Understanding SAFEs and Priced Equity Rounds by Kirsty Nathoo

i would like to introduce kirsty who is going to talk uh in much detail about safe's notes equity and the like kirsty all right good morning everybody so my name is kirsty nathu i'm the cfo one of the partners here at y combinator um and i have now worked with probably over 1500 companies in terms of getting them incorporated doing our yc investment and then seeing them through their their subsequent raises either on convertible instruments or on equity rounds so i've seen kind of a lot by now um and so this this presentation is is to give you some understanding of some of the things that people don't necessarily understand when they're raising money um and to hopefully help you avoid some of the pitfalls that we've seen with that some of the mistakes that we've seen founders make so the key the key message in all of this presentation is that it's important that you understand at all stages of the company's life cycle how much of the company you've sold to investors and in connection with that how much therefore you also own and the thing the thing that makes this complicated is that most companies will raise money on convertible instruments first and because those convertible instruments aren't yet shares it's not immediately obvious for a lot of founders how much of the company they've sold so i'm going to talk through some of the mechanics of that and help you understand how how all that works so that you don't get surprised when it's too late and you can't do anything about it so the other thing that you should also be aware of is that a lot of companies and a lot of founders will just say oh i don't need to worry about my cap table my lawyers deal with my cap table i don't need to worry and actually that's a really dangerous statement um again you should make sure that you're understanding this it's your responsibility as the ceo or as the founder of the company to to understand all of this and there's lots of ways that you can maintain your cap table there's lots of ways that you can you can keep track of this and the simplest form is just a spreadsheet all it's going to show is who owns how many shares and that's it that's all you need at the beginning but there are other services out there that can help um and i'll i'll include them on a list of resources after the presentation but there's tools like cap table dot io and carter which also help for you to keep track of these things okay so these are the these are the three sections that i'm going to talk about first of all i'm going to talk about safes and particularly for us companies most companies will raise money first on safes or some other convertibles convertible instruments which i will talk about briefly as well and i know jeff mentioned the safe last week um in a little bit of detail but i'm going to go into much more detail on that and also how how the sections of the safe works the s stands for simple and so hopefully you will you will believe me with that and you will all be ready to understand what's going on in that safe as you come out of this presentation then we'll talk some more about dilution again so you can see we're going to walk through the life cycle of a company from incorporation up to raising a priced series a round so you can see how how things change over that period and then i'll give you some top tips on other other items to do with raising money all right so first of all the safe so let's cover what it is and then we'll go through the details of of how a safe is built up so as i said safe the s stands for simple the rest of it is a simple agreement for future equity and put simply it's a instrument where the investor will give you money now in exchange for a promise from the company to give shares to the investor at a future date when you raise money on a priced round there are minimal negotiations with a safe really there's only two things that you're probably going to negotiate with the investor which is how much money you're going to how much money the investor will put into the company and what valuation cap so really those two things are the things to negotiate whereas when you compare that with a priced round there's a whole raft of things to negotiate and that's what makes a priced round a lot harder to to close and to raise money on than than a safe does so so that's why often companies will start with a safe and then when they get to the point of being able to raise more money and they have a lead investor which they negotiate with for the price round then the safes when they convert into shares will piggyback on the terms that has been negotiated with the lead investor in the priced round the other thing to bear in mind is that a safe is not debt so some of you will have raised on what's known as convertible debt that's a different instrument um debt has generally an interest rate attached to it and it has a maturity date where the debt needs to be repaid safes have neither of those things so it's important to understand that there is a distinction between the two instruments but in terms of conversion in in the way that they convert in a priced round there are some similarities so this is the first section in the safe and this paragraph actually includes pretty much all the key details that you need to understand in a safe so it talks about in exchange for payment by investor you're gonna the investor is putting in a certain amount of dollars around this date and down here the valuation cap is some number so really those two blanks are the two negotiating points this paragraph here is something that we've added just recently in our newest version of safes and this is something that will hopefully help you so that once you've read our safe that we have available on our website once if there's this paragraph on the safe then you know that you have read the safe the idea behind this is that if anything changes in the safe they can't you either the company or the investor cannot say this paragraph it can't say that it's the same as the safe that's on the y combinator website and so you'll know as a founder that you should be looking at it more closely to see what's been changed so this is just something to keep your eyes open for when you when you if you receive a safe from an investor okay so the anatomy of the safe is pretty straightforward it's only five pages in length so it's not very long we've tried really hard to keep the language not too legal and so it's easy to understand and really it's split into is split into five sections section one talks about what happens in a various um different sets of events and so most of the time what's going to happen is there will be an equity financing at some point in the future and so the first part of the section talks about what happens then how does the safe convert or there might be a liquidity event either company might get sold before the safe converts so it also addresses what happens if the company is sold before the say whilst the safe is still outstanding or the company might decide to close down whilst the safe's still outstanding so it also addresses that so those are the three real key events that might drive change um from the safe so it addresses all of those and often we get questions from founders or from investors saying but what happens what happens if and actually these three sections are the answers to pretty much all of those questions and then there's a couple of other sections where we clarify the liquidation priority which just means who comes first in the queue to be repaid in these different situations um and also clarifying that the safe actually terminates i.e it does no longer exist if any of the top three events happen so that section is kind of your instruction booklet if something happens in your company that's the section you look at to see what happens to you safe then the next section section two is just the definitions section so anything that we refer to within the safe will be explained in section two so if you're not sure what the company capitalization definition is you go to section two to look at that for a for an explanation section three are the representations that the company makes to the investor so it's it's saying things like the company um the company is duly formed it's it's correctly formed in delaware um section four is the representations that the investors make to the company so it's things like the investor saying yes i agree i'm um i'm an accredited investor um and then section five is kind of legal boilerplate language that that needs to be in there so really from your point of view the sections that you really need to understand are sections one and sections two obviously you need to know what you're representing in section three as well but those section one and section two are the key key parts and that bit is only three pages long of the safe so i'm pretty sure you can all read three pages and understand what's going on so i encourage you to do that okay some of you may have heard um in the last couple of weeks we announced to move to a different type of safe um we've really we've introduced the concept of post money safes and it's important that we understand what post money means what it basically means is after all the safes have converted what happens at that point and we'll go into that in a little bit more detail in a moment but it's it's easy to get confused about what post money means here but it's after all the safes um and the reason why we introduced these is that we we wanted to make it easier for founders to understand the dilution that they were taking i.e how much of the company they'd sold to investors and so how much less of the company they owned it was all it's a lot easier to to understand that with post money safes than with the previous safes that we had which were known as pre-money safes okay so basically when we're talking about pre-money and post money we're talking about the same thing it's just a different way to express it to explain it and so in both the priced round and for safes the formula stays the same so the pre-money valuation plus the amount of money raised equals the post money valuation of the company okay so if you have a five million dollar pre-money valuation and you raise a million dollars then the post money valuation of the company is six million dollars okay and that's important to remember in a moment but really that's that's as simple as it gets so then based on that so that you can understand how much of the company you've sold when you're raising money um on safes the formula is just your owners or the ownership of the investors the ownership that the the investors will take is their amount raised divided by the post money either valuation in the case of a priced round or valuation cap in the case of a safe so in our example before if the investors were putting in one million dollars and the post money valuation was six million dollars then they will own sixteen point six seven percent of the company does that all make sense to everybody so far okay good so i'm going to i'm going to talk only about safes with valuation caps here to keep things simple but just be aware that there are other different flavors of safes that you can use and that you may have already used um or that you may find that you you use in future so there may be the concept of a discount instead of a cap um so instead of capping the valuation at say six million dollars it says um there's a there's a 20 discount on the series a price there's also an uncapped safe which basically just says i'm going to put money in now as an investor and when you do a priced round i'll get the same price as the priced round investors are going to get that's pretty uncommon because the investors who are putting in money early want some kind of bonus for putting in the money early um so so it's pretty unlikely that you'll you'll use one of those and then finally there's a safe that's uncapped with a most favored nation clause which basically what that says is i'm not going to agree a cap right now but if you raise some money from some other investors who do have a cap and that those terms are better than my terms i get their terms as well as an investor so this one can sometimes happen if you're raising money very early on and you don't really know what the cap is and maybe you know you just want to punt it for another month or two um but it just creates a little bit more admin for the founders because it's another thing that they have to keep track of um so we we see them sometimes again not all that common um by far the most common is just the valuation cap only all right so now we understand safes and how they're made up we're going to talk about dilution and understanding how your cap tables work all right so we're going to we're going to walk through this process so we're going to start with our company hitting corporation which uh carolyn talked about right at the start of the startup school course i believe so hopefully this will not be anything new to you then we're going to talk about what happens when you raise on some raise money on safes on post money saves then we're going to talk about what happens as you hire people and start to issue equity to employees and then the company is going to do a priced round and so what happens to the cap table at that point and now i'll warn you this is starting to get into the math section of the whole thing so turn your brains on and keep concentrating all right so incorporation so let's just assume it's a really simple company there's two founders and they split their shares equally between the two of them so in this example each founder owns 4.625 million shares so there's a total of 9.25 million shares issued and each founder owns 50 that's pretty straightforward right and so at this point in order in order for them to own those shares the founders have done the paperwork they've granted those shares through a restricted stock purchase agreement and there's vesting on those shares as was talked about with with carolyn earlier in the um earlier in the the course okay so then the next thing that's going to happen is this company raises some money on a post-money safe and they raise from two investors so the first investor comes in quite early and they put in two hundred thousand dollars at a four million dollar post-money valuation cap and then a little bit later on investor b comes in puts in 800 000 at an 8 million dollar post money valuation cap so if you remember back to our formulas the ownership that investor a has at this point is their amount of money that they've put in divided by the post money valuation cap which gives them five percent of the company same for investor b 800 000 over 8 million which gives them 10 percent of the company so in total the founders at this stage have sold 15 of the company so even though this doesn't change the actual cap table because these aren't shares at this point this is just a safe this is just a promise to give shares in future the founders should know at this stage that they have sold 15 percent of the company and if they've sold 15 of the company then they can no longer own a hundred percent of the company so now instead of the founders owning a hundred percent of the company between them they've been diluted by the fifteen percent so they're going down to eighty-five percent of the company so it's important to have that in your brain when you're raising money because whilst the cap table like i say doesn't change the fact that you've just sold 15 percent of the company is an important fact and it's an important thing to know because you want to make sure that you're not selling too much of the company because you know that there's a lot of future fundraisings that are going to happen with the company and therefore there's going to be more future dilution is everyone happy with how we've got to that fifteen percent yes the question so the founders are only ones getting diluted at this point uh the earlier investor doesn't get value right so the question is it's only the founders that are being diluted at the moment and yes that's that's exactly right because that's the construct of the post money safes the the all the later the later safe investors don't dilute the earlier safe investors it just dilutes the existing shareholders and at this stage it's just the founders who are the existing shareholders does it make sense to have shares in the treasury so that they can cover the anticipated dilution okay so the question is does it make sense to have shares authorized but unissued i think is what you mean so at this stage it doesn't necessarily make a difference as you'll see in a moment you actually create new shares that you're going to issue to these these safeholders when they convert um so at this stage it's it's fine to just have the shares that the founders have and maybe some that you want to give out for hiring why investment d has different uh post money valuation cap well in this example so the question is why do they have different post money valuation caps and so in this example um you know it could it could be for very any number of reasons but in this example we're assuming that you know this this one happened maybe a month after incorporation and maybe this one happened six months after incorporation and more as more has gone on in the company and so slightly less risk and so the company has been able to negotiate a different cap but things things change through the company and it's totally fine to have different caps because as you can see from here you just you just calculate everything separately and then add it all together okay so companies raised a million dollars first thing it's probably going to do with that money is hire some people and when you hire employees you're probably going to give them some equity and so in this example the company creates at this stage a option pool otherwise known as an esop or an employee incentive plan there's lots of different names for it um and in this example they have created a plan or a pool that has 750 000 shares in it and they've issued out of their 650 000 shares to early employees so this has now changed their cap table because they've issued shares and so the fact that there's there's more shares um being being issued means that the cap table changes because we now have more shareholders and so now we have a total of 10 million shares that have been um fully diluted basically means the combination of issued and set aside in the options pool in this case so now we have our founders instead of owning a hundred percent have 92.5 percent of the company and the option plan in total is seven and a half percent of the company but remember those safes so these founders don't actually have 92.5 because they have also sold 15 of the company and so actually they own less than the 92 and a half percent um they've actually they actually own 85 percent of that which is about 78.6 so again this is where it gets dangerous for the founders if they forget about the safes the founders are sitting there saying well i own 92.5 this is great i own still loads of the company and they have forgotten about the safes and the dilution they're about to take from that so again it's really important to keep track of how much you've sold on your safes so that you can do that calculation and say actually i don't have 92.5 i have 85 of that because i've sold 15 of the company but it's also these numbers have been diluted by those safes as well so as you'll see in a moment these numbers change as well okay so now we're going to fast forward about let's say a year um the company is doing well it's raised a price round and it has a term sheet for the price round which says that the pre-money valuation of the round is 15 million dollars and they're going to raise a total of 5 million of which the lead investor which is the investor that they do all of the negotiations with is going to invest four million dollars and so if you remember from our formula at the start the post-money valuation is the pre-money valuation plus the total raise so the post-money valuation is 20 million the other thing that gets negotiated as part of the price round is the option pull increase so generally what happens is that the investors in the series a will say okay we're going to put some money in we know that this money is going to go towards hiring so we want you to create an option pool for all the new employees that you're going to employ and give equity to in advance so that it's sitting there ready for those employees and so usually you see that the um the option pool is about 10 percent it might go up to about 15 but anything more than that is is fairly non-standard yes where did that come from over there okay yes so you so the question is is the 10 coming from founders or collectively and you'll see in a moment is going to dilute the existing shareholders and the safeholders but it doesn't dilute the new money so how is that option tool represented on the capital is so the question is how is the option pool represented on the cap table so if we go back to here we just show it so that we have the options available from the pool that haven't been issued is a line and anything that has been issued from the pool is a separate line the reason why we show those two things separately is that these these shares are considered outstanding they're considered issued whereas these aren't and so that's the difference between what that's what fully diluted means it means outstanding shares which are these two lines plus any shares reserved under the option pool all right where are we oh so so quick quick maths question for for you what do we expect that the um lead investor will own what percentage of the company do we think the lead investor is going to own after the round closes 20 yeah for the lead investor 25 in total for all of the series a investors okay because they're the lead investor is going to put in 4 million divided by 20 million dollars gives 20 so you'll see in a minute the cap table that that all works through in the calculations but it's always good to just do that quick check so that you can sense check what's going on in your cap table all right so in a priced round where you have or where the company has raised money just on post money saves and then has raised a priced round three things will happen and these three things happen at the same time in terms of the documents but in terms of the calculations it's important that the order is correct and so the three things with post money safes is that the first thing that happens is the safes convert into shares then an options pool is increased or created if there isn't one already and then the new investors invest and you'll see in a minute how that all works through with the calculations now one other thing that starts to get a little bit confusing here is one of the the sort of the lingo of how this works is that often the the lawyers and the the founders will talk about the safes being included in the pre-money and what that's basically saying is that when the new investors invest and they calculate their price per share the calculation includes the shares from the conversion of the safes so even though the safes themselves are referred to as post money safes that's talking about how the safes convert this sentence where the safes are included in the pre-money is talking about how the series a price is calculated so it gets a little bit confusing because it's talking about post money and pre-money but that's just something to bear in mind when when this happens and obviously at the time that you're raising a priced round you're going to have a lot of advisors you're going to be working with lawyers who can explain all of this to you as well all right let's go through these three steps then so the first step is our safes are going to convert and we already know because we've already done the calculation that these safes are going to convert into 15 of the company and so 15 of the company means 15 of the total fully diluted shares both common shares and preferred shares so investors get preferred shares which have a different set of rights and privileges than the common shares which is what the founders and employees get so we have enough information here in the cap table that we have here to calculate what the actual number of shares are here because we know that they're going to be 15 of the total issued shares so we know that this is 85 of the total issued shares so we know what our total is and then once we get the totals we can work out what five percent of that is and what ten percent of that is so after a bit of algebra these are the numbers that come through so now at this point we have 11 million 764 705 shares in total because it's preferred shares plus common shares our first safe investor who we said was going to have five percent has 588 000 shares which represents 5 percent of that 11.7 million and our second safe investor has 10 percent now it's important to remember that this is part way through a whole process it's part way through those three steps that are happening in a priced round and so actually you're never going to see your cap table looking like this this is this is just one step in the calculation but it's just to break out so that you can see where that 15 percent has come from and you can also see here that when we were saying that the founders instead of owning um 92.5 they owned about 78 you can see that here because they've been diluted by that 15 as have the um employees with their options so this is this is the post money part of the post money safes after the safes have converted but before anything else has happened in relation to the priced round got it okay all right so the next step is oh we gotta have a question okay uh so the percentage of uh if you can't go back so the the five percent ten percent that has nothing to do with the whole situation and they said they straight okay so the question is it doesn't does the five and ten percent have any any um yeah okay so yeah so the five and ten percent is based on the valuation cap in the safe and so assuming the priced round valuation is higher than the valuation cap in the safe then it this is just looked at with reference to the safe and it's just connected to the the existing um shareholders if in the very rare circumstances that the price round is lower than the valuation cap on the safe then actually these safe investors will get a better deal because they will sell their shirt their their safes will convert at the same price that the series a investors have um which is a lower price than the valuation cap so actually there is the potential that this can go up um this percentage can be higher if the price round is valued at a lower price than the cap on the safe that doesn't trigger the conversion it still triggers the conversion even if the valuation is lower because it's the fact that they've raised money that triggers the conversion not the price so it's just something to bear in mind that when we're talking about this that post money saves and in this example that you're you're selling 15 of the company there is potential that it could be higher but it's a pretty rare situation where you raise a priced round that's priced lower than the the valuation of your safes and it's also something to bear in mind of trying not to negotiate too hard on the safes to make your your caps too high because if you raise money on 100 million dollar cap but then you can only raise money on a 25 million dollar priced round let's say then you're actually selling more of the company to those safeholders than you expected okay so the question is if there's convertible debt so this would this would happen here as well so it would that the calculation for convertible debt is is slightly different um but it would happen in here and you would show them just as other investors because they would be converting into shares in relation to the price round as well what if you went crazy and actually gave or sold 85 percent of your company and the valuation is lower at the end what happens you can't share with them well so that's that's the the big question so the question is what happens if you go crazy and sell 85 of your company that yeah i mean that's that's the problem um that founders can can raise too much money on too low valuation caps when they're raising on convertible instruments they don't realize how much dilution they're taking and then they get to their priced rounds and they look at their cap table and they're just like what i only own you know 10 of the company now and unfortunately there's not a huge amount you can do at that point because you've already entered into the contracts with the investors to to do this and so that's why it's important to not get into that situation in the first place that the saves are price of the cap is higher than the price range then it would lose actually a lot more can you explain that because i thought the uh it would uh although the price of the gap was actually the cap right because so yeah so the question is how to how the cap works in terms of in relation to the priced rounds so if the if the price round is higher than the cap then the safe converts at the cap which means that the safeholders basically get more shares for the same amount of money than the series a investors get so that's in that situation that's how you know what percentage you're selling but in the situation where the cap is higher than the priced round then you would never it it wouldn't be fair to the safeholders to have them getting a worse deal than the series a investors because they put money in earlier and so what happens then is that you the the calculation if you remember if you go back to the section one of the safe where it says what happens in a price equity round situation it says if the if the cap is um if the cap is higher than the price round then they just use the priced round price to calculate their shares and so because that priced round price is different these numbers will go up well it depends it depends on the delta so if it's if it's only a little bit different then yeah maybe instead of 15 they've sold 16 let's say but if it's if the delta is really big then it could go up but again it's it's something to be aware of it's in the current environment it's pretty unlikely that um people raise price rounds at lower valuations than their safes just because when you're raising money on safes the investors won't agree to invest at a ridiculously high valuation because they want they want to get that bonus of the lower price when they say when their saves convert yeah okay let's keep going all right so this this step you're going to have to trust me on um so the next step in the in the section is that the option pool is increased and this is actually quite a complicated calculation it gets a little bit circular and i'm going to be sharing a model with everybody so you can see how this works if you're interested but basically what you're trying to do is to get to 10 of um the post-money shares are sitting available in the option pool and in this example we're going to increase our option pool by 1.695 million and you'll see in a minute that that flows through into the cap table and you'll see that 10 but just trust me on this one because this is this is quite a complicated calculation and then step three the new money invests so this is where we have our series a investors putting in five million dollars and there is a couple of calculations that happen in there um so the price per share that's calculated for the round is the valuation divided by the capital capitalization so this is the pre-money valuation 15 million and when we're talking about capitalization here what we are meaning is this is the total fully diluted shares after the safe conversion and the option pool increase so that's why this is step three because our sha our safes have converted and our option pool has increased and so we have our 10 million shares that we'd issued 9.25 to the founders 725 000 in the options pool um plus the safe conversion shares plus the increase in the options pool and you'll see the numbers in a moment so then the number of shares that the series a investors get is the amount they're investing divided by their price per share so those are the three calculations that you need to remember for your series a so here we go here's here here are those calculations so we're saying that the capitalization we have our 10 million shares that were already issued we have our 1.76 million shares from the conversion of the safes and we have our increase to the option pool of 1.695 million so that gives us 13.5 million total shares we divide our 15 million dollars by those shares to get a new money price so this is the price that the investors will pay for their shares of 1.114 so that means that the 5 million dollars of new money that's coming in will buy 4.48 million shares and the lead investor because they're putting in 4 million will get 3.59 million of those shares so these are the calculations that get that get worked through this is what the cap table then looks like post money so this is now everything's been done in the round so we've still got our founders we've still got our options those numbers haven't changed this number's changed because it's increased by 1.695 million and you can see here that now this is ten percent of the total shares which is what we were targeting because that was agreed in the term sheet we have our safe investors who the number of shares haven't changed because they already we'd already done their calculation for the conversion but their percentages have changed it's gone down a little bit and the reason why those have gone down is because the safe investors have been diluted by the series a money and by the increase in the options pool and then we have our lead investor and our other investors in our series a and as you remember when we did the the quick back of envelope calculation at the point of getting the term sheet our lead investor owns twenty percent our other investors own five percent so in total they have 25 and so the founders up here now own 51.5 which is a big jump from the cap table that they originally were looking at where they owned uh 92.5 and that's where this gets complicated if you don't understand your dilution you don't understand how much of the company that you've sold when you get to this point and you look at the cap table and you're saying oh no i only own 30 of the company how did that happen there isn't a lot you can do because most of that dilution has already happened because you've raised money from the safes the because you raise money on safes and so that's why it's super important that you keep track of this dilution because at this point there isn't a lot you can do about it all right moving on so a couple of couple of top tips for you we've mentioned briefly about convertible notes and that's just another instrument that you can use to raise money in the early days um often we find companies outside of the us will raise money on convertible debt there's nothing wrong with it um it is a little bit more complex just because you have to deal with interest that accrues on it and maturity dates but companies companies deal with that but what i would say is try not to have a combination of safes and convertible notes just because it makes things a little bit more complicated in the calculations so if you start raising on debt then probably stick with it but ideally start with safes because it's actually making your life a little bit easier so again we are now recommending that companies use post-money saves but there are pre-money saves available and some of you may have already raised on pre-money saves that's totally fine um it just makes it a little bit more complicated to understand dilution but you can still do the same back of envelope calculation to get a ballpark figure even though it's not exactly accurate if you have raised money on pre-money safes then it's fine to come to in future raise money on post money safes the calculations just get a little bit complex but it's it's totally doable so that's fine don't panic um would suggest that you probably move on to post money safes um even if you've raised money on pre-money saves just so you can keep track of your future dilution and a quick word on optimization in all of this when you're raising money on safes don't try to over optimize for the cap it gets really easy to start seeing this as a as a um a competition and you start talking to your friends and you start saying well i've raised money on a six million dollar cap and they say well i've got an eight million dollar cap and so i'm more successful than you are and you know as jeff mentioned last week fundraising is not the be-all and end-all it's a means to an end so just don't don't try to over-optimize don't try to push this up too far because you're negotiating with investors who do this all day and every day and you're probably not somebody who negotiates this all day and every day and actually um when i ran the numbers on the calculation that we've just been through if we'd have changed that 800 000 that was raised on an 8 million cap to a 10 million cap the ownership at the close for the founders would have been 52.7 rather than 51.5 so it's not actually a huge difference especially if you have two or three or four founders co-founders and the extra pain for negotiating that two million dollar cap is probably not worth it you know just take the money do what you need to do with the money and make the company a success instead okay so in conclusion use post money safes where you can hopefully all of you can use those going forward understand what you're selling with the company so make sure that you keep track of your dilution and understand where where the company is being sold and finally again don't over optimize for valuation caps because it doesn't actually make as much difference as you think it's going to make thank you very much for listening i know this stuff's difficult you

Channel: Y Combinator

Views: 139,698

Keywords: YC, Y Combinator, Kirsty Nathoo, Startup School

Id: Dk6JNTDec9I

Length: 45min 3sec (2703 seconds)

Published: Wed Oct 17 2018

Reddit Comments

[u/midael]

00:50: this talk is to go through some of the pitfalls founders have made in raising money.
01:20: How much of the company is sold is non trivial if you raise some of the money using Convertibles
02:15: It Is *your* responsibility as a founder to *understand* the cap table (and its impact)
03:00: This talk covers SAFEs (Convertibles), Dilution, Tips on top items to do before / when raising money
04:00: SAFE == Simple Agreement for a Future Equity. E.g. receive money now, issue stock later
05:10: Convertibles, vs. Convertible loans → Convertibles are *not* debt
05:55: First paragraph of sample SAFE agreement
07:20: Anatomy of the SAFE; 5 sections; 1) events (equity financing, liquidity event, dissolution, liquidation priority, termination), 2) definitions / explanation of terms, 3) company representations, 4) investor representations, 5) legal boilerplate language that needs to be there.
10:18: Post-money SAFEs. New/recent concept. Money after all SAFEs have converted → Easier to understand with Post-money SAFEs
13:00: Note - there are different variations of SAFEs, so be careful to make sure what you’re dealing with. Most common is: ‘valuation cap only’.
15:50: Sample SAFE math with 2 founders with 50:50 ownership. NOTE: SAFEs don’t dilute other SAFEs. With option pool at 21:28.
22:40: Priced equity? round sample building on previous example
26:30: @ priced round - usually, 1) SAFEs convert, 2) Option pool is increased, 3) New investors invest (note: “safes are included in pre-money” is related to how Series-A price is calculated)
31:00: Note - if you’re priced round is on lower CAP than SAFEs, then you’re actually selling even more of the company to the SAFE holders
39:09: Final cap table after all the calculations / conversions etc.
41:10: Top tips sections: Try not to combine of SAFEs and convertible notes/loans, try to use post-money SAFEs (easier dilution calculation), Don’t over optimize for the CAP (e.g. fundraising is means to an end, not the game),
44:10: TL;DR: use post money SAFEs, understand what you’re selling, Don’t over-optimize for valuation caps.