by @abhia90 // newsletter // youtube

https://youtu.be/Dk6JNTDec9I

YC Partner Kirsty Nathoo gives the lowdown on several different ways to capitalize your company and how those impact founder equity and cap tables overall.

Summary:

• Use post-money safes
• Understand how much of your company you're actually selling
• Don't try to over-optimize on valuation caps (it's not worth your time b/c the overall effect is negligible)

Why is learning this important?

• It's YOUR responsibility to know your Cap table (not your lawyers, etc)— Its super impt to understand at ALL stages of the company how much of the company you've sold to investors and thus how much you actually own; simplest form is just a spreadsheet
• It's hard for most founders to know how much they actually own since they have convertible instruments and not shares

The SAFE

• What is it?

  • SAFE = "Simple Agreement for Future Equity"
  • Convertible security
  • Receive money now from investor, issue stock to them later (when you raise money on a priced round)
  • Minimal negotiations— You really only negotiate 1) How much money they're going to put into the company and 2) What valuation cap
    • This is very different from a priced round which has way more things to negotiate
    • Thus most companies start with a SAFE
  • It is NOT debt
    • Debt has an interest rate attached, as well as an end date by which it needs to be paid
    • SAFEs have neither of those
    • But there are some similarities when they convert in a priced round

• Anatomy of a SAFE

  

  • Only 5 pgs
  • Pretty simple language
  • 5 sections:
    • Section 1— details answers to "What happens to the SAFE if ___ " happens, such as if:
      • Equity financing occurs
      • Liquidity event occurs (ie if company is sold)
      • Dissolution occurs— company dissolves
      • Clarification of liquidation priority
      • Termination of SAFE if first 3 examples occur
    • Section 2— Explains the definitions of diff words
    • Section 3— Company reps (ex: Company is formed in Delaware)
    • Section 4— Investor representation
    • Section 5— Various legal boilerplate language (that needs to be in the safe)

• YC moved to Post-Money SAFEs recently (ie After the SAFEs have been converted, what happens at that point?)

  • This was done to make is easier for founders to understand their dilution (ie how much of the company they've sold)
  • Pre-money valuation + Money raised = Post-money valuation (Ex: $5 mil + $1 mil = $6 mil)
  • To understand how much of the company is sold, calculate:
    • Their Ownership = Amount raised / Post-money valuation cap (Ex: $1m/$6 m = 16.67%)

• Different flavors of SAFEs (with valuation caps)(note: these happen rarely. Much more common is just a SAFE with a cap):

  • Discount— ex: 20% discount on Series A price
  • Uncapped— "Im gonna put in money now as an investor, and when you raise money in a priced round, I'm going to get the same price as the priced-round investors are going to get" (happens rarely b/c early investors usually want some bonus for investing early)
  • Uncapped with "Most favored Nation" clause — "I'm not going to agree a cap right now, but if you do raise $ from other investors who do have a cap and their terms are better than mine, I get their terms as well as an investor"— this happens if you raise money super early and you don't know what the cap is and you just want to punt it for another month or two— gives a little more admin for the founders (ie one more thing they need to keep track of)

Dilution