Conference Presentation, Webinar, Fireside Chat
Carolynn Levy and Kirsty Nathoo - Startup Investor School Day 1
- SAFEs are designed for very early-stage startups prior to a priced round, offering an efficient mechanism for raising capital from friends, family, and angels when lead investors are absent, whereas companies with existing convertible promissory notes typically avoid reusing them to prevent complexity.
- The instrument primarily converts into common stock upon an equity financing event (e.g., Series Seed, A, or Bridge to B) or an exit via acquisition, IPO, or dissolution, with conversion typically occurring on a pre-money basis, though post-money conversion is becoming less common.
- Key conversion terms include a discount rate generally ranging between 10% and 20%, valuation caps (with $8 million and $10 million cited as examples), and the Maximum Favored Nation (MFN) provision, which is standard in uncapped versions and allows investors to upgrade to superior terms negotiated by subsequent investors.
- Ownership percentage is variable at the time of signing and depends on the final terms of the priced round, including the creation of an options pool usually around 10% of post-round shares, necessitating tools like AngelCalc or spreadsheets to model scenarios across multiple SAFEs with varying caps and discounts.
- In a "home run" exit, SAFE holders expect returns well in excess of their initial investment, while in low-value acqui-hires, they retain the option to have the SAFE paid off; in dissolution, they rank next in line after trade debt and salaries but rarely recover funds.
- Investors should expect pivots and the long-term nature of the investment, as the SAFE does not provide an exit mechanism if a company becomes self-sustaining or a "lifestyle company" without raising a priced round.
- Pro rata rights are not included in the standard SAFE conversion but are commonly secured via side letters to prevent dilution; failure to exercise these rights or honor them can harm founder-investor relationships.
- The execution process involves e-signing via platforms like Clerky, with validity contingent on the wired funds, and investors should verify conversion calculations despite potential errors by lawyers, even under tight 24-hour deadlines.
- The structure carries minimal liability for stockholders, is best suited for C-Corps (Delaware or California), and while the standard form works globally, specific jurisdictions like India and the UK have limitations or adaptations for tax relief.
- Founders retain discretion over SAFE cap values and fundraising amounts, and while it is unlikely for a founder to immediately lower a cap on a second round, investors should be prepared for such scenarios or negotiate directly if they feel misled.
- The investment philosophy emphasizes backing founders over negotiating downside protection, advocating for a helpful, non-interfering role that supports the company through highs and lows to maximize the probability of a 100x return.