iitos
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May 19, 2026Every founder who has ever raised capital remembers the first time the conversation shifted from how much to how. The numbers had been the easy part. The harder question, the one that quietly shapes everything that comes after, is the legal instrument through which the money will enter the company. A check is just a check. But the document the founder signs around it determines who controls the company, who gets paid first in a good outcome, who gets paid first in a bad outcome, how the cap table will look two rounds from now, and how much of the future the founder is silently giving away in exchange for the present.
At iitos we have lived through hundreds of these conversations on both sides of the table — with founders raising their first pre-seed, with funds structuring their lead position in a Series A, with family offices entering venture for the first time, with corporate venture arms negotiating their first cross-border check into Latin America. And the single most useful thing we can tell anyone walking into a financing round is this: there is no universally “best” instrument. There is only the instrument that fits the company’s stage, the round’s economics, the investor’s mandate, and the founder’s tolerance for dilution and control.
This article is an honest map of the principal instruments used to finance early-stage companies in our region — equity in its different forms, convertible notes, SAFEs, venture debt, mezzanine financing, revenue-based loans, and penny warrants — and a practical guide to the questions every founder and investor should ask before committing to one.
Equity: Common, Preferred and Redeemable
When most people picture an investment in a startup, they picture equity. The simplicity of that picture, however, hides a much more layered reality, because not all shares are created equal.
Common stock is the foundational layer of the company. It is what founders typically hold and what carries the basic economic and voting rights. Common shares share fully in upside, but they sit at the bottom of the payment waterfall in any liquidity event.
Preferred stock is the instrument most institutional investors will ask for. Preferred shares typically layer on top of common a set of protective rights: liquidation preference, anti-dilution protection, protective provisions, dividend preferences, board seats or observer rights, and information rights. In a priced round, preferred stock is the standard instrument.
Redeemable shares sit at an interesting intersection between equity and debt: economically they behave like equity while outstanding, but they carry an embedded exit mechanism that does not depend on a sale of the company.
Convertible Notes and SAFEs: The Pre-Seed and Seed Workhorses
For the earliest rounds of a company’s life, when assigning a precise valuation is more art than science, the ecosystem has settled on two dominant instruments: the convertible note and the SAFE. Both share a common logic: the investment converts into shares at a future event — typically the next priced round — at terms that protect the early investor through a valuation cap and/or a discount rate.
A convertible note is, legally, debt. It accrues interest, has a maturity date, and creates a repayment obligation if no qualifying conversion event occurs. A SAFE, created by Y Combinator, is not debt. It accrues no interest, has no maturity, and creates no repayment obligation. The two principal SAFE variants — pre-money and post-money — differ in how the valuation cap interacts with subsequent SAFEs and option pools, and the difference has real consequences for founder dilution.
Venture Debt, Mezzanine and Revenue-Based Financing
The instruments described above all dilute the founders. Debt-based financing instruments are an increasingly important part of the early-stage toolkit, and one that many Latin American founders underuse.
Venture debt is a loan extended to a venture-backed company, with a defined term, an interest rate, and often a small equity component in the form of warrants. It is most powerful as a complement to equity rather than a substitute: it extends runway between priced rounds and finances specific growth investments without forcing a premature valuation conversation.
Mezzanine financing sits between senior debt and equity, typically structured as subordinated debt with an equity kicker, and is used at later stages.
Revenue-based financing is one of the most interesting recent additions to the regional ecosystem: the lender advances capital, and the company repays it as a percentage of monthly gross revenues until a defined multiple has been paid back. No dilution, no valuation negotiation, no fixed repayment schedule.
Penny Warrants: A Small Sweetener with Outsized Impact
A penny warrant is simply a warrant whose exercise price is set at a nominal amount — one cent or some other symbolic figure. The investor pays effectively nothing to convert the warrant into shares.
Penny warrants are almost always paired with another instrument — most commonly a venture debt facility or a revenue-based loan — to give the lender an equity-like upside on top of the contractual repayment they are already entitled to. From the founder’s perspective, the cost is far smaller than the cost of accepting a larger pure-equity round at the same stage.
Choosing the Right Instrument
The instruments described above are tools, not ideologies. Choosing among them is a matter of fit. A pre-revenue team is almost always better served by a SAFE or convertible note than by trying to price a Series A too early. A company with predictable revenue should ask whether equity is really the right instrument, or whether venture debt or revenue-based financing could fund the same growth without dilution.
The wrong instrument, used in the right round, can quietly destroy the next round before it starts. A note that matures three months before the company expects to close its priced round becomes a negotiating weapon in the wrong hands. The mechanics matter. They always matter.
How iitos Can Help
What makes early-stage financing difficult is precisely what makes it impossible to handle from a single discipline. Choosing an instrument is a corporate decision, a tax decision, a regulatory decision, and very often a cross-border decision all at once.
At iitos, our practice was built specifically to handle this kind of multidimensional work for early-stage companies and the funds that back them. Our corporate team drafts and negotiates the full range of instruments described above. Our regional footprint across Latin America and our coordinated work with counsel in the United States and Europe allow us to structure rounds that move cleanly across jurisdictions. Our tax practice models the consequences of each instrument so that the chosen structure does not create a tax problem larger than the dilution problem it was meant to solve. The financing instruments available to early-stage companies have multiplied dramatically in the last decade, and Latin America is finally catching up. Our work is to make sure the structure of every round serves the company’s next chapter, not just its next check.
