing the investor’s ownership by converting accrued interest into additional shares alongside the principal.
In the event of default, the loan holder possesses a superior claim to investment recovery, unless the agreement incorporates subordination clauses. Creditors inherently precede shareholders, including preferred equity holders, in payment priority. However, the loan confers no voting rights upon the investor. Furthermore, the transferability of the loan to third parties necessitates corporate consent, thereby rendering it an illiquid instrument.
The fundamental vulnerability of a CLA stems from inherent uncertainty. A startup may lack the requisite liquidity to fulfill its repayment obligation if the stipulated conversion triggers are not met. The eventual equity stake and valuation are contingent upon a subsequent funding round, which may not materialize.
A significant advantage of a CLA is that, in most jurisdictions, it doesn’t incur tax obligations until the shares are sold. Specifically, in the U.S. and most European nations, the conversion of a CLA is not considered a taxable event. However, if the loan is repaid instead, the interest generated is taxed as ordinary income.
SAFE: Risk today, equity tomorrow, 1000x exit potential, no guarantees
Valuation discrepancies frequently precipitate the dissolution of early-stage transactions. To facilitate initial investment in nascent enterprises—characterized by an absence of revenue or profit, possessing merely a conceptual framework, team, and prospective—the SAFE instrument was devised. SAFE investors provide immediate capital, deferring the valuation determination until a subsequent equity financing round. At this juncture, the enterprise’s valuation is market-driven: new equity investors inject capital for a stake, establishing a price that serves as the conversion basis for SAFE instruments into shares.
The core design of a SAFE (Simple Agreement for Future Equity) prioritizes maximal share accretion and subsequent capital appreciation. Its structure deliberately omits dividends, board representation, and loan interest, focusing solely on the potential for exponential returns at exit.
The valuation cap prevents overpayment if the company’s value surges, allowing SAFE holders to receive shares at the predetermined valuation cap. The discount offers investors a 5–20% price break, resulting in a higher number of shares. The more favorable mechanism applies when both are present.
Impact Capital routinely incorporates Most Favored Nation (MFN) clauses, which automatically extend superior terms granted to other investors to its existing SAFE agreements. Additionally, the inclusion of Pro Rata Rights ensures the SAFE holder’s participation in subsequent financing rounds, enabling the acquisition of additional shares at the same valuation as new investors and thereby mitigating ownership dilution.
Upon a SAFE’s conversion in a subsequent financing round, investors may liquidate their equity on the secondary market. In an initial public offering or strategic acquisition, the SAFE automatically converts into shares of the company. This mechanism optimizes the valuation cap and discount, providing investors with a superior per-share price compared to later-stage investors, thereby facilitating substantial capital appreciation.
Forward-thinking investors utilize a strategy to generate instant, low-risk multiples by attaching a stock option to a SAFE. This grants the investor the right to purchase additional shares at the original price, in excess of the base conversion. This option is a right, not an obligation; it simply expires if the valuation doesn’t increase. However, if the valuation multiplies tenfold, the investor can exercise the option, acquiring shares at one-tenth of the market price and instantly securing a 10x return.
While a SAFE may present the potential for substantial returns, its illiquidity persists until it is converted into equity. Furthermore, a SAFE merely defers, rather than eradicates, dilution until the point of conversion. In the event of company insolvency and subsequent liquidation, SAFE holders are subordinated to creditors, including banks and holders of convertible notes. Lacking immediate share receipt, SAFE holders are disenfranchised from exercising voting rights and participating in corporate governance.
SAFE financial instruments exhibit jurisdictional variability in tax treatment. In the United States, SAFEs are categorized as equity instruments, thereby deferring investor taxation until the shares are sold. Other jurisdictions may implement distinct tax classifications for SAFEs, necessitating consultation with local tax advisories.
SPV: Smaller check, collective leverage, strategic domicile
Securing participation in significant funding rounds with modest capital allocations is frequently unfeasible. Founders typically stipulate minimum investment thresholds to mitigate escalating legal expenses, manage cap table dilution, and prioritize contributions from institutional funds and strategic partners over those from retail investors. Consequently, the formation of a strategic syndicate (SPV) by a group of investors, enabling capital aggregation, presents an effective mechanism to achieve a deal size commensurate with motivating founders to expedite transactional processes.
As a mere conduit rather than the ultimate beneficiary, a syndicate’s entire economic structure is transmuted to participants through two principal vectors: the SPV’s embedded position within the project and the investor’s equity stake in the SPV. The initial vector pertains to the SPV’s project integration. Functioning as a substantial investor, the SPV, by transacting via equity, CLAs, or SAFEs, possesses the leverage to negotiate and secure superior terms concerning caps, discounts, liquidation preferences, anti-dilution provisions, or elevated interest rates. However, even with optimal entry terms, the ultimate participant returns are contingent upon the second vector—the SPV itself. Due diligence, comprehensive reporting, and proficient deal management, alongside management fees (ranging from 1% to 2% per annum) and success fees (representing 10% to 20% of realized profits), collectively diminish the multiple for the ultimate beneficiaries. Furthermore, the jurisdiction dictates the costs associated with entity registration, ongoing maintenance, applicable taxes, and transactional expenditures.
Jurisdiction constitutes a critical advantage for the SPV. Investor participation in a syndicate, rather than direct investment, is often predicated upon leveraging the registration jurisdiction. Tax efficiencies and capital preservation imperatives determine the optimal location for an SPV’s establishment.
An SPV stake exhibits limited liquidity, with divestment contingent upon board-approved assignment or secondary market transactions. The secondary market primarily facilitates the sale of entire syndicates. Furthermore, “SPV monsters” actively acquire other syndicates, while “late” investors seek entry into projects between funding rounds.
Project-level dilution poses a risk to SPV participants absent preferred shares or equivalent advantages commensurate with their capital contribution. SPV-level dilution may occur if the deal organizer’s compensation includes SPV equity; this should be considered part of the fee and responsibility structure.
Should the startup face insolvency, the SPV’s claim priority aligns with that of conventional investors, contingent upon the structure of its entry. Following the settlement of all liabilities, the SPV undergoes liquidation. In contrast to traditional funds, which often maintain a decade-plus operational horizon, an SPV accelerates returns, designed as a singular-purpose entity for transactions typically spanning three to seven years.
Pieces on the chessboard
As a FIDE chess master, I frequently encounter scenarios where the outcome is determined well in advance of the game’s conclusion. Deal structures, akin to chess pieces, possess varying powers and ranges, yet are invariably constrained in their movement. SAFE instruments afford expedition and simplicity. Convertible loans provide the option of principal recovery. Direct equity participation establishes valuation, and preferred shares enhance an investor’s standing. Syndicates mitigate entry barriers.
The ensuing table consolidates these instruments into a simplified matrix for decision-making.
| Property | SAFE | Convertible Note | Equity Entry (Common / Preferred) | Syndicates (SPV) |
| Entry Cost | Lowest. Minimal legal work. | Slightly higher than SAFE. | Highest: requires legal counsel and corporate filings. | Set up and management costs are split among participants. |
| Overpayment Risk | Mitigated by the valuation cap and discount. | Mitigated by conversion terms. | Common—high risk. Preferred—mitigated by protections. | Depends on both SPV’s entry terms and internal structure. |
| Control and Voting Rights | No voting rights until conversion. | No voting rights until conversion. | Common equity grants voting rights. Preferred adds further protections. | Governed by a syndicate leader, other members typically have no voting rights. |
| Liquidity and Transfer Flexibility | Illiquid until conversion. Transfer requires board approval. | Liquidity is possible via principal repayment at maturity. | Often depends on buyback terms or secondary sales. | More liquid: investors can sell their SPV stake. |
| Conversion | Tied to the next funding round. | Typically 1–2 years, then converts or extends. | Shares issued immediately. | SPV stake issued immediately; project equity only at IPO or exit. |
| Capital Lock-Up Period | Indefinite until next round, then same as equity. | 1–2 years until conversion, then same as equity. | Locked until IPO or company sale. | Typically 3–7 years. |
| Dilution Risk | High, with a cap and a discount as protection. | Protected by the option to exit via loan repayment. | Common—high dilution risk. Preferred—mitigated by anti-dilution rights. | SPV itself is not diluted; the project stakeholders’ interest depends on the deal terms. |
| Return Economics | Driven by valuation growth at conversion. | Interest income or valuation growth after conversion. | Common—returns from valuation growth. Preferred—plus possible dividends. | Driven by valuation growth, profits are distributed among SPV members. |
| Tax Implications | Taxed on exit, sometimes on conversion. | Interest may be taxable. | Common—taxed on exit. Preferred—plus dividend taxation. | Depends on SPV jurisdiction and entry structure. |
| Payment Priority | None until conversion; after conversion, it is the same as common equity. | Before conversion, creditor priority applies; after, the same priority as common equity. | Common—last in line. Preferred—higher payout priority. | Depends on SPV’s entry structure into the project. |
In 2025–2026, capital concentration among robust companies intensifies, while the cost of missteps escalates. Consequently, deal structuring transcends mere legal documentation to become a pivotal asset, prioritizing strategic optionality over nominal multiples.
As priorities shift and competition intensifies, innovative financial instruments emerge, including revenue-based financing, multi-modal SAFEs, KISS, and venture debt with equity kickers. Nevertheless, these innovations do not alter the fundamental principles of private equity. The ultimate objective in private equity is not predicated on the volume of holdings, but rather on securing strategic control, mitigating risk, and achieving predictable outcomes.
