This is super helpful. Thanks, Dana Sather Robinson!
Mastering the SAFE note 🔥💸 In early-stage fundraising, SAFEs are now the go-to, with 89% of pre-seed money raised via SAFEs over convertible notes in Q4 2023. If you're a founder, it’s time to get familiar – here’s what you need to know to make SAFEs work for you. This will prepare founders to approach investors and secure funding through a SAFE Note: 𝗙𝗶𝘃𝗲 𝗗𝗶𝗳𝗳𝗲𝗿𝗲𝗻𝘁 𝗧𝘆𝗽𝗲𝘀 - Fixed Conversion at a future date - Valuation Cap, no discount - Discount, no valuation cap - Valuation Cap & Discount - MFN (Most Favored Nation) 𝗘𝘅𝗮𝗺𝗽𝗹𝗲: 𝗦𝗲𝗲𝗱 𝗥𝗼𝘂𝗻𝗱 📈 Investor invests $25,000 with a $5m Valuation Cap, 20% Discount. - Pre-money valuation of the company $10m - Number of Shares= 2m - Share Price= $10m/ 2m= $5 𝗢𝗽𝘁𝗶𝗼𝗻 1️⃣ (Discount) - Share Price after discount: $5 * (1 - 20%) = $4 - Total Number of Shares: $25,000 / $4 = 6,250 shares 𝗢𝗽𝘁𝗶𝗼𝗻 2️⃣ (Valuation Cap) - SAFE Investor choosing $5m valuation cap - Share Price= $5* ($5m Valuation Cap/ $10m pre-money valuation)= $2.50 - SAFE Investment= $25,000 - Total Number of Shares= $25,000/ $2.50= 10,000 - SAFE Investor will apply the Valuation Cap option; $2.50/ share. - Finally, the total number of Shares for SAFE Investor= 10,000 - Share Price at Seed $5 - Share Value of SAFE Investors= 10,000*$5= $50,000 - SAFE Investment= $25,000 - Unrealized Return= (($50,000- $25,000)/ $25,000)* 100%= 100% 𝗦𝗰𝗲𝗻𝗮𝗿𝗶𝗼 2️⃣ - VC Firm Invests at a Pre-Money Valuation = $6 Million - Total number of shares 2m - Share Price= $6 m/ 2m= $3 𝗢𝗽𝘁𝗶𝗼𝗻 1️⃣ (Discount) - SAFE Investor Choosing Shares at 20% Discount - Share Price= $3*(1-20%) = $2.4 - Total Number of Shares= $25000/ $2.4= 10,417 𝗢𝗽𝘁𝗶𝗼𝗻 2️⃣ (Valuation Cap) - SAFE Investor choosing $5m valuation cap - Share Price = $3* ($5 Million Val Cap/ $6 Million valuation) = $2.5 - Total Number of Shares= $25,000/ $2.5= 10,000 - SAFE Investor will apply the Discount; $2.4/ share. - Total number of Shares for SAFE Investor= 10,417 - Share Price at Seed = $3 - Share Value of SAFE Investors= 10,417*$3= $31,251 - SAFE Investment= $25,000 - Unrealized Return= (($31,251- $25,000)/ 25,000)*100%= 25% The higher the Valuation Cap in the SAFE round, the better it is for the Founder, resulting in a lower dilution of Equity provided the Founders are confident to close the next round at a higher than the valuation cap. 𝗠𝗙𝗡 𝗖𝗹𝗮𝘂𝘀𝗲 - Let’s say SAFE A has an MFN Provision. - If a new SAFE B is issued, the company has to tell SAFE A about it. - If terms of SAFE B are better than SAFE A, SAFE A can ask for the same terms as SAFE B. Thanks to Fazlur Shah for the math illustration...you are amazing. Some top-tier follows on the topic. - Chris Harvey, a fund lawyer who regularly drops pearls of wisdom - Peter Walker, who shares data on SAFEs and broader startup insights #startups #fundrasing #venturecapital ____ Enjoy this? Follow Kevin Jurovich for daily startup & VC insights and the occasional meme. ✌️