Getting Unstuck: 5 Fundraising Strategies for Overvalued companies
Deal architecture for cap table baggage
Last week, we met with a founder we really liked. Strong mission, real customers, growing revenue, close to profitability. The product works, the market is there, and the team is executing well. On paper, it’s the kind of company investors should be eager to back.
But they weren’t bankable yet. They needed just a bit more equity to cross into profitable growth, and were struggling to raise it. Why? A messy stack of mismatch SAFEs, no real governance, and an overpriced round from 2022 still hanging over the cap table.
This isn’t unusual. We see a couple of versions of this story every week. Many founders are still carrying the baggage of the 2021–2022 market, and it’s making otherwise great businesses hard to fund today, so they get stuck in zombie land.
The Overhang Problem
We're seeing this everywhere. Founders who raised at sky-high valuations or stacked multiple SAFEs without thinking about the downstream consequences. Back then, capital was flowing like water, and everyone assumed the next round would be bigger and better.
This pains us so much as these founders have built something valuable, but they are trapped in what we call "the middle": too successful to fail, too expensive to fund.
Why Investors Walk Away
Before diving into solutions, it's worth understanding what makes investors hesitate (this is not an exhaustive list):
Valuation shock: When a company's last round priced it at 15x revenue and today's market pays 3-5x, that's a tough conversation nobody wants to have.
Cap table complexity: Multiple SAFEs create uncertainty about ownership percentages. Investors hate surprises, especially mathematical ones that emerge during due diligence.
Signaling risk: Taking a down round feels like admitting failure, both to the market and to existing investors who might not participate.
Economic misalignment: Why pay premium prices when there are plenty of quality companies available at reasonable valuations?
We've seen many founders successfully escape this trap. Valuation baggage isn't terminal, it's a structural challenge that demands creative solutions. While we always prefer straightforward deals, we've helped structure a few of these less typical deal structures for founders building something very meaningful. These strategies come from real-world experience. The most effective ones align everyone's interests rather than creating winners and losers.
Strategy 1: The "Kick the Can" Approach
Sometimes the best move is to avoid the valuation conversation entirely. Companies can issue new SAFEs or convertible notes with terms that make investors comfortable:
Generous discount rates (25-30% vs. the typical 10-20%).
Lower valuation caps that reflect current market reality (this is hard if they already raised other notes with MFN, as you don’t want to make the issue worse).
Warrant coverage giving investors additional upside.
Liquidation preference kickers protecting downside risk.
This approach works best when companies need 12-18 months of runway to hit clear value-creation milestones. The key is being honest about market conditions while maintaining that the business deserves a premium once it proves the next stage of growth.
We generally don't love issuing more notes, as we don't want to rely on a new round coming after us to convert our notes to equity. We also don’t love the idea of adding a high liquidation preference (over 2x) as it sets a precedent for future rounds and can bring a lot of misalignment down the road. But you see a lot of people using all the tools above.
Strategy 2: The Great Cap Table Cleanup
Converting chaos into clarity
If the main problem is SAFE stack complexity, founders can consider a "conversion event" that cleans up the cap table before approaching new investors.
Negotiated conversions: Companies can offer existing SAFE holders slightly better terms (maybe a small discount or warrant coverage) in exchange for immediate conversion to equity. This eliminates uncertainty and shows new investors exactly what they're buying into.
Pay-to-play mechanics: Founders can structure the new round so that only investors who participate get favorable treatment. This encourages existing investors to step up while clearing out passive SAFE holders.
Voluntary conversion: Sometimes simply asking works. Explaining to existing investors that cleaning up the cap table benefits everyone by making future rounds possible can be effective.
Converting a stack of messy SAFEs is hard. Most investors walk away if they have to deal with a huge mess and “the juice is not worth the squeeze”.
Strategy 3: The Strategic Reset
Sometimes founders need to bite the bullet and reset expectations. But a down round doesn't have to be a defeat, it can be a strategic repositioning.
The reset narrative: Companies can frame it as intentional optimization, not desperation. "We've built a lean, profitable growth engine and want investors who share our focus on sustainable unit economics."
Milestone-based releases: Companies can structure the investment in tranches tied to specific KPIs. This reduces perceived risk while demonstrating confidence in execution ability.
Strategy 4: Creative Capital Structures, beyond traditional equity rounds
Founders can think outside the standard playbook. We’ve seen most of these in the past:
Staged funding with ratchets: Investors commit to larger rounds but only fund in stages as companies hit milestones. Founders can include ratchet provisions that adjust ownership if market conditions change.
Warrant structures: Companies can issue equity at today's challenging valuation but provide significant warrant coverage that kicks in as they scale. This aligns everyone around growth while addressing current market skepticism. We’ve seen this strategy work well in the past.
Hybrid primary/secondary deals: Companies can combine fresh capital for the business with small secondary purchases from existing shareholders. This provides some liquidity to early investors while bringing in new capital.
Revenue-based alternatives: Founders can consider venture debt, revenue-based financing, or strategic corporate investments that extend runway without equity dilution. Mezzanine debt is a hybrid financing tool that works very well as it blends debt and equity through a warrant coverage. We like this one, but regular VC funds would not be interested in this, as it’s not a path to 100x…
Strategy 5: The Patient Capital Play
Sometimes the solution isn't changing terms, it's finding investors who understand the market and timeline.
Industry-specific funds: Sector specialists often pay premiums for quality companies, even in challenging markets.
Strategic investors: Corporate VCs or strategics might value companies differently than financial investors.
International capital: Founders can consider investors from regions where their valuation might be more palatable.
What Doesn't Work
Before founders start executing, here are approaches that typically backfire:
Stubbornly holding onto unrealistic valuations: Markets have changed. Founders need to acknowledge it. They shouldn't let current investors hijack the company.
Hiding cap table complexity: Investors will discover it during due diligence. It's better to address it upfront and be open about it from the beginning.
Desperate fundraising: Nothing scares investors like founders who seem out of options.
Ignoring existing investors: They have information rights and can torpedo deals if not managed properly.
The Path Forward
Getting unstuck requires three things: honest assessment of the situation, creative thinking about structures, and clear communication/alignment with all stakeholders.
Founders should start by auditing their cap table and calculating different scenarios. What would conversion look like at various valuations? How much dilution can they handle? What timeline constraints do they face?
Next, companies should segment their approach by investor type. Some will care more about valuation, others about terms, still others about growth trajectory. Founders should tailor their pitch accordingly.
Finally, founders need to manage existing investor expectations early. They're going to find out about fundraising anyway. It's better to bring them along as allies than have them learn about it from their networks.
The Bottom Line
Yes, fundraising is harder when companies are carrying valuation baggage. But investors ultimately care about returns and mission, not purchase price. If founders can demonstrate a realistic and clear path to generating ~10x returns, and lots of good impact, then smart investors will engage.
The companies that successfully navigate this challenge share common traits: they're honest about market conditions, creative about deal structure, and focused on long-term value creation rather than short-term ego protection.
Startups aren't broken. Cap tables aren't unfixable. Founders just need to approach the problem with the same creativity and persistence that built their business in the first place.
The market rewards adaptability. When founders show investors they can adapt, investors will show them the money.
We’d love to hear from other people, which other deal structures have you seen that worked successfully for companies that are “stuck”? We’d love to learn new ones!
