YC

Y Combinator Cast

03/07/18

@ Y Combinator

Investors who can help should do so; asking for additional shares is just asking for a freebie.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

Having money is valuable, but someone who helps with strategy and direction is priceless, so choose wisely.

CL

Carolynn Levy

03/07/18

@ Y Combinator

The SAFE, or Simple Agreement for Future Equity, is designed for very early-stage startups that haven't raised a priced round yet.

CL

Carolynn Levy

03/07/18

@ Y Combinator

The SAFE is not a loan; it does not accrue interest and does not have a maturity date.

CL

Carolynn Levy

03/07/18

@ Y Combinator

The SAFE is a five-page document that simplifies the investment process compared to traditional financing documents.

CL

Carolynn Levy

03/07/18

@ Y Combinator

The only two negotiable terms in the SAFE are the investment amount and the valuation cap.

CL

Carolynn Levy

03/07/18

@ Y Combinator

Pro-rata rights allow investors to maintain their percentage ownership in future funding rounds.

CL

Carolynn Levy

03/07/18

@ Y Combinator

The capped SAFE has a target valuation, which is the highest valuation at which the SAFE will convert into shares.

CL

Carolynn Levy

03/07/18

@ Y Combinator

A discount SAFE allows investors to negotiate a discount rate instead of a valuation cap, rewarding early investment.

CL

Carolynn Levy

03/07/18

@ Y Combinator

The MFN SAFE, or Most Favored Nation SAFE, allows investors to amend their terms if subsequent investors negotiate better terms.

KN

Kirsty Nathoo

03/07/18

@ Y Combinator

The SAFE converts into shares when the company completes an equity financing, which can be a priced round or a series round.

KN

Kirsty Nathoo

03/07/18

@ Y Combinator

In a priced round, the SAFE converts into shares based on the pre-money valuation, which includes the increased options pool.

KN

Kirsty Nathoo

03/07/18

@ Y Combinator

The number of shares an investor receives is calculated by dividing the investment amount by the price per share, which is based on the company's valuation.

KN

Kirsty Nathoo

03/07/18

@ Y Combinator

The SAFE investor's shares are calculated based on the conversion price, which is determined by the valuation cap if it's lower than the priced round valuation.

KN

Kirsty Nathoo

03/07/18

@ Y Combinator

The cap table shows the ownership distribution among founders, SAFE investors, and priced round investors, highlighting the differences in share types.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

The SAFE (Simple Agreement for Future Equity) allows investors to convert their investment into equity at a later date, but the exact ownership percentage isn't known until the priced round occurs.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

When signing a SAFE, you might expect to own around 9% of the company based on an $800,000 investment at an $8 million cap, but this can be diluted by new money coming in during the priced round.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

In a merger or acquisition, a SAFE investor converts their investment into shares of common stock based on the target valuation, allowing them to participate in the proceeds of the merger.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

In an aqua-hire situation, where a company is acquired for its talent rather than its assets, SAFE investors may choose to have their investment paid off instead of converting to equity.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

If a startup fails and goes through dissolution, SAFE investors are next in line to be repaid after creditors, but often receive only a fraction of their investment back, if anything.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

If a company becomes self-sustaining and does not raise a priced round, the SAFE does not address this situation, which can leave investors uncertain about their investment's future.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

It's crucial for investors to quickly sign and wire money after agreeing to a SAFE, as delays can hinder the startup's ability to raise funds and continue operations.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

Investors should review the cap table and conversion calculations carefully when their SAFEs convert, as errors can occur and affect their ownership stake.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

Investors should be patient and understand that investing in startups is a long-term game, requiring support through the company's ups and downs.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

Investors should exercise their pro-rata rights to maintain their ownership percentage during subsequent funding rounds, as early investors can face significant dilution otherwise.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

Investing in a startup through a SAFE, convertible note, or equity will yield similar returns if the startup is successful, as seen with Airbnb's valuation growth.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

Founders should be cautious about how much they raise on SAFEs, as it dilutes their ownership in the company.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

It's uncommon for a founder to sign a SAFE with a higher valuation cap and then immediately sign another with a lower cap, as investors tend to follow market trends.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

Investors should ensure their rights under a SAFE are respected during conversion rounds, particularly regarding pro-rata rights, as ignoring these rights breaches the contract.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

Investors should check their rights and the cap table during conversion to ensure their SAFEs are converted correctly and that they retain their pro-rata rights.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

Investing through an LLC is often beneficial for pooling funds, while individual investments may be simpler for personal funds or trusts.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

Pro-rata rights were not included in the original SAFE conversion round due to the different nature of seed rounds in 2013, but investors can negotiate side letters for these rights.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

Founders often lack understanding of the complexities of SAFE conversions and dilution, which can lead to confusion during fundraising.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

Investors should model their SAFE conversions to understand the implications of multiple SAFEs with different valuations and discounts, as this can complicate ownership stakes.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

Investors should maintain transparency with founders regarding their rights and any changes to their agreements, fostering a strong relationship.

YC

Y Combinator Cast

03/07/18

@ Y Combinator

The SAFE is generally preferred over debt for lifestyle companies, as debt can lead to unnecessary company failures when investors call it in.

Carolynn Levy and Kirsty Nathoo - Startup Investor School Day 1

Takeaways