YC
Understanding SAFEs and Priced Equity Rounds by Kirsty Nathoo
@ Y Combinator
10/17/18
Takeaways
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Kirsty Nathoo
10/17/18
@ Y Combinator
It's crucial to understand how much of your company you've sold to investors at all stages of your company's life cycle and how that affects your ownership.
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Kirsty Nathoo
10/17/18
@ Y Combinator
Many founders mistakenly believe they don't need to worry about their cap table, but it's essential for you as the CEO or founder to understand it.
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Kirsty Nathoo
10/17/18
@ Y Combinator
A simple spreadsheet can help you maintain your cap table by showing who owns how many shares, which is all you need at the beginning.
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Kirsty Nathoo
10/17/18
@ Y Combinator
Most companies will raise money first on SAFEs or other convertible instruments, which can complicate understanding how much of the company has been sold.
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Kirsty Nathoo
10/17/18
@ Y Combinator
A SAFE, or Simple Agreement for Future Equity, allows an investor to provide money now in exchange for a promise of shares at a future date when a priced round occurs.
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Kirsty Nathoo
10/17/18
@ Y Combinator
Negotiating a SAFE typically involves only two points: the amount of money the investor will contribute and the valuation cap.
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Kirsty Nathoo
10/17/18
@ Y Combinator
SAFEs are not debt; they do not have an interest rate or a maturity date, which distinguishes them from convertible debt.
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Kirsty Nathoo
10/17/18
@ Y Combinator
The introduction of post-money SAFEs simplifies understanding dilution by clarifying how much of the company founders have sold to investors after all SAFEs have converted.
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Kirsty Nathoo
10/17/18
@ Y Combinator
In both priced rounds and SAFEs, the formula for calculating post-money valuation is pre-money valuation plus the amount raised.
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Kirsty Nathoo
10/17/18
@ Y Combinator
When raising money on SAFEs, the investor's ownership is calculated by dividing their investment amount by the post-money valuation or valuation cap.
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Kirsty Nathoo
10/17/18
@ Y Combinator
There are different types of SAFEs, including those with valuation caps, discounts, and uncapped SAFEs with most favored nation clauses, but the valuation cap is the most common.
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Kirsty Nathoo
10/17/18
@ Y Combinator
Understanding the mechanics of dilution and cap tables is essential for founders to navigate the fundraising process effectively. I hope this will not be anything new to you as we discuss raising money on post-money SAFEs and what happens as you hire people and issue equity to employees.
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Kirsty Nathoo
10/17/18
@ Y Combinator
When a company raises money on a post-money SAFE, the founders should understand that they have sold 15% of the company, which means they can no longer own 100% of it.
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Kirsty Nathoo
10/17/18
@ Y Combinator
Founders need to be aware that their ownership percentage can decrease significantly due to dilution from SAFEs and new equity rounds, so they should plan accordingly for future fundraising. The percentage of ownership for SAFE investors is based on the valuation cap in the SAFE, and if the priced round valuation is higher than the cap, they convert at the cap, receiving more shares for the same investment than Series A investors.
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Kirsty Nathoo
10/17/18
@ Y Combinator
It's crucial for founders to keep track of how much equity they've sold through SAFEs, as this affects their ownership percentage and future fundraising.
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Kirsty Nathoo
10/17/18
@ Y Combinator
The post-money valuation is calculated by adding the pre-money valuation to the total amount raised, which determines the ownership percentages for new investors.
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Kirsty Nathoo
10/17/18
@ Y Combinator
The lead investor in a priced round typically negotiates the creation of an option pool for new employees, which can dilute existing shareholders but not the new money being invested.
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Kirsty Nathoo
10/17/18
@ Y Combinator
In a priced round, the SAFEs convert into shares, and the option pool is often increased to accommodate new hires, which can dilute existing shareholders.
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Kirsty Nathoo
10/17/18
@ Y Combinator
When calculating ownership percentages after a priced round, it's important to remember that the total number of shares includes both common and preferred shares, which have different rights and privileges.
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Kirsty Nathoo
10/17/18
@ Y Combinator
In rare cases where the priced round valuation is lower than the SAFE cap, SAFE investors may receive a better deal, converting at the lower price of the Series A round.
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Kirsty Nathoo
10/17/18
@ Y Combinator
Founders should avoid negotiating too hard on SAFE caps, as setting them too high can lead to selling more of the company than anticipated during a priced round.
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Kirsty Nathoo
10/17/18
@ Y Combinator
It's crucial for founders to understand their dilution when raising money through SAFEs or convertible notes, as they may end up owning significantly less of the company than expected after a priced round.
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Kirsty Nathoo
10/17/18
@ Y Combinator
When raising funds, it's advisable to use post-money SAFEs to simplify calculations and better track future dilution, even if pre-money SAFEs have been used in the past.
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Kirsty Nathoo
10/17/18
@ Y Combinator
Don't over-optimize for valuation caps when raising money on SAFEs, as the difference in ownership percentages may not be significant, and the focus should be on making the company successful instead.