Outline
SAFE 0:00 – 0:40
Pricing 0:40 – 1:15
SAFE 1:15 – 1:50
Rate 1:50 – 2:50
Valuation Cap 2:50 – 3:30
Incentives 3:30 – 3:57

In late 2013, the Y combinator introduced the original SAFE. The User Guide on the Y combinator website notes that when SAFEs were first introduced, startups and investors were primarily using convertible notes for early-stage fundraising and the original SAFE was intended to be a replacement for those convertible notes. SAFEs were intended to provide a simple means for investors to fund early-stage companies, using documents (contracts) originating on the Y combinator’s website that were sometimes modified and customized within the start-up community to fit the needs of the parties. The Y combinator website now refers to the “original” SAFE and the “new” SAFE, and notes that the difference between the two contract forms is that the new SAFE is intended to be as a post-money security.

#startup #equity #angelinvesting

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This is really important if you’re an angel investor or if you are accepting an angel investor, if you’re a startup founder and you’re raising money, convertible notes are one of the most popular ways of raising capital. And so it’s really important to know what the terms are, and, give you little negotiation tips here, too. So the first one, most important would be the amount. Like you really, really care how much money you’re raising.

And so, you see convertible notes from, you know anywhere from like 25 grand all the way up to like $10 million or $20 million even sometimes when things are crazy. Most seed stage angel rounds are, you know two to three million, sometimes $1 million, and that’s where you see convertible notes the most. You also see convertible notes in bridge rounds which I’ll talk about at the end of the video as well. So, put a pin in that. But again the amount is what you’re raising from the investors they’re giving you a million dollars, and typically not, there isn’t just one investor, there’s a bunch of investors coming in on a note is kind of the terminology, so you might have 10 investors who put in $100,000 each or something like that for a million dollars, but amount’s very important. Next up is interest rate and these convertible notes are debt, and so they typically have a very nominal interest rate, like a small interest rate.

Because really investors who are investing in convertible notes are there for the equity upside. They’re investing in a seed stage company typically and they want this company to do an IPO 10 years from now, and so the interest rate isn’t really that important to them, but like most contracts the IRS wants there to be an interest rate and people will kind of find. So what I typically see is anywhere from like 2 to 4, 2 to 5%, again it’s a very nominal amount, and no one should get too hung up on this. If you have an investor who’s pushing you really hard for like a high interest rate that’s actually a negative signal. You’re dealing with someone who’s not in it for the equity, you’re dealing with someone who wants it for like the debt return, which is a bad idea if you’re a venture backed startup. You want someone who’s playing along for the big equity return and is going to be easy to work with.

And so they’ll give you a part of the shares in preferred and part of the shares in common. So it’s a little inside baseball thing, I’ll talk about it in another video. Just important to know you might get a mix back, especially if the valuation on the next round after you’ve invested is really high. That means you got a really good deal, and so you’ll get a mix of both of those. Next item is length. I typically see 18 months, 24 months, something like that. Ideally, you will have, if you’re a founder you want to negotiate the longest length possible. That just basically means like, “Hey, the note doesn’t come due until 24 months 30 months out.” Investors, usually again, they’re investing for the right reasons investing for the equity upside, so they’ll be fine with that. If you have someone who’s pressing you really hard for short term length, because you could be vulnerable, and this is why one of the why SAFE notes were invented that don’t really have a time period. You can be vulnerable to an investor who’s not very nice if your note comes due and they demand the cash back. And a bridge round is typically like a company that has raised institutional VC, series A, series B, series C. That’s doing okay. Like it deserves to have more capital but maybe not strong enough to raise more outside capital from a new lead investor, and so the inside investors will typically bridge the company and give it, you know another six to twelve months of cash. To we’ll do a note. It’ll typically convert the next round price but sometimes they get some warrant coverage on that, so a little extra juice on their return. Sometimes if it’s a negative situation and they’re really kind of don’t want to do it they will require that convertible note bridge to convert at a liquidation preference, that is a multiple, which you don’t see too often, but it might be a 2 or 3X multiple when it converts. And that basically penalizes the founder. It makes it hard to get a good return for the management team or the common shareholders when that’s happening. So just know that, you know, if you’re in a bridge round situation you’re going to see much different and probably more negative terms than you would in a seed round.

This Interview was recorded on June 13th, 2019 at the Future of Fintech conference in NYC.

For more on Future of Fintech visit: events.cbinsights.com

✅ Watch episode 1, the difference between SAFEs and Convertible Notes: https://youtu.be/PtTDmeU-Kok

✅ Watch episode 3, the difference between a pre-money and post-money SAFEs: https://youtu.be/Mj0LxtaLQIk

✅ Automate your cap table with Carta: https://www.carta.com

✅ Everything you need to know about fundraising with SAFEs: https://carta.com/blog/fundraising-with-safes/

Startup funding explained: If you’re raising seed financing for your startup, chances are you’re fundraising on a convertible instrument like a SAFE (Simple Agreement for Future Equity) or convertible note. But what are all these terms you need to know, like “valuation cap,” “conversion discount,” and “most favored nation clause?”

In this episode of NO FEAR EQUITY, we break down the basics of raising seed startup funding by discussing the SAFE and convertible note terms and phrases you need to know. Learn what valuation caps are, how conversion discounts work, and what to expect when a “most favored nation” clause shows up in your contract. In the next episode, we’ll discuss the differences between a pre-money SAFE and post-money SAFE.

NO FEAR EQUITY is a presentation of Carta, the #1 equity management platform for startups and equity-funded companies. We have plenty of free resources to help startup founders plan their fundraise, manage their cap table, and prepare to issue equity to investors and employees. Check out some of our resources here:

�� Carta’s Series A pitch deck: https://carta.com/blog/carta-series-a/
�� Carta’s Series D pitch deck: https://carta.com/blog/carta-series-d-pitch-deck/
�� Our free cap table template: https://carta.com/blog/cap-table-template/
�� Our free board deck template: https://carta.com/blog/board-deck-template/
�� What to look for in a 409A report: https://carta.com/blog/understanding-409a-valuation-report/

DISCLOSURE: This communication contains general information only and eShares, Inc. dba Carta, Inc. (“Carta”) is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This communication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.